The math on why U.S. inflation is so “contained” = Monetization –

1) The U.S. Treasuries problem

Currently each 1.00% increase in rates consumes 10% of total U.S. tax receipts.

Click here for the current Fed chart

2) If you’re in the 8% minority that believe the BLS.GOV CPI calculations are correct the average annual CPI during the “Great Recession” has been 1.58%

Click here for current BLS.GOV numbers

3) If you are in the 92% that currently do not give BLS.GOV inflation numbers creditability you’re supported by actual increases.

4) 1980 and 1990 inflation calculations also support the 92%

5) Click here for current charts and more information on 1980 & 1990 CPI calculations.

Using 1980 BLS.GOV calculation methods the inflation rate would be greater than 7.50%

6) Using 1990 BLS.GOV calculations the inflation rate would be near 4.00%

By the BLS.GOV massaging the CPI lower (as they have through their current revisions and “enhanced calculation methods”)  the BLS.GOV has saved the .GOV trillions in debt service costs and reduced all other cost increases that are tied to inflation.

7)  Where rates should be using current BLS.GOV inflation calculations if you are in the 8% minority that give them creditability.

The 40 year average for Treasury yields is 2.14% above the CPI, the current average Treasury rate is 2.37%

Click here for the current Fed chart and supporting historical data

8) If yields went back in line with the 40 year average above the CPI Treasury yields would increase from 2.37% to 3.72% for an increase in debt service cost from the current 430 billion to 675 billion annually

Debt service cost alone would consume 36% of total U.S. annual US tax receipts.

Click here for current debt service cost

9) Where rates would be relative to historical averages

If yields went back in line with their 40 year average the average Treasury rate would increase from 2.37% to 6.14%. Debt service cost would increase from 430 billion annually  to 1.117 trillion consuming 64% of all annual tax receipts.

Where rates would be using 1980 BLS.gov calculation methods for the CPI

The current CPI using 1980 calculations would currently be 7.57%.

Using the historical average Treasury yield above the CPI Treasury the average Treasury yield would rise to 9.71% increasing the debt service cost from 430 billion to 1.77 trillion consuming 97.25% of total US tax receipts.

Can you see why the BLS.GOV needs to massage the CPI numbers lower to bailout their parent company the .GOV?

10) Pre BLS.GOV revision magic

The CPI in orange,  debt in red, M1 in blue and tax receipts in green all move together.

Click here for the Fed chart and supporting historical data

11) Post BLS.GOV revision magic

You don’t have to be a Rhodes scholar to come to the conclusion the BLS.GOV’s inflation numbers would justify a name change for BLS.GOV to just BS.GOV.

Click here for the current Fed chart and supporting historical data

12) During the “Great Recession” and “Economic Stimulus” the U.S achieved the worst credit rating and debt to GDP ratio in history.

Click here for the current Fed chart and all supporting historical data

13) The worst debt to tax receipt ratio in history

Click here for the current Fed chart and all supporting historical data

14) The worst debt to disposable income ratio in history

Click here for the current Fed chart and all supporting historical data

15) The worst debt to the employed population ratio in history.

Click here for the current Fed chart and all supporting historical data

16) The worst debt to hourly earnings ratio in history

Click here for the current Fed chart and all supporting historical data

17) The worst debt to the dollar index ratio in history

Click here for the current Fed chart and all supporting historical data

18) Nearly every ratio is far worse than pre “economic stimulus”

Many including myself  believe  “economic stimulus” has created a far greater problem for the U.S. economy than the one it was designed to solve.

19) Why rates will rise

What everyone seems to forget up until 2008 the market basically controlled Treasury rates not the Fed.

When a country like the US needed money to finance deficit spending it created debt instruments that were sold at auction with the buyers setting the rate at auctions based on a country’s debt rating, creditability and economic outlook.

20) Click here for Treasury auction basics.

From 2008-2014 the Fed created trillions of dollars backed by no tangible assets or income flow the buy the majority of all new issues (up to 85 billion per month) to force and hold rates at artificial and unsustainable lows (Quantitative Easing)

21) This essentially shut down free market Treasury auctions and the free market determining a fair rate.

Click here for the current Fed chart and all supporting historical data

22) To put this into proper perspective 85 billion per month is 1.020 trillion annually or an amount more than twice the national debt in 1971 the year the US abandoned the Gold Standard.

Click here for the current Fed chart and all supporting historical data

23) Buy forcing rates to artificial lows the Fed created the largest negative rates of return for the longest period of time in history for holders of US debt..

Fed policy striped these “savers” and the free market economy out of trillions of dollars to save the U.S. Treasury the same amount in debt service cost, note the yields below the CPI during “economic stimulus” = a negative rate of return.

Click here for the current Fed chart and all supporting historical price data

24) Meanwhile banks never lowered the prime from 3.25%, the same banks that created the problem were allowed to lock in the largest profit margins on their borrowing costs in history for the longest period of time in history, note the Fed Funds borrowing rate relative to the prime rate the spread is 3.15% or more than 50% higher than the historical average of 2.00%.

Click here for the Fed chart and all supporting historical data

25) The Fed’s theory was to increase money supply, lie about inflation (with the help of BLS.GOV) and helicopter Ben Bernanke would inflate the U.S out of the recession back into artificial and unsustainable prosperity.

Bernanke outlines what his game plan was well before he became the chairperson of the Federal Reserve in this speech “Deflation Making Sure It Doesn’t Happen Here”

26) Click here for this speech posted on the Fed’s website.

2& His unproven theory was/is there is a direct correlation between the increase in M1 and tax receipts which  is as true,  inflation engages, prices of goods and services rise with it tax revenue.

Click here for the current Fed chart and all supporting historical data

28) What Ben didn’t take into account was the ability of U.S. politicians to outspend true inflation and tax receipt increases.

Click here for the current Fed chart and all supporting data

29) Nor did he take into account the the banking problems we’re slightly larger the TARP (700 billion) when CBS and Bloomberg were able to obtain the true figures through the Freedom of information act the total exceeded 7.7 trillion

30) Nor was his team prepared or honest

Rep. Alan Grayson questions the Fed inspector General where $9 trillion dollars went… the Fed inspector general elizabeth coleman didn’t have a clue or was it the 5th?

31) But being wrong and/or incompetent was nothing new to Ben Shalom Bernanke, B,S. Bernanke was consistently wrong on his calls on the economy before and after he became Fed chairman.

Click here for the video of his calls and the outcome

32) How U.S. “leaders” could let him orchestrate an unaudited, undisclosed mult-trillion dollar “economic stimulus” plan with his proven track record for failure is beyond me.

Economic stimulus did save the U.S. Treasury trillions in debt service costs at the expense of savers.

It did make banks trillions in inflated borrowing costs at the expense of borrowers.

It did increase the per capita portion of the national debt for every American taxpayer from 67K to over 130K.

33) Now without the Fed creating trillions of dollars with keypunch entries to buy the majority of US debt at non competitive prices who’s going to replace the Fed?

Click here for the current chart and all supporting historical data

34) If the Fed fires up the QE printing press again US creditability will deteriorate even further potentially leading to 6 trillion in foreign held US debt being sold off.

Click here for the current Fed chart and all supporting historical data

35) USD currency risk for these foreign investors is more in one day than annual yields

The dollar is near a 10 year high and the world is questioning if the USD truly is the least worst place to be?

Click here for the Fed chart and all supporting historical data

36) Would you buy a U.S. Treasury with current currency risk at the rates below?

Click here for current Bloomberg quotes

37) China’s currency is also on deck to be the world’s 5th world reserve currency and their numbers according to the Fed are far superior to the US’s

38) Click here for China versus the US using the Fed’s numbers

39) From historic lows near zero what is the only direction short term rates can have a major market move?

Click here for the current chart and all supporting historical data

40) Rates will rise from either economic recovery or deteriorating U.S creditability the only question that remains is when.

41) Fed chair Yellen has spelled out where the Fed expects rates and when on multiple occasions over the last year,

Call if you have questions, need additional information, or wold like to do a 15 minute online review where I’ll show you exactly what we’re trading and how using actual trades.

When our review is complete you’ll be able to experiment with any potential outcome for these trades or your own risk/reward criteria.

If you have any questions contact  us.

Regards,
Peter Knight Advisor

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