Following the COVID era, we have entered a period of fiscal dominance among major developed economies.
Hence, the escalating debt burden is already near historical levels and compounding at an alarming pace.
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
Quantitative tightening policies are the central banks' own version of an illusionary “debt ceiling”, a disciplinary measure that needs to be consistently reversed in practice.
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
However:
Of even greater concern is the indication that this represents an ongoing structural issue that is still in the process of evolving.
Note that with each prior recession, this measurement has reached new lows.
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
The reality is that the fiscal agenda on a global scale has never been more expansive.
While today’s severe inequality and wealth-gap issues have led to larger government social programs compared to historical norms, rising geopolitical tensions further exacerbate the issue.
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
Alongside this trend of reindustrialization, particularly among G-7 economies, governments persist in advocating for a substantial green-energy revolution, which necessitates a significant infrastructure overhaul.
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
That is higher than what we experienced after the global financial crisis or any other crisis in history outside of the Covid recession when the economy was in full lockdown.
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
Interest payments used to be close to 15% of government spending in the 1980s and 1990s when interest rates were higher.
This number is set to undergo a substantial increase and has the potential to create a larger problem soon.
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
A reminder:
In a healthy economic growth environment tax revenues typically increase while government spending tends to decline.
Today, we are experiencing a complete reversal of this trend.
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
Rather than the Fed financing over 50% of newly issued Treasuries, they are shrinking their balance sheet assets at the fastest pace in history.
It's important to note that, unlike during the recovery from the GFC, other central banks have not been buying these gvt. bonds either
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
Following the resolution of the debt ceiling agreement, the US government has already issued more than $1 trillion worth of US Treasuries.
Notably, the month of June witnessed the second-largest issuance in history. pic.twitter.com/wvt4f7aGGD
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
However, what seems to be off the radar is the fact that there has also been a substantial issuance of longer-duration Treasuries in recent months. pic.twitter.com/e106hTvkVq
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
To reiterate, although US interest payments represent less than 10% of the overall fiscal outlays, these obligations are likely to surge even further in the next couple of years.
Here is one main reason for that…
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
More importantly:
If the government decides to reissue these maturing Treasuries in short-duration instruments, as it did recently after the debt ceiling agreement, these obligations will need to be rolled over at over 5% interest rates.
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
This is likely the initial stages of a trend, and if no solutions are implemented, other components of the fiscal agenda may soon be constrained by the escalating cost of debt.
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
Based on the rate-of-change analysis, there has been a 17% decline in the Fed's holdings of US Treasuries.
Interestingly, historical patterns suggest that similar balance sheet contractions have led the Fed to eventually reverse its policy. pic.twitter.com/Ukw9Qor5li
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023
Given the current magnitude of Treasury issuances flooding the market today, resulting in upward pressure on long-term yields, we believe that the "yield curve control" narrative will soon regain prominence.
This is likely to benefit tangible assets, particularly precious metals
— Otavio (Tavi) Costa (@TaviCosta) July 22, 2023