The Economy

The two-year treasury note is trading like a penny stock right now.

Congratulations.

 

The fundamental conversation people should be having. ... This is a function of the Federal Reserve having kept financial conditions recklessly loose for an insanely long period of time. ... people cheered it on, politicians loved it, everyone lived a fantasy (look at my 401K!).

During the pandemic, their hubris (because they got away with it without things breaking) led them to take it up a notch. ... and that let the consumer price inflation genie out of the bottle (prior, all of the monetary inflation they were creating was concentrating itself in speculative asset bubbles). As a result of the backlash to the consumer price inflation that came on, they tried to STOP what they had been doing and raise interest rates to deal with the inflation.

Now, we are in a position where if they raise rates to stop price fixing the cost of capital way too low. ... things are going to break. This is a small example of the distortions they have created.

So what happens now? There is no way out of the box they put themselves in.

 

There is a huge difference between right now and then. ... the total debt levels (on the back of the distortions that were created under Greenspan, Bernake, Yellen and Powell) today are massive. There is a price to pay for all the growth they stole from the future over the last several decades. There is trillions upon trillions of dollars of debt that is being propped up by a massively distorted rate environment. Putting aside that our government has run up huge amounts of debt because the central bank was monetizing it all for them and that will would come to an end in just a normalized rate environment (imagine if a free market determined the cost of funding rather than government-appointed czars). ... we have an economy filled with zombie companies that exist on being able to roll over bigger and bigger debt levels.

Higher rates mean trillions of dollars of defaults. It will devastate the global economy.

 

If you want to visualize what I was just saying, look at 1979 / 1980 (when Paul Volcker came in) compared to today.

Also, consider WHY the economy did OK in the 1980s. ... it was when they were beginning the debt binge.