Global Debt Binge May Force QE + Inflation: Dr. Michael Howell
What this covers
#canadianeconomy #debt #inflation
Ongoing government debt requirements could mean the resumption of Quantitative Easing and the monetization of government debt – this according to Dr. Michael Howell of CrossBorder Capital.
Links:
CrossBorder Capital:
https://twitter.com/crossbordercap
CrossBorder Capital:
https://crossbordercapital.com/
Global debt is fast approaching record $300 trillion – IIF:
https://www.reuters.com/business/global-debt-is-fast-approaching-record-300-trillion-iif-2021-09-14/
US Debt Clock:
https://www.usdebtclock.org/
Faking Their Way to a Perfect Olympics:
https://abcnews.go.com/International/China/story?id=5565191&page=1
Beijing cleans up but air pollution remains:
https://www.france24.com/en/20080213-beijing-cleans-but-air-pollution-remains-beijing-olympic-games
U.S. Dollar Index (DXY):
https://www.marketwatch.com/investing/index/dxy
The US Treasury’s Backdoor Stimulus Is Hampering the Fed:
https://www.project-syndicate.org/commentary/us-treasury-backdoor-stimulus-while-fed-is-trying-to-tighten-policy-by-nouriel-roubini-and-stephen-miran-2024-08
Reserves of Depository Institutions: Total:
https://fred.stlouisfed.org/series/TOTRESNS
Assets: Total Assets: Total Assets (Less Eliminations from Consolidation): Wednesday Level:
https://fred.stlouisfed.org/series/WALCL
Britain targets the wealthy as it hikes taxes by $52 billion:
https://www.cnn.com/2024/10/30/business/uk-budget-capital-gains-tax-rachel-reeves/index.html
Europe’s Defense Spending May Need to Nearly Double:
https://www.bloomberg.com/news/newsletters/2024-11-19/europe-s-defense-spending-may-need-to-nearly-double
Chapters 0:00 - Introduction 01:12 – Global Debt Renewal Wave 03:32 – Capital Markets for Debt Refinancing 04:28 – 70 Trillion Per Year 05:15 – Debt-Liquidity Ratio - Financial Crises 06:50 – Liquidity Triggering GFC 09:56 – Dollarized China 11:20 – Dollar Strength 12:56 – Return of Quantitative Easing 15:02 – QE by Another Name 15:45 – Treasury Issuance 17:26 – Debt Monetization 18:24 - Trump Admin Tackling Debt 20:30 – Global Fiscal Pressures 21:34 –Debt Monetization - Inflation 23:46 – Fed Vulnerabilities
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Global debt maturity wall approaching mid-2025 will create refinancing pressure that exhausts available liquidity, forcing policy-makers toward covert debt monetization and likely medium-term inflation despite near-term deflationary pressures from dollar strength.
- Global debt stock of $350 trillion with ~5-year average maturity requires rolling ~$70 trillion annually; debt-to-liquidity ratio moving above historical 2.5x equilibrium signals strain
- Conventional capital markets no longer function as investment mechanisms but as debt refinancing mechanisms (3 of 4 transactions now refinancing-related)
- Treasury short-duration issuance strategy (bills vs. long-term bonds) suppresses yields ~100bp short-term but creates structural vulnerability to rate rises and forces eventual monetization
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Bank deposits created by government spending (from fiscal deficits and stimulus checks to state workers) provide a natural demand for Treasury bills, because banks need assets matching their deposit liabilities, creating a captive financing mechanism for government debt
“if you've got the federal government writing lots of checks because of the huge fiscal deficit it's paying out you know wages to state workers those State Workers are depositing money in Banks and the banks want an asset uh which is going to match that liability and what better than a treasury bill so the banks are big buyers of these short-term debts”
Treasury Secretary Yellen has demonstrated remarkable ability to create liquidity indirectly by shifting the maturity profile of US Treasury issuance significantly toward the short end of the market (bills) rather than longer-dated bonds and notes.
“Janet has been doing at the at the treasury I mean one's got to take you know one's hat off here I mean there's been a remarkable uh ability to actually uh create liquidity if you like uh indirectly by uh Shifting the maturity profile of issuant uh from the US Treasury very significantly uh towards the short end of the market so in other words what they're doing is no longer issuing so many uh 10 year 20 year or 30-year uh bonds and notes what they're doing is increasingly issuing bills”
Long-term fiscal pressures on the US and the rest of the world are too large to manage without debt monetization because societies have been too generous in welfare benefits (which are often pay-as-you-go systems), creating structural unfunded liabilities dependent on future generations' taxation
“I think in the long term you know a lot of these pressures on fiscal finances in America and in the rest of the world are just too too big I mean the fact is we've been too generous uh in terms of U you know on on um on the current generation in terms of the welfare uh benefits that they've been given and these are in many cases payers youo systems uh so we're actually dependent on you know our children and grandchildren to basic basically Finance uh you retirement or whatever or health and this simply can't go on”
Debt is the drug we've all taken and has become a global phenomenon, with debt needing to be refinanced rather than disappearing like equity, creating a fundamental maturity wall problem particularly when debt is bunched together
“debt is the drug we've all taken and the problem with debt is that debt um doesn't go away debt has to be refinanced uh it's unlike Equity if you issue an equity Purity uh it exists in perpetuity unless the company defaults but with bonds basically they have got to be renewed they have to be rolled over and refinanced”
The 2008 Global Financial Crisis, 1997 Asian financial crisis, and 2019 US repo crisis were all fundamentally debt refinancing crises, suggesting that financial crises are unified by debt maturity mismatches rather than diverse underlying causes
“look back over the last two or three decades every financial crisis you can site is in some way a debt refinancing crisis be it 2008 the GFC be it the Asian financial crisis in 1997 be it the US repo crisis in 2019 they're all about debt refinancing in some shape or form”
Short-duration Treasury bill issuance attracts bank demand because state workers receiving federal wages deposit funds in banks, and banks need safe assets (bills) to match those liabilities
“if you've got the federal government writing lots of checks because of the huge fiscal deficit it's paying out you know wages to state workers those State Workers are depositing money in Banks and the banks want an asset uh which is going to match that liability and what better than a treasury bill so the banks are big buyers of these short-term debts”
The US spent significant post-WWII reconstruction effort attempting to dismantle the British Imperial Preference system and establish a liberal multilateral trade order, representing a complete reversal of what the Trump Administration might now be considering.
“the us at the time was very vly against and in fact a lot of the efforts of the US in the period during Reconstruction after World War II was all about dismantling that Imperial preference system”
The likely outcome of the debt refinancing crisis is a deflationary crisis, not an inflationary crisis, because policymakers cannot afford to print money furiously (which would trigger runaway inflation and currency debasement) when the world structurally needs dollars for refinancing
“a lot of the sort of naysayers about what will happen to the dollar in the international monetary system a lot of the concern people have is that you know this is ended by a sort of inflationary wave where uh the US starts to print money furiously and uh you know the the dollar is is uh demised by uh falling in value I think the actual fact what you're more likely to get is not an inflationary crisis but a deflationary crisis for exactly the reasons you site um you know the world needs dollarss”
China operates as a dollarized economy despite nominally using the yuan, with Chinese banks holding very large gross positions in US dollars (both assets and liabilities), making the US dollar paramount to China's financial system and creating a paradox where a larger Chinese trade surplus strengthens the US dollar
“despite the fact that China operates uh the Chinese Yuan as their currency China is in many ways a dollarized economy and that's one of the things that makes you know the whole dollar Nexus kind of very difficult to understand and you know you you arrive at this Paradox right now where um you know the uh the bigger the Chinese Trade Surplus the stronger the US dollar uh and a lot of that is simply because China is actually using dollars you got to remember as well that Chinese banks have grow have very large gross positions in the US dollar both assets and liabilities”
The debt-to-liquidity ratio has historically maintained a stable equilibrium of approximately 2.5 times over the long term going back to the early 1980s, and when this ratio rises above 2.5 or falls below 2.5, it produces strain leading to refinancing problems and financial crises or financial bubbles respectively
“if you look at the relationship between debt and liquidity in the world economy over the long term I'm talking here going back to the early 1980s it sort of shows a pretty stable equilibrium at about two and a half times when you stray around that and there a chart that we can refer to to identify that but if you uh if you stray either side if you go above two and a half what you tend to find is that the debt liquidity ratio becomes strain you get refinancing problems and those refinancing problems Express themselves in financial crises... if you have too uh too little debt relative to liquidity and other words that ratio is depressed then you start to see Financial bubbles”
The 2008 financial crisis was triggered by Chinese Olympic preparations in 2008 when Chinese policymakers tightened monetary policy to reduce industrial pollution, forcing Chinese companies into eurodollar markets for financing, which overloaded already-fragile eurozone bank funding
“what happened in China and it wasn't that China was the cause or uh of this debt bubble if you like what the what the China was the trigger and the trigger was that ahead of the Olympics in 2008 which was clearly a showcase Olympics that China did not want to go badly and if you recall zi jingping the current Premier was actually I believe in charge of that ceremony or those arrangements so he was a key figure and this was a prestigious event for China uh they didn't want uh the Olympics to be spoiled by industrial pollution and so uh one of the arguments I put was that what you were seeing occurring in China from about the spring of 2008 was attempts to temper the economy to try and slow the economy down uh to stop you know billowing smoke or Smog or whatever that would interfere with the Olympics and so there was a tightening of policy that tightening of policy forced a lot of Chinese companies out into the euro dollar markets to get finance and it was that which overloaded the markets at the time”
Short-term bonds and Treasury bills are 'safe assets' with tremendous demand from market participants, which makes them attractive for funding but tends to be inflationary in the long term because they require frequent rolling and can be called back quickly if conditions change
“if you issue a government bill there's a tremendous demand for government bills people like government bills they're great safe assets uh the only problem is that they tend to be inflationary in the long term and so this is the this is the problem with building”
The US dollar will remain the paramount currency and hedge of world money for the foreseeable future (at least in Howell's lifetime) despite continued criticism from dollar doomsayers, because the world structure needs dollars and alternative systems cannot replace its function
“the dollar is still the Paramount currency and the the hedge of money in terms of world money and with this renewal wave coming up or this refinance wave there's going to be even more demand for US dollars because all that debts in dollars... the dollar is still the Paramount currency and the hedge of money in terms of world money... that's a long long way into the future it's certainly not going to happen in my lifetime for sure”
Europe's budgetary system is 'completely shot through' with fiscal pressures and Europe must contribute its fair share of defense spending, but the fiscal system is unable to support increased defense commitments
“Europe clearly has to come up to the plate here and you know do its FES share defense spending and budgetary uh the budgetary system in Europe is completely shot through”
A stronger US dollar in the near term will benefit inflation in the short term (by making imports cheaper and supporting price stability), but there are limits to how high the dollar can go before it harms US manufacturing and onshore production, creating opposing forces in currency dynamics
“a stronger Dollar near term if that's what we're seeing which we seem to be is going to benefit inflation in the short term but how how high can the dollar really go um if you want to regenerate us manufacturing and onshore um they are clearly limits lot of opposing forces right now pushing and pulling I suppose”
The debt maturity wall is a global phenomenon, not just a US problem, with many other economies being even more indebted and facing bigger refinancing hurdles than the United States.
“the other fact that's out there is that if you look at this uh this maturity War uh it's really coming uh I guess from about the beginning of um or beginning of 2026 but probably it starts sometime around the middle of 2025 and that's when you may start to see the or feel the effect uh that bin dead was really encouraged by the fact that during the zero interest rate regime uh in the of Co at Al U what we saw were a lot of Corporations and households refinancing debt what didn't wasn't just the private sector the public sector also played a role”
The zero-interest-rate regime (ZIRP) during COVID and post-COVID encouraged massive debt issuance by corporations, households, and governments; this debt was refinanced at low rates and bunched into similar maturity windows, creating the conditions for a maturity wall crisis.
“that bin dead was really encouraged by the fact that during the zero interest rate regime uh in the of Co at Al U what we saw were a lot of Corporations and households refinancing debt what didn't wasn't just the private sector the public sector also played a role”
The Federal Reserve has been conducting 'not QE' (hidden quantitative easing) for 2-3 years while officially pursuing quantitative tightening, by increasing bank reserves despite shrinking the overall balance sheet, because increases in liabilities to banks represent liquidity creation
“one of the things we've been seeing very much in the the last two to three years is something I've described as not qeqe and you've had that operating in parallel with a similar policy that the treasury has been engaged in... you've just got to see for example look at us uh US Bank Reserves I mean partially the last two or three weeks but generally speaking uh US Bank Reserves have increased fairly noticeably since um the svb crisis in March of 2022 um but uh sorry 23 and they've also increased fairly significantly since the British Guild crisis in September of 2022 so generally there's been an upward Trend in Bank Reserves which is reflecting uh how much money there is how much Surplus money there is in uh in US money markets”
By issuing primarily short-term Treasury bills instead of long-term bonds, the Treasury is functionally monetizing the debt because it restricts long-term supply, forcing pension funds and insurance companies (who need duration for their liabilities) to be squeezed out of the market, while banks (who benefit from low yields on short-term assets) become the primary buyers
“what you're doing is no longer issuing so many uh 10 year 20 year or 30-year uh bonds and notes what you're doing is increasingly issuing bills... you're restricting the amount of debt that you're issuing to long-term institutions such as Pension funds and life insurance funds uh they St of the duration that's necessary uh for their plan holders and what you're doing therefore you're keeping bond prices elevated at that end of the market but what you're doing is doing all the issuance at the short end which tends to be attractive for banks to buy”
Debt-to-liquidity ratio has maintained a stable equilibrium at approximately 2.5 times over the long term since the early 1980s; when this ratio exceeds 2.5, refinancing strain emerges and manifests as financial crises
“so look back over the last two or three decades every financial crisis you can site is in some way a debt refinancing crisis be it 2008 the GFC be it the Asian financial crisis in 1997 be it the US repo crisis in 2019 they're all about debt refinancing in some shape or form”
Attempts to exclude China from the dollar system by restricting eurodollar access reduce the effective global dollar supply by forcing Chinese entities to use less-efficient backwater banking channels instead of mainline US banks
“attempts to Corral China and stop China using the dollar is actually reducing uh ultimately the supply in the world economy for the simple reason that China is then forced to use backwaters to recycle dollars uh and those backwaters are less efficient than us than Mainline US Banks and so the effective supply of dollars gets interrupted and that maybe is what we're seeing right now with the rise of the US dollar dollar keeps Rising persistently”
The Federal Reserve has been conducting hidden quantitative easing ('not QE') since at least the SVB and UK gilt crises (2022-23) by increasing bank reserves and emergency lending while nominally shrinking its balance sheet
“I mean one of the things we've been seeing very much in the the last two to three years is something I've described as not qeqe and you've had that operating in parallel with a similar policy that the treasury has been engaged in uh which is called not yield curve control yield curve control in other words these are unconventional unconventional policies they're very unusual uh you know marks or they've got unusual Stripes relative to what we would normally see or understand as QE or yield curve control but nonetheless they're happening”
Federal Reserve and Treasury are acting in concert (more than publicly acknowledged) to target the 10-year note yield as the actual policy rate, rather than the Fed funds rate which is largely indicative
“the treasury and fed together I think they're acting a lot more in concert than we're already led to believe but what they're what they seem to be doing is uh using the 10-year note yield as their target uh interest right their policy rate uh it's not really the uh you know I mean it's not really the FED funds rate there's very little transactions that occur at fed funds rate anyway it's more indicative rate but I think the true policy Target rate uh is the 10year yield and that's what they've been trying to do to suppress”
The world economy has had luxurious conditions for the last 4-5 years with ample liquidity relative to debt, but this is transitioning starting mid-2025 to a regime where debt-liquidity ratio will be higher and more strained, diverting available capital to debt rollover rather than speculative or productive investment
“if you have too uh too little debt relative to liquidity and other words that ratio is depressed then you start to see Financial bubbles we've actually been in the sort of luxurious situation for much of the last four or five years where you've actually had a lot of liquidity relative to debt and that's what's inflated markets but we're moving now into a regime uh you know really from 2025 or mid 25 onwards where that relationship is now skewed more unfavorably and so the debt liquidity ratio is higher suggesting there may be more and more demands uh on Capital markets for this rollover”
China operates the yuan as its currency but functions as a dollarized economy with large gross positions in US dollars in both assets and liabilities, making Chinese banks and the Chinese economy heavily dependent on access to eurodollar funding
“you know despite the fact that China operates uh the Chinese Yuan as their currency China is in many ways a dollarized economy and that's one of the things that makes you know the whole dollar Nexus kind of very difficult to understand and you know you you arrive at this Paradox right now where um you know the uh the bigger the Chinese Trade Surplus the stronger the US dollar uh and a lot of that is simply because China is actually using dollars you got to remember as well that Chinese banks have grow have very large gross positions in the US dollar both assets and liabilities so the the the US dollar matters hugely to China”
The Treasury and Federal Reserve are acting in greater concert than publicly acknowledged, with their true joint policy target being the 10-year Treasury note yield rather than the officially stated Fed funds rate, which is merely indicative.
“the treasury and fed together I think they're acting a lot more in concert than we're already led to believe but what they're what they seem to be doing is uh using the 10-year note yield as their target uh interest right their policy rate uh it's not really the uh you know I mean it's not really the FED funds rate there's very little transactions that occur at fed funds rate anyway it's more indicative rate but I think the true policy Target rate uh is the 10year yield”
Long-term fiscal pressures in America and globally are unsustainable because current-generation welfare and pension benefits are paid by future generations; this is unmanageable especially as defense spending must increase due to geopolitical tensions
“a lot of these pressures on fiscal finances in America and in the rest of the world are just too too big I mean the fact is we've been too generous uh in terms of U you know on on um on the current generation in terms of the welfare uh benefits that they've been given and these are in many cases payers youo systems uh so we're actually dependent on you know our children and grandchildren to basic basically Finance uh you retirement or whatever or health and this simply can't go on it's it's it's unmanageable particularly in a world where you've got more and more geopolitical tensions where defense spending almost certainly will have to go up”
The US government has to refinance one-third of total US debt outstanding (approximately $12 trillion of $36 trillion) next year, representing enormous demands on capital markets that overwhelm the textbook capital market model of interest rates as financing mechanisms for new capital spending
“just look at the US government they've got to refinance something like onethird of total US debt outstanding uh next year um so we're talking about you know a US debt outstanding of what now 36 trillion a third of that's got to be rolled next year so these are big big demands on Capital markets”
Global debt stock has accumulated to approximately $350 trillion, with an average maturity around 5 years, requiring roughly $70 trillion of debt to be rolled every year
“if you look at the this stock of global debt which is now amassed to about $350 trillion and you assume uh probably you know not far from the truth it's about five year uh five years uh maturity you're talking about rolling something like $70 trillion of of debt every year”
Treasury Secretary Janet Yellen has engineered a substantial shift in US debt issuance from long-term bonds (10yr, 20yr, 30yr) toward short-term bills, reducing average auction maturity by approximately 1.25 years over two years
“Janet has managed to reduce the average maturity at auctions over the last two years by about one and A4 years which in bond terms is actually quite a lot so what you're doing here is you're actually by getting the banks to buy more and more debt”
Three out of every four transactions in world financial markets are now debt refinancing transactions; capital markets no longer function primarily as investment financing mechanisms but as debt refinancing mechanisms
“we estimate about three out of every four uh that go through uh world financial markets now three out or four transactions is in some way a debt refinancing transaction”
European budgetary systems are 'completely shot through' with deficits and unsustainable commitments; Europe must increase defense spending while lacking fiscal capacity
“Europe clearly has to come up to the plate here and you know do its FES share defense spending and budgetary uh the budgetary system in Europe is completely shot through uh um so you know there are clearly big big challenges out there”
Policy makers must implement quantitative easing (or policies called by alternative names like 'quantitative support') to provide liquidity for the upcoming debt refinancing wave, and failing to do so will result in severe problems.
“policy makers need to get ahead of um or or there's there's going it's going to be problematic does that mean QE well I think it means QE in Albert name yes I mean one of the things we've been seeing very much in the the last two to three years is something I've described as not qeqe”
Government debt obligations (pensions, entitlements, defense) cannot be paid without debt monetization in coming years; default or renegotiation is politically infeasible, making inflation the only realistic outcome
“I don't see how they're ever paid for without debt monetization and the ensuing inflationary pressures”
The constraint on Treasury ability to raise interest rates long-term is structural and durable; as short-duration debt dominates, rate rises become prohibitively expensive for the government to service
“that may tell us something in the sense it may tell us that it's very difficult with the F to raise interest rates going forward uh that may well be the case I'm sure that's actually that is true uh there are constraints now as to what could happen”
Short-term debt (bills) have historically remained in a 15-20% range of total US debt; current levels are at ~22% but could rise to ~25% before becoming structurally unsustainable
“there's been a longterm rule of fun um that seems to have now been gone by the by which is that bill issuance would settle in a sort of 15 to 20% range out of total US debt it's currently about 22% so it's above that you know I acknowledge it's been a lot higher in the past at one stage it was up to 40% uh but those days were a long time ago and you know I think the reality is that we're probably moving up to a figure which is probably around 25% which gives them a little bit of leeway but at the end of the day you can't really go beyond that”
The US dollar will remain the paramount currency and primary store of global money for the foreseeable future; predictions of dollar demise or rapid depreciation are mistaken
“that's a long long way into the future it's certainly not going to happen in my lifetime for sure”
The 2008 financial crisis was triggered by China's policy tightening ahead of the 2008 Beijing Olympics, which forced Chinese companies to borrow in eurodollar markets, overloading those already-fragile markets and precipitating the crisis, though the underlying cause was Western financial excess
“if you actually Trace back what happened the trigger May well have been what happened in China and it wasn't that China was the cause or uh of this debt bubble if you like what the what the China was the trigger and the trigger was that ahead of the Olympics in 2008 which was clearly a showcase Olympics that China did not want to go badly and if you recall zi jingping the current Premier was actually I believe in charge of that ceremony or those arrangements so he was a key figure and this was a prestigious event for China uh they didn't want uh the Olympics to be spoiled by industrial pollution and so uh one of the arguments I put was that what you were seeing occurring in China from about the spring of 2008 was attempts to temper the economy to try and slow the economy down uh to stop you know billowing smoke or Smog or whatever that would interfere with the Olympics and so there was a tightening of policy that tightening of policy forced a lot of Chinese companies out into the euro dollar markets to get finance”
Wealthier corporations and tech companies fund new capital investment from cash flow rather than from capital markets, and state-owned enterprises (particularly in China) invest regardless of profitability or interest rate conditions, removing the assumption that capital allocation depends on interest-rate arbitrage
“what capital investment is being done is being done by wealthy corporations tech companies maybe out of their cash flow or it's been done by state-owned Enterprises for example in China uh which are you know investing regardless of what the interest rate backdrop or even the profitability uh of the investment is likely to be”
Debt is fundamentally different from equity: equity, once issued, exists in perpetuity unless the company defaults, whereas bonds and debt must be rolled over and refinanced periodically, creating ongoing financing demands.
“debt um doesn't go away debt has to be refinanced uh it's unlike Equity if you issue an equity Purity uh it exists in perpetuity unless the company defaults but with bonds basically they have got to be renewed they have to be rolled over and refinanced”
Upcoming debt maturity wall will generate increased demand for US dollars from non-US entities attempting to refinance dollar-denominated debt, supporting rather than undermining dollar strength
“with this renewal wave coming up or this refinance wave there's going to be even more demand for US dollars because all that debts in dollars”
Policy-makers must proactively address debt refinancing challenges through quantitative easing or equivalent measures starting immediately; failure to do so will result in financial crisis
“you've also written that policy makers need to get ahead of this um or or there's there's going it's going to be problematic”
The implied break-even inflation rate in the US is approximately 3.2-3.5%, not the stated 2% target, suggesting that the market prices actual long-term inflation expectations much higher than official targets and that current bond yields artificially suppress long-term inflation expectations
“if you look at the implied Break Even inflation rate in the US what that would suggest is that we're actually probably at 32% not the 2% that's stated so in actual fact what we're looking at here is higher underlying inflation and I think that 3 and a half% readers a more realistic view of what long-term inflation is than the 2% that we're led to believe”
Treasury's yield-suppression efforts through short-issuance may have reduced long-end yields by approximately 100 basis points, significantly distorting long-term bond prices
“at the shortterm uh you know the short-term attraction of keeping bond yields depressed and we think this may taken you know 100 basis points out of the long end of the market so it's a substantial amount”
The consensus that the US will experience an inflationary crisis from money printing is incorrect; a deflationary crisis is more likely because debt refinancing will absorb liquidity and compress spending power
“a lot of the sort of naysayers about what will happen to the dollar in the international monetary system a lot of the concern people have is that you know this is ended by a sort of inflationary wave where uh the US starts to print money furiously and uh you know the the dollar is is uh demised by uh falling in value I think the actual fact what you're more likely to get is not an inflationary crisis but a deflationary crisis for exactly the reasons you site uh you know the world needs dollarss”
Alternative fiscal consolidation measures (like legalizing illegal immigration and requiring registration with IRS) could generate revenue faster and cheaper than border deportation, focusing political will
“such as you know making all illegal all illegal suddenly legal by getting to register with the IRS I me that would be a a thought rather than the the big cost of deportation this will sort of focus the Mind pretty pretty quickly”
All liquidity absorbed by debt refinancing is unavailable for productive investment or asset speculation; the upcoming maturity wall will starve both real economy investment and speculative markets (S&P 500, Bitcoin, gold, etc.) of funding.
“it's not being there to fuel increases in the S&P Bitcoin gold prices you name it so all the money is going to help this maturing debt it's not going towards any productive Endeavors or even speculative Endeavors correct right correct”
Attempts to restrict China's access to the dollar system reduce the effective global supply of dollars because China is forced to use inefficient backwater channels (non-mainstream US banks) to recycle dollars, disrupting the efficient dollar supply that underpins global finance.
“attempts paradoxically attempts to Corral China and stop China using the dollar is actually reducing uh ultimately the supply in the world economy for the simple reason that China is then forced to use backwaters to recycle dollars uh and those backwaters are less efficient than us than Mainline US Banks and so the effective supply of dollars gets interrupted”
Medium-term inflation is likely to be higher than current consensus expectations; underlying inflation is being masked by transient deflationary factors like dollar strength
“inflation in my view is likely to be uh higher over the medium term it's not to say you're going to get Runway inflation but you know the analogy is that we're sort of excoriated by uh slight higher inflation so we're sort of markets are being sandpaper on consumers are being sandpaper to death”
Inflation is likely to be higher over the medium term, not hyperinflationary, but persistent as consumers and markets are 'sandpapered to death' by a chronic underlying inflation above the official 2% target, due to the necessity of debt monetization
“inflation in my view is likely to be uh higher over the medium term it's not to say you're going to get Runway inflation but you know the analogy is that we're sort of excoriated by uh slight higher inflation so we're sort of markets are being sandpaper on consumers are being sandpaper to death”
A potential path forward for the Trump Administration would be establishing a tariff system among allied nations while excluding 'rogue states' like China, Russia, Iran and North Korea, which would create increased demand for dollars and represent a modern version of the 1930s British Imperial Preference system that the US previously opposed.
“maybe in the next four years and the upcoming Trump Administration maybe what will happen is something like you know dare I suggest uh like the uh the British Imperial preference system uh in terms of tariff walls that was put in place in the 1930s which the us at the time was very vly against and in fact a lot of the efforts of the US in the period during Reconstruction after World War II was all about dismantling that Imperial preference system am maal didn't occur recur again but you know paradoxically maybe this is what is going through the minds of Trump's advisers now maybe it's much better to have a tariff system among your friends your allies uh and then you can exclude uh you know Rogue States like China or North Korea or Iran or Russia or whatever maybe that's the way forward that would actually create in my view a lot more demand for dollars”
A future tariff system among Western allies (British Imperial Preference model) may emerge as Trump Administration policy, which would increase demand for dollars by ring-fencing allies within a dollar-based trading bloc
“maybe what will happen is something like you know dare I suggest uh like the uh the British Imperial preference system uh in terms of tariff walls that was put in place in the 1930s which the us at the time was very vly against and in fact a lot of the efforts of the US in the period during Reconstruction after World War II was all about dismantling that Imperial preference system am maal didn't occur recur again but you know paradoxically maybe this is what is going through the minds of Trump's advisers now maybe it's much better to have a tariff system among your friends your allies uh and then you can exclude uh you know Rogue States like China or North Korea or Iran or Russia or whatever maybe that's the way forward that would actually create in my view a lot more demand for dollars”
Future monetary policy will be relabeled from 'QE' to more benign terminology ('quantitative support' or similar) to avoid political messaging problems, but will functionally constitute QE
“I would Envision you're going to see something not to similar I think it'll be called something more benign or anod it won't be called QE it'll be called Qs quantitive support or some you know something like that the fed's acronym department will clearly be going overtime on this to try and find something that's suitable but broadly that's what we're going to see”
Debt is described as 'the drug we've all taken,' implying a widespread structural dependence on expanding credit that becomes difficult to reverse without economic pain.
“we're on a debt binge I mean debt is the drug we've all taken”
The UK Labour government's tactic of claiming the 'books were hidden' and inheriting a 'black hole' allows rapid policy reversal (tax increases) without political accountability; similar tactics could be employed in Trump Administration
“just take for example what's happened in Britain uh with the socialist government that's coming in uh you know making all these claims about not raising taxes and what do they do immediately they come in they say oh look oh we didn't realize this because the books have been hidden um the uh previous uh conservative government uh basically had done a shocking job at financing and therefore there's a whopping great black hole we've got to we've got to fill sorry we have to raise taxes we've got to go back on our word”
Strategically, the optimal policy for the Trump Administration to manage the debt and deficit crisis would be to create a recession early in the administration to clear imbalances, despite Trump's stated preference for low interest rates and a strong economy, because a long-term Republican dynasty strategy requires addressing long-term fiscal sustainability
“if I was if I was a strategist there what I would be recommending is uh is to create a recession as early as possible and I think if you want and that may be you know a fanciful thought given the fact that Trump wants a strong economy and he clearly uh it prefers low interest rates but the reality is that if this is a long-term Republic Administration uh with the idea of winning the midterms gain sizely I mean the majority at the moment clearly is not is not that big it's it's it could easily be revers midterm uh and getting Advanced maybe as the next candidate after Trump then I think if you've got this idea of creating Dynasty Republican Dynasty you've got to S with your you've got to have an eye on long-term strategy and I think it's better to get the bad news out now”
Historically, Treasury bill issuance has settled in a 15-20% range as a percentage of total US debt outstanding, but the Treasury has increased this to approximately 22% and could move to approximately 25%, beyond which it becomes imprudent and difficult
“there's been a longterm rule of fun um that seems to have now been gone by the by which is that bill issuance would settle in a sort of 15 to 20% range out of total US debt it's currently about 22% so it's above that you know I acknowledge it's been a lot higher in the past at one stage it was up to 40% uh but those days were a long time ago and you know I think the reality is that we're probably moving up to a figure which is probably around 25% which gives them a little bit of leeway but at the end of the day you can't really go beyond that”
Policymakers cannot renege on benefit promises to Trump voters and other beneficiaries of entitlement programs without severe political damage, making benefit cuts politically infeasible and forcing reliance on debt monetization and inflation as the only viable adjustment path.
“it's extremely difficult to see how how these things are back and me You've either going to have to reneg on the Promises now that's clearly difficult in the context where maybe a lot of trump supporters are actually beneficiaries of these programs um so it would be very difficult to say no to that and I think the only thing to do is to find ways of monetizing”
The Trump Administration faces a strategic choice: immediately engineer a recession to clear out excess debt and reset baselines, or defer resolution and face larger problems later in a potential Republican multi-term dynasty
“if I was if I was a strategist there what I would be recommending is uh is to create a recession as early as possible and I think if you want and that may be you know a fanciful thought given the fact that Trump wants a strong economy and he clearly uh it prefers low interest rates but the reality is that if this is a long-term Republic Administration uh with the idea of winning the midterms gain sizely I mean the majority at the moment clearly is not is not that big it's it could easily be revers midterm uh and getting Advanced maybe as the next candidate after Trump then I think if you've got this idea of creating Dynasty Republican Dynasty you've got to S with your you've got to have an eye on long-term strategy and I think it's better to get the bad news out now”
Forward-looking policy will likely involve continued accommodation under a euphemistic name like 'quantitative support' (QS) rather than quantitative easing (QE), because the political cost of acknowledging ongoing monetary accommodation is high while the economic necessity for it is unavoidable
“I would Envision you're going to see something not to similar I think it'll be called something more benign or anod it won't be called QE it'll be called Qs quantitive support or some you know something like that the fed's acronym department will clearly be going overtime on this to try and find something that's suitable”
Mark (the host) is interviewing Dr. Michael Howell of Crossborder Capital, who authored 'Capital Wars: The Rise of Global Liquidity.'
“that was the message coming from my interview with Dr Michael Howell of crossb capital author of Capital Wars the rise of global liquidity who can be found ATC crossb cap on Twitter I had the pleasure of speaking with Dr Howell”
The Trump Administration could increase tax revenues immediately by legalizing illegal immigration and having undocumented workers register with the IRS, rather than pursuing the high-cost deportation approach, thereby generating funds to address fiscal challenges.
“there's other things that could go on where they could get tax revenues up immediately such as you know making all illegal all illegal suddenly legal by getting to register with the IRS I me that would be a a thought rather than the the big cost of deportation this will sort of focus the Mind pretty pretty quickly”
Dr Michael Howell is the author of 'Capital Wars: The Rise of Global Liquidity' and can be found on Twitter at @crossbcap.
“Dr Michael Howell of crossb capital author of Capital Wars the rise of global liquidity who can be found ATC crossb cap on Twitter”
The Trump Administration faces an extremely challenging fiscal situation with uncertain outcomes, but the magnitude of debt obligations and structural policy constraints make the next four years 'uncertain times' requiring careful navigation.
“uncertain times very definitely okay”
The host (Mark) introduces the interview and notes the importance of issues to be discussed: upcoming global renewal wave, lack of cash to handle it, potential return to quantitative easing, and longer-term inflation expectations.
“I had the pleasure of speaking with Dr Howell about the upcoming Global renewal wave the lack of cash to handle it potential return to quantitative easing and longer term inflation expectations”