Discover more from American Economy Daily
How the US Government's Debt Crisis is Affecting Banks and Consumers.
Disinflation is on the horizon.
Here is what we will be getting into today:
The Treasury Curve and the Economic Ripple Effect.
What the Latest Economic Report Means for Inflation and Price Stability.
San Francisco Bay Area Housing Crash.
Let's Dive In!
YouTube Channel: George Gammon
Title: This could trigger a QT Doom Loop
Here are the key highlights:
The government has admitted that it is almost broke and the debt ceiling isn't where the story ends. It's where it just begins. The Congressional Budget Office has reported that by July, the government could run out of money. From 2000 to today, we can see that the amount of Bank Reserves in the system on the Fed's balance sheet assets have gone from zero to five trillion dollars. Prior to the Great Recession in 2008, there was about 40 billion, but when we get to 2021, it reaches a peak of four trillion dollars. This increase in debt is unsustainable and must be addressed immediately before it leads to further economic instability.
The Federal Reserve recently lowered the overnight rate to around three trillion dollars, and it is still hovering around that amount. This is important because prior to the Global Financial Crisis, the Federal Reserve would not pay interest on these reserves. With only $40 billion worth of reserves in the system, relative to M2 money supply of about $7.5 trillion, this creates an environment where banks have to compete for your deposits because you are essentially lending your Bank Reserves to them. This competition is beneficial for consumers as it gives them the opportunity to get better returns on their deposits. The Federal Reserve set the overnight rate at five percent prior to the (GFC). This enabled banks to pay customers a rate of 4.8 percent on their deposit accounts. However, with the GFC and an influx of four trillion dollars into the banking system, banks no longer need customers' money and deposits and are now flush with reserves. This creates an environment where the consumer has a decision to make: either leave their money in the bank and collect 4.8 percent or buy a T-Bill at 5.5 percent. Banks are now offering rates cheaper than they can get from other banks as set by the Federal Reserve's interest rate.
The Federal Reserve has recently raised their interest rates to 5%, however banks are only willing to pay 0.5% on deposits. This means that the Average Joe has to make a decision about where to put their money for the best return on their investment. They can either keep it in the bank at the low rate of 0.5% or invest in a money market fund which offers 5% interest. The Average Joe is pretty much the only buyer of treasuries, so they have the power to make a difference in this situation. By investing in a money market fund, they will be able to get a higher return on their investments than if they were to keep it in the bank at the low interest rate.
The Federal Reserve is in the process of quantitatively tightening their monetary policy, which has led to a decrease in the amount of treasuries that would normally be held on balance sheets. This extreme rate differential between what banks are paying and what they can get on something like a treasury T-bill has forced the average Joe to look for alternative investments. Janet Yellen's Treasury Department is issuing more and more treasuries, but those treasuries have to be absorbed by the private sector or investors.
The Average Joe is turning his savings into treasuries, and the Federal Reserve is reducing the size of their balance sheet by reducing the amount of Bank Reserves in the system. At the same time, Uncle Sam is issuing more and more of these treasuries that have to be absorbed by an entity other than the Federal Reserve. This means that there is a lot more supply that has to be absorbed by the market, and the only bidder in the market is the Average Joe. Consequently, interest rates will spike because Joe goes from treasuries back into savings. This means that banks will have to start competing for those reserves, which could lead to a decrease in borrowing costs for consumers.
The government's long-term treasury curve has gone from roughly 3.5% to 7% over the past 10 years, which has significant implications for the economy. Mortgage rates, the housing market, and the stock market are all likely to be impacted by this rise in treasury rates. If asset prices tank due to a decrease in tax revenue going into the treasury, it could create an environment of financial hardship for many people. The deficit would also likely explode at this point. This highlights why it is important to pay attention to how the government manages the treasury curve and how it affects the economy.
The current economic and fiscal situation is dire, and the government is now admitting that it might be completely broke by July of this year. The debt ceiling, or the amount of money the government can borrow, is increasing, and tax receipts are going down. Janet Yellen's deficit problem has become even more extreme as the cycle continues to repeat itself. The main takeaway is that the government might not be able to fix the debt ceiling issue.
Newsletter: Apricitas Economics
Title: The Road to Disinflation.
Here are the key highlights:
Inflation has been a hot topic in recent months as the economy continues to recover from the pandemic-induced recession. The January economic report showed positive growth in all major categories—food, energy, core goods, and core services—but inflation is still mostly driven by core services such as housing.
The energy sector is likely to be a major negative contributor to headline inflation soon. Barring a large unexpected surge in gas prices, energy is likely to be a major downward contributor due to high prices this time last year. Core goods could also become a negative contributor depending on how the vehicle market develops; however, strong demand and stabilization of used car prices might keep its net contribution low in either direction.
Wage cost pressures, a key driver of core services ex-housing inflation, have abated significantly recently according to data from the White House Council of Economic Advisors. Their index of average hourly earnings in non-housing services shows that wage growth has decreased significantly and is only 1% higher than pre-Great Recession levels.
Market-based measures of inflation expectations indicate that disinflation is coming, but it may take longer than initially expected for base effects to cause annual rent inflation to decelerate significantly and for nominal growth indicators to stabilize at target levels.
It appears that disinflation is on the horizon but will take some time before we see its effects on headline inflation figures.
Website: Wolf Street
Title: San Francisco Bay Area Housing Market Crashes, Prices Plunge 35% from Crazy Peak: Wheres Demand Supposed to Come From?
Here are the key highlights:
The Bay Area housing market has seen a dramatic decline in prices since the start of the pandemic, with the median price in the nine-county area dropping by 8% in January 2021 from December and by 17% year-over-year. The median price in San Francisco alone dropped by 6.3%, while 12,000 new housing units were completed over the same period. Sales of single-family houses in the Bay Area plunged by 37% year-over-year and mortgage rates have already risen back above 6.75%. San Francisco alone lost about 56,000 residents, or about 6.3% of its population between 2020 and 2022.
Alameda County (which includes Oakland) saw a 31% plunge from May 2022 - dropping from $1.54 million to $1.06 million - while Contra Costa County (also East Bay) experienced a 30% plunge since April 2022 - falling from $1.05 million to $736,500 over nine months - with a 11% drop year on year compared to last January's figures. The situation is further complicated when looking back at what happened during 'Housing Bust 1' which started in mid 2007 and saw median prices plummet 59% within 21 months - meaning that this current 35% plunge may not yet have worked off all of the pandemic free money spike yet.
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