• What’s happening in the UK?
• Can there be an alternative to US Dollar as the reserve currency?
Good morning, I’m Austerity Jones and I am back with C Thomas Printer who again wants to talk about what is going on across the pond. What is this obsession with the UK C Thomas?
C Thomas: Good morning Austerity. We have discussed the UK and how the new PM Liz Truss and how she was going to cut taxes while giving the people more money for high energy bills while her country was experiencing high inflation. Well, there is an interesting thing that happens when a government runs a deficit. Someone has to buy that debt and it turns out when someone buys something they do so at a price. In a free market economy, those people can choose the price at which they buy and folks the price of government debt is going up. That brings us to the word of the week: vigilantes.
Vigilantes: a member of a self-appointed group of citizens who undertake law enforcement in their community without legal authority typically because the legal agencies are thought to be inadequate.
I’m not sure we are ready for vigilantes in their purest form Austerity, although looking at the rising crime waves in our cities I could argue that they are needed, but that is a podcast for another today, no today I want to introduce you to the bond vigilantes. The bond vigilantes are bond market traders who protest against monetary or fiscal policies considered inflationary by selling bonds, thus increasing yields. In essence, the bond vigilantes say I need to be compensated at a higher yield because a) the chances that you don’t pay me back are greater or b) you are going to pay me back with cheaper currency with lower purchasing power and again I need more yield. They are in essence the people that call bs on government debt and policy. Kwasi Kharteng, the UK Chancellor, is out after 38 days as Liz Truss fired him this week. Kharteng was one of her biggest supporters and the architect of her plan to lower taxes and raise spending and borrow the difference. Remember how we said the Bank of England was selling bonds on Tuesday and buying them back to save the UK pensions on Wednesday just a couple weeks ago. That was the bond vigilantes saying you’re finished spending foolishly. The bond vigilantes have spoken and have won.
Now, Liz Truss is fighting for her political life and she will be lucky to have her job by Christmas, and all she can talk about is growth. I find this very interesting because no one is talking about the easiest way to add growth. Have your governments stop spending so much. Stop. Full Stop. A government employee takes money out of the system as it must be paid for by the citizens and their taxes. You want to deliver a tax break, get rid of the government. You want to stimulate the economy, cut the government. You want to survive as a politician, cut government. Nowhere is this more obvious than the UK right now. Liz Truss has only part of her thinking correct, cutting taxes is perfectly fine, but you better cut spending to offset it. Governments have reached the limit where the sovereign bond markets are going to tell the government what they can spend and what they can’t. When are we gonna get the medicine we need? Lower government spending. I haven’t seen this anywhere in the world. This is a seismic shift and a very key fork in the road. This is an option that politicians pretend isn’t even on the table.
Jeffrey Gundlach, the CEO of Doubleline, puts out some content on YouTube and a few weeks ago he put out an episode and the theme was we need to go to rehab, and he played the song by Amy Winehouse. He was referring, of course, to the federal government and their reliance on debt, and easy money, and easy and cheap financing. He has been called the bond king and he knows better than anyone that now people like him get to dictate terms like I need more yield. I don’t believe the governments can keep kicking the can down the road. They have been doing this for too long and now we are down the road. We will need to be compensated or we won’t buy your bonds, at least at this price. It got me thinking that we are all addicts in this country. We are addicted to spending. Our very economy is reliant on spending now, and if that spending even slows, it will be catastrophic. Well, the bond vigilantes just told the British government that they couldn’t spend beyond their means and it was game over. I remind you that we have talked about how the Brics countries are trying to put together a new currency as an alternative for the US dollar, the current world reserve currency. We said that the new group would need customers? Well the US dollar is crushing the world and we seem oblivious to it? The dollar set new multi-decade highs versus the Yen this week, and it was the UK last week, and the Canadian dollar is getting close to 1.40. Well, the UK market breaking looks like a leading indicator to me. Putin and European energy policies are putting a squeeze on Europe from the one direction, but remember they had serious energy problems before the Ukrainian conflict began, Putin is only making it worse, but their old friends the US are putting the squeeze on them from the other direction by strengthening the dollar so much that it is threatening to break their own currency. This financial pressure could be just what the Brics need to get other countries on board. We can ease your energy needs and offer a release valve from the pressure of the dollar. Please step right over here and get a nice cup of natural gas, and would you like a barrel of crude priced in something other than expensive US dollars? WE have that as well. If that happens at scale, it will be the US that needs to worry about our own bond vigilantes driving yields up and calling BS. We are the ones with the 31 trillion dollar debt and trillion dollar annual budget deficits. Why do I bring that up this week in particular? Well, the 10 year US bond just broke 4% this week, that’s up from less than 1% last year. Do you know what a 3% increase on 31 trillion dollars is? Its 930 billion dollars annually and since our debt is financed with so much short duration paper, that’s what the US government will soon be paying on its debt. 930 billion in interest payments which just happen to be 150 billion dollars more than we will spend on all defence spending this year. The bond vigilantes have been crossing the pond and they are approaching our shore. They are the ones that gather you in a circle and tell you they love you and that they are here to do what is best for you. They hold the interventions, and they are about to stage an intervention in the US and when they do, its game over.
Sincerely Yours,
C Thomas Printer
Austerity: Game over? C Thomas that is very ominous, do you really think it is that bad?
C Thomas: Yes, I do Austerity. I think interest rates, financial markets, government spending, and social policies are all at a key juncture right now. They are realizing that they need a huge fundamental change- less spending and more savings which brings us to our financial tip of the week.
Today’s financial tip
Austerity: Did you open that savings account and put $20 in it last week like we recommended? Did you at least save something? If so, very good. If not, here is a tip for this week that we were remiss in not offering up last week. Look for a good savings account and shop around for a better interest rate. Google search and find out what account pays the most on a savings account.
C Thomas: I saw that my own savings account was on my very first google search. I have been getting emails confirming that my money is getting a little more interest- one tenth of a percent at a time. Don’t be like the governments and be addicted to spending. Save a little for a rainy day and earn some interest because a storm is brewing, and savers will weather the storm better than spenders.
On this date in history
A story I have told before: Marie-Antoinette was guillotined 229 years ago today. That’s right, in 1793 the vigilantes of France had finally had enough with the opulence of her lifestyle and her policies as queen of France. She popularized the phrase “Let them eat cake” and they cut off her head in response.
Also born on this date
Dwight D. Eisenhower, Ralph Lauren, Lori Petty, Stacy Kiebler, Harry Anderson, John Wooden, and William Penn.