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After all, “they can always print more money.” That’s always the solution until it becomes the problem.
What we call economics is best understood as:
1. A mechanism that distributes resources asymmetrically: some benefit more than others.
2. The running of the herd: humans are a social-herd species.
3. Everyone seeks a windfall: something for nothing, or grabbing more while doing less.
4. Everyone seeks to make windfalls permanent by rigging the mechanism to favor their interests.
5. The mechanism is a system of self-reinforcing feedback loops that generate diminishing returns, blowback and unintended consequences.
This perspective helps us understand the progression of the economy from 2021 to 2024. In a nutshell:
2021: massive stimulus, “meme stock” bubble
2022: “Revenge” splurging, inflation
2023: AI stock bubble, “soft landing”
2024: Forced Frugality
So massive stimulus initially triggers the locked-down herd into meme stocks, inflating a bubble. Once the lockdowns end, this massive stimulus unleashes “revenge spending” where price no longer matters, we need a vacation, a new wardrobe, etc., never mind the cost.
Unsurprisingly, this tsunami of price-insensitive spending while the distribution mechanism was still struggling to reconnect disrupted global supply chains leads to 1) rampant price gouging / profiteering and 2) rampant inflation as costs are passed up the food chain.
Many costs are “sticky” and rarely decrease: taxes, fees, wages and benefits, healthcare, rent, insurance, childcare, etc. typically only ratchet higher. Any ratchet lower is rare and modest, and eventually reversed.
The net result is self-reinforcing inflation, as stimulus never really stops: windfalls are rigged to be permanent, even as broad-based stimulus dries up.
Two things happen when windfalls are rigged to be permanent:
1) the distribution of resources (“money,” entitlements, tax breaks, subsidies, goodies of all kinds) becomes increasingly asymmetric (the already-rich get much richer at the expense of those barely holding their ground) and
2) the source of the supposedly permanent windfall generates self-reinforcing feedback loops that lead to diminishing returns, blowback and unintended consequences.
In other words, the asymmetric distribution either self-corrects or enters run to failure feedback. Either way, the sources of the windfall cease functioning, and the result is forced frugality. Windfalls that were presumed to be permanent are revealed as temporary asymmetries whose own dynamics generate decay, diminishing returns, blowback and run-to-failure.
And always, of course, the gravy train ending is “impossible” because recency bias encourages us to think the distribution mechanism has god-like powers and permanence. Bur frugality ends up being forced one way or another, even if the stimulus appears to increase. Bubbles deflate and windfalls shrink and then reverse into doing more to get less.
After all, “they can always print more money.” That’s always the solution until it becomes the problem.
At the start of August, Fitch Ratings downgraded the US government’s top credit rating. Last week, Moody’s cut the credit ratings of small and midsized US banks because of higher funding costs, potential regulatory capital weaknesses, and rising risks tied to commercial real estate loans. Now, another week, another possible downgrade, this time of major banks.
Fitch analyst Chris Wolfe told CNBC another round of turmoil could be nearing for the banking industry. He said the ratings agency is mulling over sweeping rating downgrades for dozens of banks, including ones as big as JPMorgan Chase.
“Another one-notch downgrade of the industry’s score, to A+ from AA-, would force Fitch to reevaluate ratings on each of the more than 70 US banks it covers,” Wolfe told CNBC at the firm’s New York headquarters.
He continued, “If we were to move it to A+, then that would recalibrate all our financial measures and would probably translate into negative rating actions.”
Wolfe said lowering of the operating environment score for US banks to ‘aa-‘from ‘aa,’ reflecting downward pressure on the US sovereign rating, gaps in the regulatory framework and structural uncertainty around the normalization of monetary policy, went “largely unnoticed because it didn’t trigger downgrades on banks.”
This comes one week after a triple whammy of factors of regional banks: Higher funding costs, potential regulatory capital weaknesses, and rising risks tied to CRE loans prompted Moody’s to lower credit ratings for ten small and midsize US banks; and noted in a slew of notes that it may downgrade major banks.
“Collectively, these three developments have lowered the credit profile of a number of US banks, though not all banks equally,” the ratings agency wrote in some of the assessments.
Perhaps Fitch is sending out trial balloons for Wall Street to inform them that the potential for another round of bank downgrades is a real risk for the market.
More from CNBC on the conversation with Wolfe:
The problem created by another downgrade to A+ is that the industry’s score would then be lower than some of its top-rated lenders. The country’s two largest banks by assets, JPMorgan and Bank of America , would likely be cut to A+ from AA- in this scenario, since banks can’t be rated higher than the environment in which they operate.
And if top institutions like JPMorgan are cut, then Fitch would be forced to at least consider downgrades on all their peers’ ratings, according to Wolfe. That could potentially push some weaker lenders closer to non-investment grade status.
The timing of the next round of bank downgrades wasn’t disclosed but serves as a warning for more banking turmoil as the Federal Reserve has hiked interest rates to 22-year highs.
“What we don’t know is, where does the Fed stop? Because that is going to be a very important input into what it means for the banking system,” he said.
Rates on swap contracts referencing future Fed policy meetings suggest the rate hikes might be peaking with the potential for cuts to begin in the second half of 2024.
The interview continued:
A related issue is if the industry’s loan defaults rise beyond what Fitch considers a historically normal level of losses, said Wolfe. Defaults tend to rise in a rate-hiking environment, and Fitch has expressed concern on the impact of office loan defaults on smaller banks.
“That shouldn’t be shocking or alarming,” he said. “But if we’re exceeding [normalized losses], that’s what maybe tips us over.”
Meanwhile, days ago, we quoted a note from Vishwanath Tirupattur, a strategist at Morgan Stanley, who said, “We are skeptical that the turmoil in the regional banking sector which came to the fore in March is behind us.”
… and this all comes after Fitch downgraded the US credit rating from AAA to AA+ earlier this month. Of course, the Biden administration blamed Trump.
Shares of big banks are already sliding premarket on the CNBC report.
Commentary: You know when your country has implemented terrible monetary policy when your fellow citizens consider the U.S. Dollar a safe haven… Could this be a pre-cursor to the United States currency?
The value of Argentina’s currency is being decimated by spiraling inflation.
The publication Central Banking reported on April 27 that Argentina was importing its bank notes from several countries. On May 22 The Guardian newspaper reported Argentina’s newest and highest denomination bank note, the 2,000 peso, was worth $4 U.S. in international exchange markets. On June 20 a New York Times newspaper headline read: “In Argentina, Inflation Passes 100 percent (and the Restaurants Are Packed).”
Javier Milei is an Argentine congressman and economist who is the front runner running for president. Milei has been vocal, saying if he wins he will make the U.S. dollar the official currency and “blow up” the Banco Central de la República Argentina or Central Bank of Argentina.
What’s going on here? The peso has suffered the humiliation of being named the worst-performing currency in emerging markets. Since 1970 Argentina has gone through one inflationary crisis to the next one.
The so-called dollar blue is the informal name given to U.S. currency circulating at a rate of exchange significantly higher than that of the official Argentine peso. Argentina removed exchange restrictions on the U.S. dollar in December 2015, resulting in the official exchange rate and the unofficial “blue” rate converging at that time. On April 1, 2016 the exchange rate was 14.4 pesos to the dollar. By July 29, 2022 the official exchange rate was 131.22 pesos to the dollar while the “blue” rate had morphed to 298 pesos to the dollar—an increase of 127 percent.
According to a May 22 Reuters news report, “Argentina’s new 2,000-peso bill, the largest denomination note, went into circulation on Monday, though due to fast depreciation of the currency it is worth only $8.50 at the official exchange rate and just over $4 in commonly used parallel markets. The peso has shed around a quarter of its value against the dollar this year despite strict capital controls that slow its fall. Most Argentines buy dollars in unofficial markets where they trade at over 480 pesos versus the official rate of 235.”
The June 20 New York Times article explains, “Argentina’s financial crisis has a surprising side effect: a flourishing dining scene in Buenos Aires, as residents rush to spend pesos before they lose more value.” This sounds more like a headline you would read in post-World War One Germany than in 21st century Argentina.
In a recent campaign speech presidential candidate Milei said, “The peso melts like ice in the Sahara Desert.” He has proposed closing the Argentine central bank, replacing the nation’s domestic currency exclusively with the U.S. dollar.
According to the publication El País, Argentina has contracts to import bank notes with Brazil, China, France, Malta, and Spain. El Pais reported shipments of 360 pallets of notes from France, and more than 800 pallets of note from Malta, where security bank note producer De La Rue has a plant. El Pais estimates these shipments will amount to 260 million pieces of currency.
For practical purposes coins don’t circulate, so importing more isn’t even on the table. Coins in denominations of 1, 5, 10, 25, and 50 centavos were introduced in 1992. The 1 peso was added in 1994, followed by the 2 peso in 2010. The 1-centavos denomination ceased production in 2001. The last gasp for coins came in 2017 when a new series of 1- and 5-peso coins were issued. Due to inflation a 2- and 10-peso coin were introduced the following year.
In 1970 peso moneda nacional bank notes were replaced with the peso ley at a rate of 100 peso moneda nacional to one peso ley. In 1983 the currency system exchanged at a rate of 10,000 pesos ley to one peso argentine. The austral replaced the peso argentine at a rate of 1,000 PA to one austral in 1985. This was followed by the peso convertible in 1992 at a rate of 10,000 austral to the peso convertible. Until 2001 bank notes carried the legend “Convertibles de curso legal,” indicating the value of the Argentine bank notes was fixed to the same amount in U.S. dollars. These notes no longer circulate.
The 1992 peso convertible was initially comprised of coins as explained earlier and bank notes in denominations of 1, 2, 5, 10, 20, 50 and 100 pesos. A coin replaced the 1-peso bank note in 1994. The peso convertible is still in use, but the latest series of notes introduced in May 2022 is comprised of denominations of 100, 200, 500, and 1,000 pesos. In March 2023 the 2,000-peso denomination was added, using the printing plates meant to be used for a proposed 5,000-peso note.
For now Argentine citizens are coping with inflation through the strategies of buying now while paying later, bartering, bulk buying, hoarding U.S. dollars, or spending as fast as you get it.
More than 65 countries currently peg their currency to the U.S. dollar. Five U.S. territories use the dollar as their official currency. Bonaire, the British Virgin Islands, Ecuador, El Salvador, Marshall Islands, Micronesia, Palau, Panama, Timor-Leste, Turks and Caicos, and Zimbabwe are each independent countries that also use U.S. currency exclusively.
We are offering up to 200 Certified MS63 $20 Liberties at just $2,250 per coin. This is a $40 discount off our current price sheet pricing, and just 19.36 % over melt. These were 30% over melt in mid- April!
Minimum order is just 10 coins. Call or to confirm
We do business the old fashioned way, we speak with you.(800) 257-3253 Monday thru Friday 9:00 AM – 5:00 PM CST
Uncover history’s allure with the 1 oz Heraeus Gold Bar Republic National Bank of New York, available through RPMEX. Crafted with precision by Heraeus, this vintage gold bar holds one troy ounce of .9999 fine gold. The obverse features the emblem of the Republic National Bank of New York, representing its prominent role. Each bar comes sealed in the original plastic packaging, adding prestige to this offering .
