Category: zerohedge

Authored by Samuel J. Abrams via RealClearPublicAffairs,

I have had the privilege of teaching politics and history to college students for well over a decade, and I noticed a significant change among my students in the past few years: their interest in politics and political engagement is far greater than when I began. My first group of students were Millennials, and while some were deeply interested in politics and the socio-historical world, this was the exception, not the norm. Today, my Gen Z students are deeply passionate about political change and not politically dogmatic. The 2020 election revealed their significant level of turnout, potentially setting the stage for a more vibrant polity going forward.

Three weeks ago, when looking at the unprecedented labor shortage that is crippling the US economy (even with some 100 million Americans not in the labor force)…

…we said that there is a simple reason for this paradoxical phenomenon: trillions in Biden stimulus are now incentivizing potential workers not to seek gainful employment, but to sit back and collect the next stimmy check for doing absolutely nothing in what is becoming the world’s greatest “under the radar” experiment in Universal Basic Income.

Consider the following striking anecdotes from Bloomberg:

• Early in the Covid-19 pandemic, Melissa Anderson laid off all three full-time employees of her jewelry-making company, Silver Chest Creations in Burkesville, Ky. She tried to rehire one of them in September and another in January as business recovered, but they refused to come back, she says. “They’re not looking for work.”
• Sierra Pacific Industries, which manufactures doors, windows, and millwork, is so desperate to fill openings that it’s offering hiring bonuses of up to $1,500 at its factories in California, Washington, and Wisconsin. In rural Northern California, the Red Bluff Job Training Center is trying to lure young people with extra-large pizzas in the hope that some who stop by can be persuaded to fill out a job application. “We’re trying to get inside their head and help them find employment. Businesses would be so eager to train them,” says Kathy Garcia, the business services and marketing manager. “There are absolutely no job seekers.”

Even more amazing: a stunning 91% of small businesses surveyed by the NFIB said they had few or no qualified applicants for job openings in the past three months, tied for the third highest since that question was added to the NFIB survey in 1993.

But what is most striking is the context on these figures: recall that just one year ago, the unemployment rate was a depression-era 14.8%. And while it has since dropped to 6%, it remains well above the 3.5% rate of February 2020, before the pandemic. So judging from the jobless rate – which the Federal Reserve tracks closely – there’s still plenty of slack in the labor market.

Only… if one goes by the complete lack of workers, there isn’t.

This was confirmed by the results of the latest, April, NFIB Small Business survey, which found that a record 42% of companies reported job openings that could not be filled.

The key quote from NFIB Chief Economist Bill Dunkelberg was “Main Street is doing better as state and local restrictions are eased, but finding qualified labour is a critical issue for small businesses nationwide.” And the explicit admission that BIden’s “trillions” in stimulus are behind this predicament:

“Small business owners are competing with the pandemic and increased unemployment benefits that are keeping some workers out of the labor force.”

As if it wasn’t clear, the NFIB added that “finding eligible workers to fill open positions will become increasingly difficult for small business owners.”

Seven percent of owners cited labor costs as their top business problem and 24% said that labor quality was their top business problem. Finding eligible workers to fill open positions will become increasingly difficult for small business owners.

Illinois-based Portillo’s Hot Dogs LLC boosted hourly wages in markets including Arizona, Michigan and Florida, and is offering $250 hiring bonuses. The chain has hired social-media influencers and built a van called the “beef bus” to help recruit. Still, many of the chain’s 63 restaurants remain understaffed, said Jodi Roeske, Portillo’s vice president of talent.

“We are absolutely struggling to get people to even show up for interviews,” Ms. Roeske said.

To be sure, it’s not just entry level places that can’t find workers: full-service and high-end restaurants like Wolfgang Puck’s Spago Beverly Hills, where servers can earn $100,000 a year with tips, also are struggling to recruit workers. Puck said in an interview with the WSJ that expanded unemployment benefits and new options like personal chef gigs are contributing to staffing shortages at Spago and his other restaurants.

“I don’t think we should pay people to stay home and not work if there are jobs available,” he said.

Summarizing the data, Rabobank’s Michael Every wrote that Biden’s generous unemployment benefits are “ironically helping to push up wages, at least temporarily – which I am sure nobody intended, but underlines just how radical policy has to get in the US to make it happen.” His conclusion: ”the problem is that small businesses trying to get past Covid are least well placed to lead this socio-economic charge; and if this points to a wage-price spiral –which is still unlikely– then the bond market will soon be pointing its finger at the Fed.”

Well if it is unemployment benefits that is causing the labor shortage why not do away with said benefits?

Of course, that is far easier said than done: once Americans are used to collecting money for doing nothing, they would be extremely displeased – to put it mildly – once the money is gone. This is not lost on politicians who know that they would be the immediate target of popular ire.

And yet, one state is taking the much needed, if extremely unpopular step, of breaking this addition to stimmy handouts which has also led to this historic labor shortage.

According to Yahoo, Montana plans to stop some of its federally-funded unemployment benefits to address “the state’s severe workforce shortage,” according to its labor department, which will leave many out-of-work residents without any support at all.

“Nearly every sector in our economy faces a labor shortage,” Governor Greg Gianforte, a Republican, said in a statement on Tuesday, echoing what we said last month, namely that “The vast expansion of federal unemployment benefits is now doing more harm than good.”

Instead, the state will do the correct thing and begin offering return-to-work bonuses to help employers looking to hire.

Starting June 27, Montanans will lose access to the extra $300 in weekly unemployment benefits, but maintain their regular benefits. Contractors, gig workers, and others will also lose access to the Pandemic Unemployment Assistance (PUA) program, meaning those workers won’t get any benefits.

Those relying on the DOL’s Pandemic Emergency Unemployment Compensation (PEUC) program, which gives additional weeks of unemployment benefits to workers, will stop receiving benefits. The state also plans to reinstate the requirement that stipulates workers must be actively searching for a job to qualify for unemployment benefits.

Predictably, the decision sparked howls of outrage from those already habituated to Biden’s Universal Basic Income regime:

“Montana’s move to end these fully federally-funded UI programs, along with their COVID-19 exceptions, is cruel, ill-informed, and disproportionately harms Black and Indigenous People of Color and women,” Alexa Tapia, unemployment insurance campaign coordinator at the National Employment Law Project, told Yahoo Money, basically slamming the decision as both racist and sexist. “Ending these programs would leave 22,459 people unable to support their families and hurt thousands more.”

Alternatively, those 22,459 people can find a job.

Montana’s unemployment rate was 3.8% in March, down from its 11.9% pandemic peak in April 2020, according to data by the Labor Department.

The federally-funded unemployment programs run through September 6 nationwide. Montana’s cancellation would cost workers at least $3,000 per worker in supplement benefits if they couldn’t find work through the program expiration. Workers on PUA and PEUC would lose at least $4,500 in benefits because they no longer will be eligible for the base unemployment benefit.

Liberal economists were also outrage, claiming that Universal Basic Income is a wonderful creation (it hasn’t worked out that great in any socialist nation where it has become a staple of social welfare, but whatever), with studies from such liberal bastions as the National Bureau of Economic Research all the way to Yale University claiming that the extra $600 in benefits distributed earlier in the pandemic had limited labor supply effects and likely didn’t disincentivize work. (narrator: they disincentivize work, just see Wolfgang Puck’s quote above).

“The 100% federally-paid unemployment benefits have boosted spending and contributed to the strong economic recovery,” Andrew Stettner, an unemployment insurance expert and senior fellow at the Century Foundation, told Yahoo Money. “It’s shortsighted for the state to sacrifice that economic stimulus based on the anecdotal labor shortages concerns of a few employers, especially given the limited evidence of work disincentives from unemployment pay during the pandemic.”

What he forgot to mention is that the artificial spending created by stimulus has led to soaring prices and out of control “transitory” inflation, which will lower the standard of living for everyone, not just those on the government’s dole, but again anything that goes contrary to the liberal mantra of “bigger government is always better” is anathema and must be crushed immediately.

So far, Montana is the first and only state to fully opt out of the federal unemployment benefit programs enacted in the pandemic and currently extended by the American Rescue Plan signed into law in March. As a way to incentivize workers to return to work, the state is offering a one-time return-to-work payment of $1,200, using money from the American Rescue Plan to fund the program. Only those who complete four weeks of work would receive the payment.

“Incentives matter,” Gianforte said. “Our return-to-work bonus and the return to pre-pandemic unemployment programs will help get more Montanans back to work.”

One can only hope that more states follow Gianforte’s extremely unpopular, if extremely prudent decision, before the US is mired in 1970s style hyperinflation.

We won’t be holding our breath.

Authored by Walter Block via InternationalMan.com,

Voting with your feet is a crucially important indicator of what is really going on, regarding the political economy. No, this does not refer to taking off your shoes and socks, entering the polling booth, pressing a button with your big toe instead of your thumb or index finger.

Rather, it denotes migration patterns as the best way to determine human welfare.

The island government 90 miles off the Florida shore can brag all it wants about its health care and educational systems that have “made Cuba great.” But massive numbers of people have rejected that sorry system as demonstrated by their migration away from it, often at great bodily risk, to enter our country. Yes, there might have been a Bernie fan or two who moved in the opposite direction (Senator Sanders spent his honeymoon not in Russia, but in the USSR), but these are the exceptions that prove the rule.

Were there any Jews attempting to enter Nazi Germany? Who knows; again, maybe one or two. But the virtual one-way traffic was in the very opposite direct. Ditto for the Berlin wall. In which way was the immense movement there? To ask this question is to answer it.

The U.S is a racist country that grinds down blacks? Then we ought to see large numbers of African Americans attempting to leave for greener pastures elsewhere, and observe very few people from sub Saharan Africa headed in the U.S. direction. But this does not occur. Indeed, the very opposite takes place. There is no better refutation to the claims of the Black Lives Matter Marxist movement. All the statistics about African American unemployment rates falling and a poverty rate of intact black families falling to single digits (before Covid) pales into insignificance compared to the primordial fact of migration patterns. Or, rather, lack of same.

What is the reaction of the governments from which migrants are fleeing? Some act responsibly, morally, justly: they do not try to shoot or incarcerate emigrants as they depart. Mexico is certainly an example of this, and ought to be congratulated for such civilized behavior. Similar accolades must be awarded to Namibia, Botswana, Zimbabwe (formally Rhodesia) and Mozambique. They did not violently prevent their residents from entering even apartheid South Africa.

But others act in the opposite direction, and reveal themselves to be in effect, gigantic jail cells. The cases in point are too numerous to mention, but the following are certainly examples:

• All too many Cubans have resorted to making the passage to Florida on rafts supported by inner tube tires and were shot at or arrested by authorities of that nation.

• East and West Germany and the infamous Berlin Wall; in which direction were the feet voters headed!!!

• The traffic in the Korean peninsula eight decades ago, and even in the modern era, was from North to South, not in the opposite direction

• Recent headlines blare: “Hong Kong Residents Formally Arrested.” Their “crime?” They were caught attempting to escape to Taiwan. So much for the “One Country, Two Systems” agreed upon in a treaty signed by both countries when Brittain in 1997 turned this island community over to the tender mercies of the People’s Republic of China. So far, no Uighurs have been imprisoned for fleeing, but it does not take too much imagination to suppose that if they had a prayer of succeeding in such a venture, they would also dearly love to do so.

Let us close with a U.S. example. In the 1930s, there was a strong pattern of African Americans leaving Alabama, Mississippi, and other Jim Crow southern states for Detroit, Philadelphia, Chicago, and other more receptive environs. Did the donor states attempt to in any way prevent this migration pattern? No. So they also garner honor roll mention in the litany of political jurisdictions that have eschewed the title of vast penitentiaries.

*  *  *

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Beijing’s crackdown on its tech giants is threatening a critical mutual aid service that millions of Chinese citizens have used to bail themselves out of a tough situation – often due to illness or unexpected injury.

As WSJ explains, Ant’s Xianghubao “mutual aid” service is crowdfunded medical coverage where signing up is free, and members are entitled to receive lump-sum cash payouts of up to $45K in cases of certain critical illnesses or life-threatening injuries. The theory is that there is strength in numbers, and many members contribute the equivalent of a penny (or less) toward each claim.

The service, the name of which means “mutual treasure”, has never earned a profit for Ant, even though it has skirted regulatory lines in China from Day 1. Ant has aggressively advertised the service, and although it has never earned a profit for the company, Ant Group believes it has helped its Alipay app compete with WeChat’s offering among key demographics, including the rural poor. According to Ant, 116,950 members of the service have received a total of $2.6 billion in the past two-plus years.

But now that Ant is being forced by Beijing to apply to become a financial bank holding company, the mutual aid product will almost certainly be transformed into a more traditional commercial product falling under the purview of China’s banking and insurance regulators.

At its peak, the mutual aid product had more than 100M users, although numbers have fallen since Ant’s IPO was scrapped last October after chairman Jack Ma, the billionaire who still controls the company, criticized Beijing at an obscure tech conference, eliciting the backlash that transformed into the current anti-trust crackdown on China’s biggest companies.

Xianghubao fell into a regulatory grey area, partly due to the fact that Chinese regulators weren’t particularly eager to oversee it.

After Beijing scuttled Ant’s blockbuster IPO, the central bank ordered Ant to return to its origins as a payments company and stop its “regulatory arbitrage.” Since the crackdown began, Ant has been forced to step up verification practices to protect against false claims are paid out. Several other Chinese firms have recently abandoned their mutual aid businesses after China’s banking and insurance regulator flagged the financial and social risks of these types of products.

In its place, Alipay’s loosely regulated “mutual aid” service will likely be replaced by more traditional health-insurance products. Some Chinese insurers have already been rolling out more affordable private policies. In April, the Shanghai government introduced a policy jointly underwritten by nine insurers. For an annual premium of just 115 yuan, the equivalent of $17.80, the one-year policy provides up to 2.3 million yuan, the equivalent of $355,000.

It’s just another example of how Beijing’s crackdown on big tech will benefit state-controlled industries like banking, along with China’s cities and municipalities, who could use the premiums to offset all the off-the-books debt they have accumulated.

Authored by Mark Glennon via Wirepoints.org,

“Regarding the Great Depression,… we did it. We’re very sorry… We won’t do it again.”

– Ben Bernanke, November 8, 2002, in speech given at conference honoring Milton Friedman

Ninety-two years ago, as what was to become the Great Depression was setting in, the Federal Reserve made what is now widely regarded as a historic error. Instead of pursuing an expansionary policy and growing the money supply, it did the opposite, contributing to the decline. “Scholars believe that such declines in the money supply caused by Federal Reserve decisions had a severely contractionary effect on output,” as a Federal Reserve history puts it. Hence, that apology above by former Federal Reserve Chairman Ben Bernanke.

“Joined at the hip”: Treasury Secretary Janet Yellen and Fed Chair Jerome Powell

Today, with the economy reopening and a snapback recovery happening, the opposite blunder is underway. A previously unimaginable torrent of cash is pouring into the economy from both the federal government and the Fed, which are now “joined at the hip,” as former Fed economist Henry Kauffman recently wrote.

The consequences are already visible. Worker shortages are rampant, undermining the rebound and institutionalizing government dependence. The federal cash is finding its way into everything from homes to cryptocurrencies to stocks to raw materials, making it certain inflation will claw back much of the recovery in income. And everything is getting federalized, upending the system of decentralized government that served America well for so long.

The Torrent:

It’s key to first to get your mind around how much money Washington is pumping out, which isn’t easy. So far, lawmakers have enacted six major pandemic relief bills costing about $5.3 trillion. For a little perspective, that’s 27% more than the entire federal budget for 2019, the last fiscal year before the pandemic. And now the Biden Administration wants to spend an additional $4.5 trillion.

Through it all, the Fed has been the Treasury’s enabler. It has already wished into existence $3.5 trillion since the pandemic started, used to purchase notes and bonds. And it says it expects to continue that buying at a clip of $1.4 trillion per year while keeping interest rates low, rates that already are negative, being lower than inflation.

Here’s another bit of historical perspective. In 1988, Democratic Senator Lloyd Bentsen said this in a debate during his candidacy for Vice President: “You know, if you let me write $200 billion worth of hot checks every year, I could give you an illusion of prosperity, too.”

That $200 billion would be only $450 billion today. But this year’s projected federal deficit is five times higher than that even without the Biden Administration’s new spending proposal. The Fed is now creating as much money as Bentsen decried in today’s dollars every four months.

Granted, not everybody has benefited from federal largess. Some individuals have suffered immense financial hardship from the pandemic.

But that definitely has not been typical. Federal assistance has been so vast that total personal income in every state has actually been higher during the pandemic than before. As a Pew Research report put it, “The sharp increase in government transfer payments more than offset a slight decline in inflation-adjusted earnings, which include wages from work plus extra compensation such as employer-sponsored health benefits, as well as business profits.”

Nor have state and local governments suffered. Federal relief for almost all of them together with their own reserves has exceeded losses caused by the pandemic. Many needed no help at all, as we detailed here.

The Predictable Results:

Worker shortages are now rampant and severe.

Why work or return to normal if federal handouts keep coming?

The evidence is overwhelming in stories everywhere, across the nation and in multiple sectors. A few examples:

• The National Federation of Independent Business found in a March survey of its own small business members that 42% had job openings they couldn’t fill.

• Factories are “desperate for workers,” says a Reuters headline. “I’ve never seen it this bad,” said president of Look Trailers, based in Middlebury, Indiana, one of the examples Reuters cited.

• In Chicago, where crime is often blamed on unemployment, summer jobs are going unfilled for lack of applicants, according to a report this week by the Chicago Sun-Times.

• A Plainfield, Illinois restaurant is begging its customers to be patient because of its worker shortage. “To all of our loyal patrons, customers and friends, we ask you to remain patient with us as we deal with an abnormal shortage of employees.”

• Former Treasury Secretary Larry Summers last month panned Biden’s focus on job creation in light of the labor shortage.

• As many as 2.1 million manufacturing jobs will be unfilled through 2030, according to a study published this week by Deloitte and The Manufacturing Institute, cited by CNN. The report warns the worker shortage will hurt revenue, production and could ultimately cost the US economy up to $1 trillion by 2030.

Senior Biden economic officials have in recent weeks “been peppered by complaints from restaurant groups, the construction industry and other businesses about their inability to find enough workers as the U.S. economy begins to recover from the pandemic,” the Washington Post reported on Wednesday.

But so far that has fallen on deaf ears. Neither the Fed nor the Biden Administration have shown an inkling of interest in changing direction.

Yes, there are other reasons why some may be reluctant to return to work beyond monetary and fiscal policy. Though vaccines are now available to all adults, some still fear COVID-19, and not all employers are back to running normally.

But the lack of financial incentive is surely key. “Show me the incentives and I will show you the results,” as Charlie Munger, Warren Buffet’s partner says. The expanded federal unemployment benefits authorized by Congress last until September 6. That makes no sense whatsoever in light of Biden’s goal of returning to normalcy by July 4. Many states have already done so and even in Illinois, where lockdowns have been harsh, Gov. JB Pritzker is talking about a full reopening by July 4.

Aside from discouraging people from returning to work, the gush of federal money has other consequences.

• First, inflation is now a certainty, most experts agree. “Everything screams inflation,” said a Wednesday Wall Street Journal headline. But the Fed and Treasury Department seem oblivious. Inflation lags policy that influence it by 12 to 18 months, the Fed often says, yet it continues to focus on current signals of inflation that it thinks are benign.

• Second, with interest rates negative in real terms, retirees, pensioners and others that need fixed income are desperate. There are simply no suitable investments available to them that will produce any returns.

• Third, everything is getting federalized, as we detailed earlier, turning America into one big, blue state, as others have put it. Many on the left have been quite open, as we wrote there, about their intention to create a culture of dependence on the federal government and make the federal cash flow permanent. It’s a warm-up for dependence on an all-powerful federal government.  “It is a baby step toward universal basic income, or guaranteed income,” says the Brookings Institute. “The significance of this moment in U.S. social policy is hard to overstate.”

The grownups in the room telling the politicians to back off should be Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell. They are failing.

It took decades for a consensus to form about the folly of federal policy at the outset of the Great Depression. This time, the reverse blunder and its consequences won’t take long to figure out. They are in plain view already.

Real Vision managing editor Ed Harrison and editor Jack Farley evaluate price action in markets as the bond market refuses to budge, some chaos in single stocks today has been hidden by relatively flat U.S. equity indexes, and gold is breaking out of its range, surging beyond $1800. Ed also takes an in-depth look at today’s economic data on initial and continuing jobless claims as well as the latest news flow on companies’ struggles to hire workers even as unemployment rate remains in elevated territory. Jack reports from the trenches of the over-the-counter interest rate swaps market and speculates on what it indicates about investors’ trust in the Fed.

Japanese newswire Kyodo just confirmed that Japan plans to extend its state of emergency which covers Tokyo, Osaka, Hyogo and Kyoto prefectures. The third state of emergency has been in place since April 25 and had been set to expire on May 11, but officials are concerned that the brief shutdown hasn’t been sufficient to suppress infections, especially as cases start to accelerate across Asia.

Prime Minister Suga had a meeting on May 5 with senior ministers to discuss the necessary measures moving forward, and rumors about an extension started swirling shortly after the meeting concluded.

In addition to extending the state of emergency for the four prefectures, the government is also considering implementing stronger measures in several other prefectures including Hokkaido and Fukuoka.

Of course, Japan’s decision to extend this state of emergency wouldn’t be a big deal if it wasn’t for the fact that Tokyo is due to host the rescheduled Olympics Games this summer. Although there won’t be much of a crowd, the Games, which had been delayed from last year, are still scheduled to continue, though the IOC reserves the right to cancel them.

In other news, as Moderna touts new study data showing its vaccine is effective in minors as young as 12, Bloomberg reports that Japan is set to approve the Moderna jab as soon as May 21 as it scrambles to ramp up vaccinations. Japan has a contract with Moderna for enough shots to inoculate 25 million people, and is set to receive sufficient deliveries for 20 million by June and another 5 million in the following three months, the paper said.

But for now, Japan’s vaccination efforts are falling dreadfully below the rest of the developed world…

Meanwhile, as safety concerns grow in Tokyo, ESPN reports that a petition to cancel the games has attracted tens of thousands of signatures already just days after being launched. The petition was organized by Kenji Utsunomiya, a lawyer who has run several times for Tokyo governor.

It registered about 50K signatures in the first 24 hours after being launched.

The reason is that many fear Japanese citizens are being neglected as the government sees hosting the Games as a face-saving effort. Organizers of the Games say they will need 10K health workers to support the Olympics, including 500 additional nurses and 200 sports medicine specialists.

“Government policies are being set with the Olympics in mind, and measures to curb the coronavirus pandemic are being neglected,” Utsunomiya told The Associated Press. “Hospital are stretched thin, and some people are dying at home.”

The headline in English over the petition reads: “Cancel the Tokyo Olympics to protect our lives.”

The postponed Games are due to begin on July 23.

DoubleLine’s Jeffrey Gundlach called the Fed’s bluff late last month, telling investors during an interview that he suspected the central bank was merely “guessing” about the impact of inflation being “transitory”.

Since then, we have only received more signs that inflationary pressures are growing in the US economy, while a growing number of investors have been persuaded to agree with Gundlach.

The other day, DoubleLine released a recording of another talk given by Gundlach where he elaborated on the inflation theme, while also discussing other issues like the outlook for the US dollar in the face of President Biden’s tax-and-spend agenda.

During the course of an hour-plus conversation, much of it accompanied by a slide deck with some of Gundlach’s favorite charts, Gundlach tackled a few key topics that he feels could threaten the Fed’s ability to backstop financial markets.

He started by slamming Biden’s plan to hike capital gains taxes on taxpayers with more than $1 million in earnings, arguing that fears of higher capital gains taxes is already weighing in the market.

Gundlach argued that high-beta stocks and other speculative investments like bitcoin have the most to lose due to a hike in capital gains. After all, who is going to want to take a risk on a long shot if they need to give half of their winnings to the government?

“Today is an important day because the president has made good if you want to call it that on his promise to begin raising taxes and the capital gains tax if you make more than a million dollars a year in California the capital gains tax if the proposal goes through that was launched today will be 57 capital gains tax that’s the federal tax plus the California tax so it’s getting pretty ugly and i think it’s going to have some very significant effects which we started to see the minute that this tax proposal was was launched today we’ve seen bitcoin a very speculative darling investment these days go down about 20 from its high in the last couple of weeks and obviously a lot of people would think twice about speculating on something like bitcoin if they felt that if they won meaning the price went up from their cost that 57 percent of a highly speculative gamble if it hits if it hits would go to the federal government but the stock market also fell pretty sharply upon that no wonder it’s surprising that people haven’t been contemplating this already.”

He then launched into his criticism of the federal government’s embrace of an MMT-like monetary policy fusing fiscal spending and monetary stimulus to try and paper over the economic damage caused by COVID-19.

 Between the stimulus checks, which were supposed to be temporary, and all the expansions of unemployment and other benefits, the percent of personal income comprised of government payments soared, something we also saw in recent spending data when we observed that 34% of household spending last month came from the government.

“A lot of weird things happened once the pandemic hit….it was a steady march to dependency on the government by a larger and larger fraction of the US population went absolutely vertical what this chart represents is what percent of personal income which is a government statistic what percentage of government of of personal income is made up of government giveaways which we call transfer payments back in the 60s it was down near five percent.”

The trillions in Congressionally-approved payments caused the deficit, already blown out under President Trump, to widen further.

While the Fed’s balance sheet exploded as the central bank monetized much of the new debt.

Gundlach also pointed out that the surge in the debt doesn’t fully capture how much money the federal government owes. There are also unfunded liabilities which, when combined with all local, state and federal debt, leave US citizens on the hook for $163 trillion. That’s more than 5x the $28 trillion national debt

“The government giveaway programs and the programs that we put in place to battle the economic impact especially to people who were suddenly unemployed and there were about 20 20 uh 20 million people that were suddenly unemployed those stimulus packages were originally thought to be temporary but now they’ve become a fixture and we can see that the blue line in recent months has needed uh as has grown again as a requirement in funding these non-stop stimulus programs so the US government is now has over 28 trillion dollars in debt and the US government has $163 trillion in unfunded liabilities when you roll it all together federal state uh and local level that amount of unfunded liabilities is 775% of our current total economic output,” Gundlach said.

If we wanted to pay that off, Gundlach observed, it would have to put 10% of our economy, and have negative economic growth, for 77 and a half years. In other words, there’s no feasible way the US will be able to pay off its debt. Instead, the US has no choice but to continuously refinance.

Moving ahead, Gundlach of course touched on one of the most important topics in contemporary markets: inflation. Earlier on Thursday, the Dallas Fed chief Robert Kaplan came out and said he wants the Fed to talk about tapering its asset buys sooner rather than later, saying the economy has improved faster than expected, and citing worries about “excesses and imbalances” in the market, a reference to frothy prices in everything from equities to housing.

Gundlach cited the Fed’s failures to anticipate the collapse of the subprime mortgage market as one reason to be skeptical of Fed Chairman Jerome Powell’s rhetoric about rising inflation being “transitory”.

“It’s quite likely that we’re going to see this inflation rate going up now the Federal Reserve has been transparent saying that they’re not worried about it they think an inflation increase would be transitory. How do they know that? How do they know that the inflation rate going up is just going to be transitory? I’m reminded of the subprime banking crisis that started in 2006 really 2007. It started and Ben Bernanke was the chairman of the Federal Reserve and Ben Bernanke said don’t worry about the subprime loan problem that we have subprime is contained well housing prices fell all over the country by an average of 35 percent so it wasn’t contained so since the federal reserve did not have the crystal ball accurate about subprime being contained I’m not going to accept that their crystal ball is any clearer on this inflation up move being transitory. We’ll see um it is true that we will probably have higher inflation in the middle of 2021 than at the end of 2021 because it does have some input things I’m not going to get into it it’s fairly esoteric but the inflation trend seems to have reversed a lot of trends.”

Readers can watch the full presentation below:

By Jim Reid, head of credit strategy at Deutsche Bank

We’ve all known that nationalizing student loan debt would turn out to be a terrible decision (just as it is when the government nationalizes any industry). We have been saying it on this site for years: it skews the market, offers capital to people who don’t have the means to pay it back and allows universities to price gouge, leading to a lower quality of education.

What we didn’t know was exactly how deep the rabbit hole would go.

Enter Jeff Courtney, a former JPMorgan executive, to deliver the bad news. He was brought in by Betsy DeVos, then U.S. education secretary, who sought out help from J.P. Morgan in trying to determine how much trouble the program was actually in, since revenues from payments continued to come in below projections. 

Courtney arrived at a stunning conclusion, according to the Wall Street Journal: “various administrations and federal watchdogs had systematically made the student loan program look profitable when in fact defaults were becoming more likely.”

Courtney discovered “a growing gap between what the books said and what the loans were actually worth, requiring cash infusions from the Treasury to the Education Department long after budgets had been approved and fiscal years had ended, and potentially hundreds of billions in losses.”

Currently, the budget assumes the government will get 96 cents back on every dollar borrowers default on. Courtney pointed out that in the private sector, that number drops to about 20 cents on the dollar. 

He was told by the Education Department that they calculated this number this way by basically running a ponzi scheme:

They told him that when borrowers default, the government often puts them into new loans. These pay off the old loans, and this is considered a recovery, even though in many cases the borrowers haven’t repaid anything and default on the new loans as well.

And so the stark reality is that the government is really going to only recover 51% to 63% of these amounts, Courtney noted. 

DeVos commented on the data: “If you accounted this way in the private sector, you wouldn’t be in business anymore. You’d probably be behind bars.”

“Taxpayers could ultimately be on the hook for roughly a third of the $1.6 trillion federal student loan portfolio,” the Journal had previously reported. If Courtney’s calculations are accurate, there could be “big implications” for taxpayers. 

If the loans are accounted for properly, he noted, it would force the Federal Government to realize the losses and add hundreds of billions of dollars to the national debt. This, in turn, could cause pressure to shut down or curtail the program in its entirety (something that probably should have been done years ago). 

Prior to 1990, the loans were treated, from an accounting standpoint, as an expense. Since then, they have been allowed to incorporate future repayments. Nearly 30 years later, and it seems like anyone can get a student loan for any worthless degree – which they can then turn around with, combine with their stimulus checks, and have enough money to buy themselves a new car or put a down payment on a house. 

Courtney’s report found that while federal loans took out in the 1990s were repaid to the tune of 105% on average, that loans since 2006 had been repaid just 73%. It’s almost as if the government is sending the message to the market that debt is okay. 

A spokeswoman for the Education Department said the model is based on incomplete data: “One of the many reasons we have a model of record is to ensure valuation of the student loan portfolio is not subject to political interference.”

The Education Department under President Biden “killed” Courtney’s project in late February, denoting that his model won’t be used to value the loan portfolio. Biden officials dismissed the report and said it was “motivated by a political agenda”. Yeah, the political agenda of actual math and proper accounting.

You can read the Journal’s full, detailed write-up, here.