While it is true that when someone writes of macroeconomics most people stop reading, I’m thinking this might be a good time to change that.
I’m going to write. You decide whether or not to read.
Many wonder why they should care about the economy and investing markets.
Well . . . if you have a job that might be jeopardized by a weak economy, you should care.
If you are collecting Social Security and/or a pension, or plan to do so, you should care.
If you have an IRA or 401k retirement account, you should care.
If you own whole life insurance with cash value, you should care.
If you like to be able to travel the country without an armed escort, you should care.
There are many other reasons, but that’s enough for now.
People whose job it is to notice such things are seeing warning signs everywhere that the world’s economic system, including our own United States example, is showing signs of distress that could lead to collapse.
Never happen, you say? It almost did in 2008. And the bloated money supply, overall debt both public and private, and leverage in investments is much greater now than it was in 2008.
The Dow Jones Industrial index was down 1,000 or so points at its worst today and closed off 876 and change. The tech-heavy NASDAQ lost even more on a percentage basis.
But what really has investment pros worried is the wild gyrations in the bond markets. Customarily these markets move at a glacier-like pace. There is plenty of time to identify a trend and either get on board or get out of the way.
Understand that the monetary value of global debt markets dwarfs the stock market capitalizations. Bonds are supposed to be the safe money, the bedrock of stability in tough times.
But that changes when inflation is clipping along at 8.6 percent for May on a year-over-year basis, and our panicky Federal Reserve floats a trial balloon in the Wall Street Journal that, where last meeting 75-basis-point interest rate increases were taken off the table by Fed Chairman Jerome Powell, now they are back on the table.
This spelled chaos in the bond market Monday, with the unlikely result that 2-year, 5-year, 10-year and 30-year U.S. Treasury bonds all closed with yields in the low 3-percent range. Even worse, the 2-year yield was slightly higher than that of the 10-year or 30-year.
Such instances of inversion of the interest rate curve, where traditionally long rates are higher than shorter term rates to account for inflation risk, virtually always mean an economic recession looms or already is upon us.
This comes as 30-year fixed mortgage rates climbed over 6 percent, where in January of this year they were just over 3 percent.
This sort of thing craters the housing market, never a good thing.
But the Federal Reserve Board, a group of unelected people who run the nation’s money supply – check the bills in your wallet, they’re Federal Reserve notes – has amassed a $9 trillion balance sheet in buying bonds and mortgage backed securities in recent years to boost the economy and keep interest rates low.
By way of comparison, the 2022 U.S. federal budget is about $6 trillion.
Should those purchased bonds or mortgage backed securities ever need to be marked to market at greatly reduced values, as would be possible in the case of a surge in interest rates, the Fed would be bust.
What happens then is a question no one can answer.
This nation faced even higher inflation in the late 1970s and early 1980s and then-Fed chairman Paul Volcker helped rein it in, but only by increasing the Fed Funds rate (the interest rates at which banks can borrow from the Fed) to 20 percent in June 1981.
This cooled borrowing demand, put the economy into recession and cured the problem – with plenty of economic pain.
But even if our Fed goes 75 basis points at its Wednesday meeting announcement that would put the Federal Funds rate at just 1.75 percent.
Powell would need a total of 10 raises of 75 basis points just to get that Fed interest rate on level with the current admitted inflation rate (many believe the government is understating that inflation number).
Before that happens, the U.S. economy and by extension that of the world, will be in shambles.
As strange as it might sound, you could find yourself in the not-too-distant future longing for the good, old days of $5-a-gallon gasoline.
If you’re counting on the Fed’s Jerome Powell, or Clueless Joe Biden and his regime to get us through this crisis, you’re whistling past the graveyard.
Sam Ross Jr's site 