Fundamentals of the crisis on deck

1) Since 1981 U.S. Federal debt has grown 5 times faster than revenue.

Growth in Federal revenue from 1981 to 2023 +679.79%
Growth in Federal debt from 1981 to 2023 +3,284.32%,

Annual Federal revenue as a percentage of total Federal debt has fallen from 60.26% in 1981 to 12.94% in 2023 if rates rise to the same levels we saw from 1978 through 1985, 100% of total Federal revenue will be consumed by debt service cost alone.

1981 60.26%
2008 25.28%
2023 12.94%

Data & Sources Spreadsheet

2) Chronology of U.S. debt and demise of the U.S. dollar & debt market

15th of August 1971 Richard Nixon “temporarily” took the USD off the gold standard which enabled politicians to create and spend nearly any amount of money at will,

3) During the first 9 years off the gold standard, 1971 through 1980 Federal debt increased from 424.27 billion to 909.04 billion,  reported inflation from 4.35% to 14.60%.

4) In 1980 politicians had two choices,

A) To reel in deficit spending, balance budgets and implement responsible fiscal policy which would have contained inflation, earned back the open market’s trust in Treasuries and enabled the Federal Government to finance deficit spending in the open market.

B) To revise the way inflation was calculated this would immediately contain it, without making any of the necessary spending cuts and, if the market bought these revised inflation numbers it would contain debt service cost and potentially make U.S. Treasuries attractive enough to find bids in the open market. 

They chose B and instructed the BLS.GOV to come up with a solution, the BLS.GOV did and Hedonic Quality Adjustments were born. in short if a car went from 50K to 75K prior to Hedonic Quality Adjustments the increase in price would have been 50%, post Hedonic Quality Adjustments if the same car went from 50K to 75K because the car according to the BLS.GOV is now of a higher quality and is going to last twice as long, according to the BLS.GOV it’s gone down in price and would lower the overall inflation rate. See Inflation – Perception versus Reality, for more on how inflation has been twisted since 1981.

5) In 1981 the market saw through Hedonic Quality Adjustments, their purpose and dramatically reduced purchases of U.S. Treasuries to the extent the majority of all U.S. Treasury debt hitting the market did not find bids.

Rather than fix the problem the Federal Government opted to transfer all unsold debt to Federal Agency and Trust Accounts. From 1981 through 2023 they literally have cleaned out all 6.743 trillion paid into all Federal agency and Trusts.

6) The mandatory deposits made by beneficiaries of these Trusts had their hard earned dollars replaced with special issues , special issues are nothing more than non marketable government IOUs that pay non competitive rates, The decision to remove marketable Treasuries and replace them with “special issue”  debt is the major reason for their estimated insolvency before 2031.

Data & Sources Spreadsheet

7) Unfortunately cleaning out every Federal Agency and Trust wasn’t enough to satiate the spending appetites of politicians, multiple bad trade deals including NAFTA were cut resulting in cumulative total trade deficits increasing by 18.993 trillion from 351 billion in 1994 to 19.334 trillion in 2023.

Data & Sources Spreadsheet

8) Of this 19.334 trillion in trade deficits 7.741 trillion was rolled into Treasuries, this supported the dollar, enabled U.S. consumers to continue to borrow, buy from foreign manufacturers while U.S manufacturers because of deals like NAFTA were unable to compete and were decimated by regulation, taxation and litigation.

9) In 2021 these trade deficit beneficiaries went from net buyers of U.S. Treasuries to sellers. with the face value of their positions dropping from 7.740 trillion to 7.099 trillion. From the in 2021 peak including  unrealized profit or loss U.S Treasuries owned by Non U.S. investors has declined by nearly 2 trillion dollars.

Data & Sources Spreadsheet

10) By 2008 cleaning out every Federal Agency & Trust account, the bad trade deals like NAFTA to motivate trillions in Treasury debt purchases by non-U.S. investors wasn’t enough. The US needed multiple crises to justify lowering Treasury deposit rates to historic lows and to fire up the quantitative easing printing press to buy all the debt the free market wouldn’t at noncompetitive rates.

The Federal Government and Federal Reserve represented that the historic low deposit rates and creation of money was to save and stimulate the U.S. economy, Ironic that during this 15 year period of “economic stimulus” only deposit rates dropped to an average of 2.79% consumer loan rates stayed steady averaging 13.89%.

You have to ask yourself how does stripping depositors of over 14 trillion in interest income while at the same time letting the banks that taxpayers & depositors bailed out overcharge them on their consumer loans stimulate an economy?

Data & Soruces Spreadsheet

11) The true reason for the historic low deposit rates was to contain Federal debt service cost while Federal deficit sending spiraled out of control.

From 2007 through 2021 Federal debt increased from 8.95 to 26.88 trillion up 17.93 trillion, or plus 200.32%. At the same time Federal debt service cost increased from 411.32 to 538.45 billion up 127.133 billion or plus just  30.91%.

Data & Soruces Spreadsheet

12) By 2008 debt rating services like S&P, Fitch and the market literally wasn’t buying the fictional inflation rate, the represented motivation by the Federal Government and Federal Reserve for historic low deposit rates and the creation of money with keypunch entries, U.S. debt was downgraded twice and nearly 5.0 trillion dollars in U.S. Treasuries didn’t find bids 

Rather than fix the problem by containing deficit spending and offering a high enough rate on Treasuries in the open market to attract bids for U.S. Federal debt the Federal Reserve decided to create over 8 trillion dollars with keypunch entries of which 5.713 trillion was used to buy the U.S. Treasury debt that could not be dumped into Federal Agency and Trust accounts or sold on the open market at non competitive rates.

Data & Sources Spreadsheet

13) By 2020 the Fed was holding over 8 trillion in paper they bought with created money, both S&P and Fitch told the U.S. Treasury and the Federal Reserve they would downgrade U.S. Federal  debt further from AA+ Negative to AA- stable, at AA- stable U.S. Federal debt would be rated the same as Estonia and Slovenia. An AA- stable rating would also narrow the Federal Government’s captive buying pool by eliminating institutions, like Insurance companies, Trusts and Pensions that would no longer be able to buy U.S. debt because it would be rated too low.

14) By 2020, 5 decades of corrupt monetary policy had put the Federal Government and Federal Reserve between a rock and a hard place , Federal Agency and Trust accounts we’re cleaned out, non U.S. trade deficit beneficiaries had gone from being net buyers of U.S. Treasuries to net sellers, rating services like S&P and Fitch had turned off the Federal Reserve’s QE printing press, The Federal Government’s resources were exhausted and they still had trillions of dollars of debt that needed to be sold at non competitive rates,

15) Boxed in this bad did the U.S. finally realize they needed to stop record deficit spending, stop creating money to pay for it, balance budgets, report inflation honestly and pay a high enough rate on Treasury debt in the open market to attract bids?

16) No, this didn’t happen the only solution from the Federal Government was to spend trillions more, the only solution offered by the Federal Reserve was to eliminate the 10% bank Reserve requirement, this would enable banks to literally borrow any amount of money from the Federal Reserve at near zero and use this money to buy longer dated Treasuries with an average yield of 1.86% above their borrowing cost, banks made money and this temporarily solved the problem of finding buyers for the trillions in U.S. debt the free market wouldn’t touch at non competitive rates.

17) By 2023 institutions owned to nearly 14 trillion of U.S. debt, the majority of it bought with money borrowed short-term (overnight to 30 day) from the Federal Reserve at near zero then deposited into U.S. Treasuries with durations from 2 to 5 years, many of these institutions like Silicon Valley, Signature and First Republic  didn’t properly hedge which added too or caused their insolvency.

Data & Sources Spreadsheet

18) From 2008 through 2023 Treasury debt owned by non institutional U.S. investors increased from 176.05 billion to 432.52 billion up 255.47 billion. This increase of 255.47 billion over this 15 year period is an amount equivalent to what Federal debt increased by over the last 6 weeks.

Data & Sources Spreadsheet

19) Since 2008 the U.S. has cranked up 24.53 trillion in deficit spending,

Federal debt December 2008, 8.95 trillion,
Federal debt estimate by December 2023 33.48 trillion +24.53 trillion or +274.07%,
Federal revenue 2008, 2.567 trillion.
Federal revenue estimate December 2023  4.359 trillion +69.80%.

20) Deficit spending of 24.53 trillion in 2023 USD is 5 times the fiscal cost of WW II, 23 times the cost of  FDR’s New Deal. (The New Deal was FDR’s stimulus program that employed 4 million citizens, built America’s infrastructure, prepared the U.S for World War 2 and lifted the U.S. out of the Great Depression)

21) 15 years, 24.53 trillion in deficit spending, can you name one thing in the United States that is better in 2023 than 2008? You would think after spending more the 5 times the fiscal cost of World War 2 the U.S. would have something to show for this 24.53 trillion other than a crumbling infrastructure and over 1 million homeless.

22) Over the next 12 months the U.S has 4+ trillion in maturing debt that needs to be refinanced, 2+ trillion in new debt that needs to be sold, they’re going try and sell this record 6+ trillion dollars in debt on the open market with a debt rating below Taiwan, Hong Kong and Finland that pays an average of 1.63% below the 12 month average of their fictional inflation rate of 6.30%.

23)  What it took to attract buyers for U.S. debt prior to quantitative easing was a debt rating of AAA stable paying an average of 8.70%, or 3.99% above more accurately reported inflation of 4.71%, even with these stellar numbers the U.S. couldn’t find enough bids for the debt it needed to sell.

  Data & Sources Spreadsheet

24) All Federal debt sold through 2007 totaled 8.957 trillion of this 8.957 trillion, 1,611 trillion was sold to domestic institutional buyers, 152.415 billion non institutional domestic buyers, 2.353  trillion was purchased by non-us investors using trade deficit proceeds. in 1981 the started using Hedonic Quality Adjustments and lying about inflation to contain debt service cost and buyers for US Treasures dropped off dramatically. 4.833 trillion of Treasury debt couldn’t. find bids. The Federal Government rather than fixing the problem by reducing deficit spending and paying a high enough rate to attract bids on the open market decided to dump all unsold Treasury debt into Federal agency and trust accounts, from 1981 through 2007.the federal government dumped 4.093 trillion into these trusts at non competitive rates, when the Trusts ran dry the Federal Reserve stepped in and created 740 billion with key punch entries. to buy all remaining unsold debt to bridge the gap.

Data & Sources Spreadsheet

25) Who is going to buy this record 6 plus trillion of downgraded U.S. debt?

26) Domestic non institutional investors? No, it would be a little challenging for them to cover this 6+ trillion over the next 12 months with 5.693 trillion in assets that could be used to purchase downgraded treasury debt, you have to remember domestic non institutional investors can’t create trillions with keypunch entries like the Federal Reserve or U.S. banks. A stock market sell off could access trillions more but my bet would be the money would roll into gold, tangible assets or higher rated government debt, not Treasuries.

Source Federal Reserve

27) Federal Agency and Trust accounts?  No,

Social Security, Military and Civilian Pensions funds have and are being cleaned out as quickly as the beneficiaries make their mandatory payments of 6.20% to 12.40%  into these Trusts. Since 1981 the Federal Government has “borrowed” all the money out of these Trusts and dumped (non marketable “special issue” Federal debt) into them paying non competitive rates, this is the cause of their projected insolvency before 2031.   
Federal Reserve Site for Data

28) Banks? No, they are already over leveraged and have literally trillions in unrealized loses on their books generated by the rate hikes and inverted yield curve. 

29) The Fed ending the 10% bank reserve requirement in March 2020 enabled banks to create nearly any amount of money to do anything with, this immediately spiked money supply (M1) from 4.26 trillion in March of 2020 to 16.244 trillion by May 2020.  

30) Current M1 of 18.447 trillion tells you banks are using more than 10 times the leverage in 2023 than 2008 and the severity of the Federal debt, banking and mortgage crisis on deck will be multiple times what we saw in 2008.when total M1 was 1.378 trillion versus the current 18.447 trillion.

Fed Chart

31) The Fed’s fund rate is now averaging 5.33%, average Treasury rate 5.18%. The borrow from the Fed and deposit into treasury spread is gone, it went from paying an average of 1.86% above bank borrowing cost less than 0.00%,

32) The last time we had the Fed funds rate at or above the Treasury rate was 2007, the banking crisis fully engaged by 2008, by 2012 465 banks had failed. This occurred when money supply M1 was at 1.378 trillion, M1 in August 2023 18.447 trillion.

Data & Sources Spreadsheet

33) Liquidation value of the 5 year has fallen from 126 to below 106 -16.01%, see this chart. Banks that are in these trades and didn’t adequately hedge risk are getting hammered, it’s a safe bet Silicon Valley, Signature and First Republic are just the tip of the iceberg.

34) Fed Funds (bank borrowing cost) versus the 5  Year has gone from paying 2.61% on 22 April 2022 to costing -0.95% 8 August 2023 heavy bank speculation in these positions will be one of the main causes of the next banking crisis.

Data & Sources Spreadshet

35) In 2023 unrealized loses for banks just on their treasury positions alone now exceeds 1.743 trillion, 360 billion more than total money supply M1 at the start of the last banking crisis in 2008.

Data & Sources Spreadsheet

36) Federal Reserve article The Implications of Unrealized Losses for Banks,pdf
More on hedging issues by the Fed The Misleading Notion of Notional

37) Video, impact of the end of the 10% bank Reserve Requirement  (18 minutes)

39) Can the U.S. depend on Foreign buyers of U.S. Treasuries? No,

The 19+ trillion dollar trade deficit beneficiaries, who bought 7.740 trillion in U,S, Treasuries by 2021 turned net sellers by 2023 their net holdings of Treasuries from the 2021 high including unrealized profit or loss declined by 1.933 trillion, this gives you a pretty good idea what they think about current U.S. monetary policy, the Federal Reserve and the outlook for the U.S. economy.

Data & Sources Spreadsheet

40) Brics is yet another increasing threat to the dollar’s dominance as the world’s reserve currency, in short it’s a group of countries that are growing in number that are trying to start a new world reserve currency backed by tangible assets like metals and energy, their objective is to negate the U.S.s ability to dictate political policy through control of trade.

41) For the 37 years prior to the Federal debt downgrades and the QE creation of money to buy debt at non competitive rates the U.S.paid an average of 3.99% above reported inflation or 6.20 trillion more on a fraction of the debt than if the Treasury rate was tied to the reported inflation rate.

42) From 2008 through 2021 the Fed created over 8 trillion dollars with keypunch entries of the 8+ trillion 2.517 trillion was used to buy bad bank debt,  5.713 trillion was used to buy treasuries at non competitive rates, an additional  2.637 trillion was “borrowed” from Federal Agencies and Trusts, this 8.35 trillion pushed Treasury yields to near zero and enabled the U.S. Treasury to pay 12.554 trillion less in interest on Federal debt than if the Treasury rate was tied to reported inflation.

Data & Sources Spreadsheet

43) In 2023 the only option left for the U.S. is to let another crisis engage or god forbid a war this will give the U.S. the justification they need for the Federal Reserve to lower rates once again to new zero to contain Federal Debt service cost and to fire up the Quantitative Easing printing press to buy trillions more in bad bank, and Treasury debt at non competitive rates the free market won’t touch.

44) Currently the Federal Reserve is holding over 8 trillion in paper they bought with created money during the last two crises, I see this number growing above 15 trillion by 2028 with both S&P and Fitch downgrading U.S. Federal debt further from the current AA+ Negative to AA- stable. 

45) At AA- stable U.S. Federal debt will be rated the same as Estonia and Slovenia. An AA- stable rating will also narrow the Federal Government’s captive buying pool further by eliminating institutions, Insurance companies, Trusts and Pensions that will no longer be able to buy U.S. debt because it is rated too low, leaving yet another gap for the Federal Reserve to fill by creating even more money.

46) Use this link to monitor total money created by the Federal Reserve, in 2023 as in 2019 (before the covid crisis) we’re seeing a reduction in the Fed’s balance sheet which will be temporary, within the next 24 months I see this once again trending aggressively higher.

Federal Reserve Site for Data

47) Ironic how during this period of dangerously low inflation from 2008-2021 which according to the Fed required them to keep the Fed Funds rate near zero and to create trillions dollars gold rallied from $643 to $2000 per ounce up 211.07%.

Gold data and chart

48) That during this dangerously low inflation consumer loans from 2008-2022 averaged 13.149%, according to the Federal Reserve and Federal Government, stripping savers of trillions in interest income, devaluing their currency and letting banks that their tax dollars bailed out overcharge them on their consumer loans is good thing for them and the U.S. economy. 

Data & Sources Spreadsheet

49) If rates stay at 5.50% Federal debt service cost,  will consume 43.50% of total Federal revenue and will eventually cause U.S insolvency, bank failures from existing leveraged Treasury positions, declining real estate prices, mortgage defaults and ultimately another mortgage crisis..

Another mortgage crisis?

51) 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.

52) In the last 12 months commercial real estate had it’s biggest decline since 2008

Data & Sources Spreadsheet

53) Commercial mortgage rates for the refi on these properties have increased from 3.51% to over 6.95%.

54) In 2019 the overall vacancy rate, was 11.14%, in 2023 18.60%, this number will increase dramatically as leases expire and are not renewed. Local governments forcing employees to work from home during the COVID scamdemic ensures many of these employees will never return full time to the office, retail COVID closures, online sales of products at more competitive prices have lessened demand for retail space, many of the retailers that survived covid and online competition were finished off by looters, this decline in demand is expected to push the average vacancy rate from 18.60% to above 29% prior to 2026,

55) With fewer tenants, nearly twice the carry cost and 29.24% of the commercial mortgages needing to be refinanced  over the next 12 months, commercial property is holding together far better than expected with first quarter delinquency rates still below 1.00% (2010 recent high 8.93%) unfortunately it’s expected to rise above 4.00% prior to 2026 putting pressure on banks and other institutions that hold loans on these properties. . .

56) Commercial mortgages, rate of change and delinquency rate

57) Total residential mortgages have increased from 12.146 trillion in 2008 to 15.508 trillion in 2023 up 27.67%,

58) Residential 30 year fixed mortgage rates have increased from 2.67% to 7.23%

Home affordability for the median American family in 2023 it’s non existent

59) 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.

60) According to Fortune  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 post tax income this by itself will pressure home prices lower, additional  pressure will be generated from holders of adjustable rate mortgages who will not be able to afford afford higher the rate and will foreclose.

Initial impact of the rate hikes on home prices

61) Median Home prices have dropped from $479,500  to $416,100, -13.22%  in 2023 and are expected to fall further, if the decline exceeds 20% to $383,600 many of the analysts I follow tell me they won’t  stabilize until they drop to 2020 levels of  $322,500, This will hammer banks that are holding mortgage debt and investors holding mortgage backed securities.

62) Monitor total transactions, an increase gives a good idea of how hot a market is, decrease how cold..

63) With these fundamentals a “soft landing” for the U.S. economy is highly unlikely.

64) Continued out of control deficit spending with zero plans to contain it?, the only solution the Federal Government has offered in 2022 & 2023 to reduce the Federal deficit was hiring another 87,000 IRS agents to squeeze more money out of U.S. citizens, the Fed hasn’t offered any solutions, Powell’s statements over the last 5 years have given less direction than reading yesterday’s news.

65) The biggest unanswered question in 2023 is where is the 6 plus trillion dollars going to come from over the next 12 months to cover the refi on maturing issues and to finance new Federal debt?  The Federal Reserve can’t print any more money or US debt will be rated below Estonia and Slovenia, Federal Agencies and Trusts have been cleaned out  and non U.S. investors have gone from net annual buyers to net annual sellers of U.S. Treasuries, ask yourself, where is this 6 plus trillion going to come from?

66) Second biggest question is who’e going to bail out the banks that currently have  unrealized loses on their treasury positions exceeding 1.74 trillion, 360 billion more than total money supply in 2008.

67) With real estate prices are having their biggest decline since 2008 who’s going to cover their mortgage losses, mortgage rates have more than doubled, commercial vacancy is at 18.06% and climbing, home affordability non existent as I see it it leaves only one direction that real-estate can go if rates stay constant or rise.

68) The only thing that could prevent further bank insolvencies, declining real estate prices and another bank crisis is a cut in the Fed Funds rate by at least 2.50% and the creation of more money, this might buy the U.S. some time but will ultimately lead to further debt downgrades, higher inflation, the dollar losing it’s status as the world’s reserve currency and the eventual collapse of the U.S. dollar and debt market.

69) Fact, in 2023 the situation in the U.S. is beyond repair, I would challenge anyone to present a viable solution that could prevent what I believe will be a monetization meltdown in the U.S. by 2027.

In 2023 we have two choices, prepare for the coming major market moves to protect and enhance family wealth or be complacent ignoring the severity of these dismal,  verifiable fundamentals and watch our wealth evaporate.

I’m preparing for tomorrow’s major market moves and making sure I have multiple tools and programs in place to capture them long or short.

If you’d like to know more contact me, I’ll review risk/reward and strategy for any amount from $10,000 to over $1,000,000, answer your questions and provide links for additional information and/or verification.

Peter Knight
Direct VI Phone +1-340-244-4310
Skype:: Peter Knight Advisor
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