The coronavirus panic has been primarily manufactured – I won’t conjecture why governments and the media have done that. So far 100,000 people have been infected in the world and slightly over 3000 have died. The Swine Flu infected 60 million people and killed 60,000 in the United States alone. Noone shut down their entertainment, sports, and travel industries over it, nor stockpiled toilet paper and instituted quarantines. But now the powers-that-be are shutting down large group meetings. If factories, corporations, and schools follow suit, the economy will follow the direction the stock market has been taking. And this may be the catalyst (of the final erosion of confidence) that sets-off the real crisis that has been imminent for some time.
The real crisis is the biggest debt load ever – over 200% of global GDP; an amount that divvies-out to over $150,000 per household across the developed world. I wrote several months ago about the fact that the illiquidity in the repo market never went away although most of the attention to it did. The Federal Reserve this week promised to extend another $1 Trillion (yes, with a ‘T’) in repo loans to banks. $500 billion of 3-month repos were offered today, $500 billion of 1-month repos (which the Fed just introduced) will be offered tomorrow, and these operations will continue weekly. All of this is adjunct to the $175 billion in daily overnight repo operations and the at-least $45 billion in two-week term repo operations that the Fed currently offers twice per week. The Fed cannot exit the Repo market without short term rates rising sharply. This level of demand throughout the banking system for liquidity just does not occur unless there is something hugely wrong. Some have indicated that the Fed is now also engaged in supporting foreign central banks quietly in repo-with-no-collateral-required-style transfers. American taxpayers will love that if it turns out to be the case and comes to light.
It is a very odd time indeed to witness all of this while members of congress want to fight the corona virus’ spread by giving more wads of money away (?), and while capital is running from equities and tangible assets into other places including the very heart of the problem: government debt – however not to the extent history would indicate. Interest rates usually drop in a flight to ‘quality’ during stock market crashes. And they usually surge at the onset of a financial crisis as more endemic credit risk is anticipated. The 10-year treasury yield and the dollar both declined since mid-February but bounced in reversal on March 9. So a significant amount of capital may be starting to prefer to park in the dollar rather than in treasuries. The Fed is currently in a Herculean campaign to keep interest rates limited. But at some point the fed and other central banks will lose control of rates, the decline in equities will reverse, and the annual servicing cost of the national debt will jump. More people will realize that governments are no longer creditworthy and the big shift from paper obligations to real assets, including stocks in brick-and-mortar businesses, will occur. For awhile.
Watch governments continue to increase the restrictions and taxation of capital as they continue to hunt it. Investments into tangible cash-alternatives like land, metals, bitcoins have increased over recent years. But a number of wealthy people have also acquired varieties like art and gems that can be moved without detection and so offer tax-haven advantages. Although I doubt it will happen anytime soon in the United States, it will be interesting to see if any governments institute centralized electronic money, enabling them to keep peoples’ assets confined in banking accounts where they are sure to catch every cent in taxes, and even double tax it with negative interest rates to aid the banking complex if they are willing to go to that extreme.
Bernie had a good run this time, but government-run, central social-planning is failing across the world stage because of one simple truth that has stood the test of time: Government will pathologically tax & borrow to enable itself to increasingly spend. Thomas Jefferson was against deficit spending because he considered it taxation without representation upon the unborn. History shows how willing politicians have been to borrow against the public’s future with no plan for ever repaying any of it.