# Fundamentals 230717

From 1970 to 1979 the average of more accurately reported inflation was 7.09% the average Treasury rate 9.90%, the average rate paid above more accurately reported inflation 2.8%, this enabled the federal government to attract buyers on the open market for the majority of its debt.

By 1980 the tables are turned inflation went from 5.88% in 1970 up to 13.5% by 1980 for an increase of 7.62% while treasury rates went from 9.09% in 1970 up to 12.38% 1980 for an increase of 4.76% dropping the rate paid above inflation from 3.21% in 1970 to 1.21% below reported  inflation by 1980

In 1980 the federal government had two choices contain what was at the time record deficit spending removing money from the system and containing inflation or coming up with adulterate way to contain inflation, they chose the latter and decided to Instruct the Bureau of labor and statistics to implement hedonic quality adjustments to bring the inflation rate down.

An example of an hedonic equality adjustment would be if a car increased in price from 50,000 to 75,000 rather than saying the car goes up 50%, an hedonic equality adjustment tells us because the car is going to last twice as long it’s gone down in price,  housing if a home price goes from 200,000 to 300,000 you would think that would represent a 50% increase in the price  a hedonic quality adjustment says because the home is of  higher quality the price has actually going down. Food let’s say a family is used to eating porterhouse steak which provides 20 grams of protein for each of the family members, they can no longer afford to buy porterhouse steaks so they buy chicken and the family still gets 20 grams of protein per family member but a more competitive price, because they’re still getting 20 grams of protein their food cost has actually gone down.

Using 1980 calculations from 1980 through 1989 inflation would have declined from 13.5% down to 11.1%  Even though federal debt increased from 909 billion to 2.867 trillion up 215.48% between 1980 and 1989 through the magic of hedonic quality adjustments the inflation rate went from 13.5% down to 4.79% four decline of 8.71% this enabled the treasury to justify reducing the treasury from an  average of 12.38% in 1980 down to 9.58% by 1989 with treasuries  going from paying 1.12% below inflation in 1980 to paying 4.79% above reported inflation in 1989

This premium the federal government hoped would attract enough buyers on the open market to fund the masajority of tis 1.958 trillion in deficit spending between 1980 and 1989 but it didn’t, out of the 1.958 trillion in deficit spending and maturing issues 707.8 billion found no bids, rather than raise rates high enough to attract  bids for this 707.8 billion and increase federal debt service cost the federal government  opted to dump this 707.8 billion into federal agency and trust accounts home of Social Security military an civilian pension funds by issuing these agency and trust accounts non marketable special issue bonds at a rate below what the open market was paying, this was the beginning of the end for Social Security that has an expected insolvency by 2031.

Federal Ageny and trust part 1 add in debt sold to other entities

16 countries now have a higher debt rating than the United States, in 2023 the U.S.  is ranked below Finland, Hong Kong and Taiwan. By 2028 it’s expected to fall further from the current  AA+ negative to AA- stable, at AA- stable this once great country and temporary home to the World’s Reserve Currency will share the same debt rating as the Czech Republic, Estonia and Slovenia.

What happened?

Since 2008 U.S. Federal debt has spiked form  trillion to trillion up 23.215 trillion or +253.26% while at the same time total annual Federal revenue increased from 2.567 trillion to 4.359 trillion +69.75%

23.215 trillion in 2023 dollars is 5 times the fiscal cost WW II and 23 times the cost of FDR’s economic stimulus program the new deal, the New Deal built America’s infrastructure, prepared it for WW II and lifted the US out of the Great Depression.

Over the last 6 months U.S. Federal debt has increased by another 1.088 trillion, to put this into perspective 1.088 trillion is more than twice Russia’s total debt of

In 2020 Federal debt service cost was 528 billion, in 2021, 601 billion, in 2022, 852 billion,

3.28% generating a debt service cost of 1.104 trillion or 25.34% of total annual Federal Revenue,

In 2023 each 0.25% increase in rates increases U.S. debt service cost by 81.365 billion dollars an amount equivalent to the total annual government budget of Switzerland.

Annual Federal revenue as a percentage of total Federal debt has dropped from 56.89% of total revenue to 12.94% in 2023 an all time historic low.

What makes the U.S. debt service problem worse, maturing Treasury debt that needs to be refinanced at much higher rate and new Federal debt that needs sold to finance current deficit spending, this task is expected to bump the average rate on Treasury debt to a minimum of 3.85% in 2023 which will consume 29.74% of total Federal Revenue, The high estimate calls for an average rate of 4.87%%, which would consume 37.62%%  of  total Federal revenue.

Adding to the problem demand for downgraded U.S. Treasuries has declined,  the primary reasons, Treasuries have not paid a competitive rate of return for decades, they’ve, lost their AAA rating and the market does not believe the reported BLS.GOV inflation rate is remotely credible, enter anything into BLS.GOV inflation calculator odds are their projected price has nothing to do with reality housing for example is 44% of the CPI, in June 2009 a Median home  cost \$220,900 according to the BLS.GOV in June 2023 a median homes should be \$312,474 up 41.45%, actual cost in June 2023 \$436,800, up 97.74%

In 2023 the U.S. government needs to sell over 6.5 trillion in Treasury in debt, of the 6.5 trillion over 4.4 trillion is maturing debt that needs to be refinanced and more than 2.1 trillion to fund new debt. The Treasures the Federal Government are trying to sell to Fund this 6.5 trillion have a debt rating below Finland, Hong Kong and Taiwan with an average yield of 4.67% which is 1.63% below the 12 month average reported inflation, it’s just not going to happen,

What it took for the Federal government to fund deficit spending from 1970 through 2007 selling it’s debt on the open market and not to the Fed was a AAA stable debt rating paying an average rate of 3.99% more than reported inflation.

In 1970, 1973, 1977 and 1982 when the inflation rate averaged 6,19% it took a a AAA debt rating and an average Treasury rate of 10.62%, paying 4.42% above more than reported inflation.

 Year Average Inflation Treasury Rate Rate Above Inflation 1970 5.88% 9.09% 3.21% 1973 6.26% 9.73% 3.47% 1977 6.47% 9.83% 3.36% 1982 6.16% 13.81% 7.65% Average 6.19% 10.62% 4.42%

From 1987 through 2007 (prior to QE) the Federal Government had to sell a total of, these Treasuries were rated AAA stable and had an average rate of 6.78%.

Over this 20 year period out of the 6.604 trillion sold, the open market bought only 2.715 trillion the remaining 3.889 trillion we’re “sold” at non competitive rates to Federal Agencies and Trusts like Social Security, Military and Civilian Pension funds. What the Federal Government did was borrow and spend all of the actual hard earned cash the beneficiaries for forced to pay into these Pensions and Trusts and replaced these retirement dollars with non marketable “special issue debt” that paid a non competitive rate jeopardizing the retirement income  for millions of Americans. Social Security for example is scheduled to become insolvent in 2031  what this means is a citizen who is 57 years old who’s had to involuntarypat 6.2% to 12.4% of his income into Social Security for the last 35 years and will continue for another 8 years, when its time for him to retire in 2031 Social Security will be insolvent and the amount of his monthly benefit if it exists will be questionable,

In 2007 when borrowing out all the money paid into the pensions funds and Trusts wasn’t enough the Federal Government and Federal Reserve created quantitative easing and capitalized on a “financial crisis” that gave them excuse they needed not only to lower Treasury deposit rates to near zero to reduce Federal debt service cost, but to create as much money as they wanted to spend, Since 2007 the Federal government has cleaned out another 2,651 trillion out all the  Federal Agencies and Trusts and created another 7.435 trillion with keypunch entries.

This  10.086 trillion was used to buy Treasury debt at non competitive rates the open market wouldn’t and to bailouts banks in the to the too big to fail club

Spening 10.086 trillion in the system creates inflation except in Federal Government and Federal Reserve fairyland, inflation plummeted with it Treasury yields essentially taking trillions awat from savers to save the federal government the same trillion in debt service cost this redistribution of wealth was done in the name of  economis stimulus and fighting dangerously low inflation, According the The Federal Government and Federal Reserve paying you an historically fair interest rate while having your money maintain it’s buying power is a bad for the the economy.

Strange how during this period of dangersoly low inflation which according to the fed  required them to create trillions of dollars to keep deposit rates near zero that gold rallied from \$643 to \$2000 per ounce up 211.07%

Gold data and chart

And consumer loans stayed steady averaging 13.149%, according to the Fedral Reserve and Federal Government, stripping savers of interest income on thier Treasuires while devaluing the curreny the are denominated in and overcharing them for borrowing is good thing for them and the economy.

In short during the last 20 years the American citizen has had his pension money stolen from him, he’s been screwed out his personal saving and over charged on momey he needed to borrow to survive in the name of economic stimulus, what was the Federal Government’s solution? Hire an additional 87,000 IRS agents to makre sure they’ve they didn’t mss anything, and people wonder why there are over 1,000,000 livinging in tents on the the streets of America

With citizens cleaned out, U;S. creditability at an historic low, a debt rating below Tiawan, Hong Kong and Finland and a Treasury rate 1.63% below the fictional BLS.GOV just who is the U.S going to sell this 6 trillion in new debt to?  .

My guess it out of the 6.5 trillion the Federal government needs to borrow  less than 2 trillion will find its way to the open market, the rest will be offed in  Federal Agencies and Trusts agncies and Trusts, bought by banks who untimatly have created the money with the Fed’s blessing and help and  money created by the Fed to buy whatever is left, this will occur when the U.S, can manufature antoher crisis that will justify more emergency rate cuts back to zero and the Fed once again firing up the QE printing press.

during the next crisis I don’t think the U.S will usin a pandemic again, I hope they don’t srtart another war my money is on a banking crisis which will engae before this 6.5 trillion  they are trying to sell staurates the market.

Since 2008 artificially low rates have cost buyers of U.S. Treasuries nealry 14 trillion in interest income, 5.81 trillion in just the last 30 months making it clear Treasuires as an investment and the Government that issues them have gone from qulaity to crap, they don’t belong in anyone’s portfolio that is trying to perserve and enhace wealth.

What it took last time reported inflation averaged 6.19% to fully fund deficit spending in the open market without Fed intervention was a AAA Treasury rating, an average Treasury rate of 10.62%, paying 4.42% above more accuratley reported inflation.

What is would take in 2023 to control actual oinflation in 2023.

• Over the last 12 months reported inflation has averaged 6.30%, add in the historical average of 4.42% paid above reportd inlfation during previous periods when inlfation averaged 6.19% would generate an average Treasury rate of 10.72%. a rate of 10.72% would consume 82.88% of current total annual Federal Revenue, add in the debt downgrade premium of 1.50% to the 4.42% and it generates an average Treasury rate of 12.22% consuming  84.10% of total Federal Revenue.

• If a buyer of a Treasury was compensated for inflation using BLS.GOV 1980- calculation methoiods inflation would currently be 12.21%, add in the 1970-2007 average paid on Treasuries above the 1980 BLS.GOV calculated inflation rate of 3.99% generates an average Treasury rate of 16.20% which would consume 125.15% of total Federal Revenue. .
 Level Rate % of Revene Current 3.28% 25.34% CPI + average paid above an 6.19% average CPI (4.42%) 10.72% 82.88% Old CPI calculations + 1970-2007 average paid above the CPI 16.20% 125.15%

In 1980 annual Federal Revenue was 56.90% of total federal debt, and the U.S could afford  to pay an average Treasury rate of 16.20%, an average rate of 16.20% in 1980 would have consumed 24.48% of  total Federal revenue.

In 2023 annual Federal Revenue is at 12.94% of  total Federal debt, (an historic low) the current average Treasury rate in 2023 is 3.28%, this 3.28% consumes 24.24% of total Federal revenue.

The current pause in the creation of money and declining inflation is unsustainbale even with the BLS.GOV continuing to magically massage the thier finctional inlfation rate lower using tricks like hedonic quality adjustments, after 43 years the BLS.GOV is running out of calculations they can “adjust” .  See shadowstats for inflation calculations using BLS.GOV 1980 and 1990 calculation methods versus what’s currently posted on the BLS.GOV website.

Money in circilation has quadroupled since March of 2020

In March of 2020 the Federal Reserve ended the 10% bank reserve requirement this enabled banks to create nearly any amount money, to do nearly anything with inculding  buying Treasurt debt and stock. The Fed;s decsion to end of the 10% reserve requirement essentially took the governor off what banks could borrow, create or lend and spiked Money Supply (M1)  from 3.98 to 20.64 trillion +418.41% most of the move in the first month, Although we are expecting a brief move lower as Fed’s manufactured banking crisis enages to distract the mases form the actual U.S. debt crisis the Fed’s QE printing press will also fully enage though the creation of money M1 will move higher, my numbers tell me it could be above 25 trillion by the end of 2026.

Link to monitor Money Supply (M1)

Bank Mortgage Status

Commercial Mortgages have increased from 2.77 trillion in 2008 (start of the last banking crisis) to 3.58 trillion in 2023 +29.24%,  897 billion of this 3.58 trillion or 23.35% is coming due within the next 12 months. In th last 12 months commercial real estate has had it’s biggest decline since 2008

Commercial mortgage rates for the refi on these properties have increased from 3.58% to 6.74%. The average vacancy rate, is up from 7.01% in 2019 to 18.60% in 2023, this number will increase as leases expire, and are not renewed, for cing employess to work from home during covid ensures 100% of these employees will never return full time to the office, covid closures, online sales of products at more competitive rates have lessened demand for retail space, many of the retailers that survivded covid and competition were finshed off by looters, this decline in demad is expected to push average vacency rates above from 18.60% toabove 27% prior to 2026,

Fewer tentants, nearly twice the carry cost, 29.24% need to be refinanced? The first quarter deliquency rate was still  below 1.00% (2010 recent high 8.93%) but it’s expected to rise above 4.00% prior to 2026 putting pressure on holders of thier debt. .

rate of change and Deliquency rate

Total Residential Mortgages have increased from 11.322 trillion in 2008 to 13.430 trillion in 2023 up 18.61%, of  the total 13.430 trillion 1.317 trillion, 10.21%  are adjustable.

Monitor total mortages  rate of change

Residential mortgage 30 year fixed rates have increased from 2.67% to 6.81%

Home price affordability with mortage rates at  6.81% is non existant for the median American family.

Real household income is down 2.77% from 2020,  median post tax monthly family income stands at \$5,226 median monthly home ownership cost, \$2,962.94, median cost of 1 automobile \$894, median cost for family health insurance \$1,280, this leaves \$89 per month for all other family expenditures, this math makes it clear it’s impossible for a median U.S. family to currently buy a median family home.

According to Forbes  post tax family income to comfortably afford a median priced home in the U.S. should be \$10,750 per month, roughly twice current median family income this by itself will pressure home prices lower, additional  pressure will be generated from holders of adjustable rate mortages coming due who may not not quailify to refiance thier own home.

The numbers I’m seeing makes me question how well the Fed thought trhough the timing of these hikes unless they have the alterior motive to create another banking cris to justify more emergency rate cuts (lowering Federal debt service cost) and to fire up the QE printing press to one again bail out the banks and by Treasuries at non competitive rates the free market won’t.

Intial impact of the rate hikes on home prices .

Median Home prices  dropped from \$479,500  to \$436,800, -8.90%  just in the first quarter of 2023 and they are expceted to fall further, if the decline excceds 20% many of the analyssts I follow tell me we won’t see them stabalize unitl they drop to 2020 levels of  \$322,500,

Monitor total transactions the step decline is expected to continue, an increase gives a good idea of just how hot a market is, decrease how cold. .

Monitor  Delinquency Rate currently at 1.73%, (2010 high 11.28%) our numbers tell us  the this rate (without signifigant rate cuts) could move to 9.75% before the end of 2026.

Since 2021 U.S. credit card debt has increased by 75.56%
Average credit card rates  from 15.09% in 2020 to 20.68% in 2023
Delinquency rate for credit cards from 1.54% in 2021 to 2.43% in 2023, our numbers tell us

1948 through current Inflation

Since 2008 the Federal Reserve has created 7.4 trillion for bailouts to keep the U.S solvent I see this number exceeding 30 trillion by 2030.

Expact them to buy more Treasuires

Expect them to bailout more banks