Friday, October 6, 2023

Bonds And Money

The US bond market is getting hammered lately as investors and traders realize that (a) the economy is not collapsing and (b) the Fed will keep rates high for longer than previously anticipated.

Money creation is THE driving force of consumer spending which is, by far, the most important component of US GDP. 

So, here is a chart of “money creation” via the Fed’s own balance sheet. Assets are now at 32% of GDP, up from 18% pre-COVID and just 6% before the Great Debt Crisis.

In both cases the government/Fed just threw money at the problem instead of handling it in a more constructive and structural fashion.  If the current situation evolves into yet another crisis, this time printing money will definitely create much bigger problems than it solves: to wit, hyperinflation and the end of empire.

The chart is another way to measure the devaluation of the dollar vs “real” assets and economic activity. The rest of the global economy is also “devaluing” (eg the EU/euro and recently Japan/yen) so as of yet there are no credible alternatives.  But watch out for China…