US NATIONAL DEFICIT EXPLODING UNDER TRUMP — THE ECB AND GOLDILOCKS — NOT TOO HOT, NOT TOO COLD — WHAT IS A UNICORN COMPANY?
US NATIONAL DEFICIT EXPLODING UNDER TRUMP
The US Federal Government total deficit has expanded by almost 40% over the last year. The deficit is the difference between expenditure and taxation revenue. If they continue to increase spending at the present rate and taxation revenue falls (or does not increase) then the deficit can be expected to double roughly every 2 years from $ 1 Trillion to $ 2 Trillion to $ 4 Trillion and the National Public Debt will grow rapidly from $ 15 Trillion towards $ 20 Trillion before 2022.
Most people think that the US National Federal Debt is already in excess of $ 21 Trillion because that is what the “national debt clock” shows and it is the number most often quoted but that is a little misleading. That number includes intra-governmental debt of $ 5.7 Trillion and Public Debt of $ 15.7 Trillion. The key figure is the latter one.
Remember — Governments don’t borrow from banks, they issue bonds. In doing so, this does not cause an increase in the money supply (in general), is not CPI inflationary (in general), the risk of default is very, very low (in advanced economies with stable government) and the so called “debt” is not collateralized. So it is not like debt generated by bank loans. It is a very special kind of “debt”.
The August budget report from the CBO showed that government outlays, or total spending, soared to $433.3 billion, the highest government single monthly outlay of any month on record. The August budget deficit was $214 billion, which was not only one of the highest one-month deficits on record, it was also the highest August deficit on record. So you can see that a rapid increase in US Governmental expenditure is happening relative to its taxation revenue.
What are the impacts of this and does the US Government have an expenditure problem? And a “debt” problem?
We should see the impact of rapidly expanding Federal Government expenditure in increased GDP Growth figures. That is exactly what we can see happening in the official numbers. Real gross domestic product (GDP) increased at an annual rate of 4.2 percent in the second quarter of 2018. In the first quarter, it grew at 2.2 percent. So GDP appears to be growing rapidly — that is what happens if a government spends like a drunken sailor. Don’t get too excited by this — Greece did this leading up to 2008 prior to its crisis when the whole economy crashed.
But, as BOOM pointed out last week, the new job creation numbers in the US are very poor by historical standards reaching barely 200,000 new jobs per month when that number would often top 400,000 per month during the mid-1990’s (with some months achieving 500,000 new jobs).
Profits of domestic financial corporations increased $16.8 billion in the second quarter, in contrast to a decrease of $9.3 billion in the first quarter. Profits of domestic nonfinancial corporations increased $63.6 billion, compared with an increase of $32.3 billion. So corporate earnings appear to be growing OK.
As Donald Trump says, the US economy is rapidly growing officially (as represented by real GDP growth numbers) and company profits are growing too. But new employment is not growing. This suggests that the increase in GDP growth is being generated principally by government expenditures and not by increased private demand for goods and services. In such a situation, we can expect that credit expansion should be happening at a slower rate than government expenditure expansion. And if that is the case, then we should see a discernible increase in the Velocity of Money and that is exactly what we do see if we look at the Velocity of MZM Money from the FRED statistics (the St Louis Federal Reserve).
Can this set of circumstances continue? The answers is Yes — as long as CPI Inflation does not rapidly increase and as long as the US Dollar does not fall rapidly against other major currencies. And as long as the government “debt” service obligations do not become onerous.
CPI inflation is around 2.7 % annualized at present (not a large number) so inflation seems steady. The US Dollar is not falling against other major currencies. In fact, it is performing strongly during 2018. And the interest expense of Federal Government plus State Government plus Local Government “Debt” has currently increased from $ 458 Billion in 2017 to approximately $ 534 Billion in 2018.
That is an increase assuredly but by only $ 76 Billion over last year. That increase is about 0.95% of the total Government outlays (including state, local and federal governments) of approx $ 8 Trillion per year and 1.7% of Federal Government outlays of $ 4.5 Trillion (estimated). It appears manageable as long as interest rates do not rapidly increase on Federal Government Debt.
As BOOM always points out, the US government does not borrow from banks. It issues bonds and there is a very healthy appetite in the private investment world for those bonds. There is also a very healthy appetite for US Dollars in the foreign exchange markets because they are a relatively “safe” haven and are used in over 60% of international trade settlements. US interest rates are rising but they are not rising rapidly. So it appears that the current US expenditure expansion and debt expansion is not problematical.
Thus, GDP growth in the US should continue to expand with this expansion in government spending. But a jobless expansion is not good. So the next key variable to watch for every month is the new job creation number. This is called the Non Farm Payrolls report. If new job creation does not happen sustainably, then the whole economy simply becomes more fragile as it becomes bigger, much like a sand castle or a house of cards.
Bear in mind that very large sand castles can be built on the beach by determined “professionals” if they are incentivized to do so.
THE ECB AND GOLDILOCKS
NOT TOO HOT, NOT TOO COLD
Last week, the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility would remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of CPI inflation to levels that are below, but close to, 2% over the medium term.
The Governing Council will continue to make net purchases under the asset purchase programme (APP) — otherwise known as “QE” (Quantitative Easing) or “the printing money program” — at the current monthly pace of €30 billion until the end of this month. After September 2018, the Governing Council will reduce the monthly pace of the net asset purchases to €15 billion until the end of December 2018 and subject to incoming data confirming the medium-term inflation outlook, net purchases will then end. The Governing Council intends to reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.
It all sounds so easy.
WHAT IS A UNICORN COMPANY?
A unicorn is a privately held startup company valued at over $1 billion. The term was coined in 2013 by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures. A decacorn is a word used for those companies over $10 billion, while hectocorn is the appropriate term for such a company valued over $100 billion.
According to TechCrunch, there were 279 unicorns as of March 2018. In 2013 when Aileen Lee originally coined the term “unicorn”, there were only thirty-nine companies that were considered unicorns.
Data as of March 13, 2018: (Reference: Wikipedia)
Number of Unicorns: 279
Total Combined Valuation of Unicorns: $1 Trillion
Total Amount of Capital Raised: $205.8 Billion
Number of New Tech Unicorns in 2016: 25 (down 68% YoY)
Total Number of New Unicorns in 2016: 51
We live in a strange financial world. As BOOM often says “it’s complicated”.
In economics, things work until they don’t.
Until next week ………… Make your own conclusions, do your own research.
BOOM does not offer investment advice.
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EMAIL: gerry [@] boomfinanceandeconomics.comPRICE PULSE DOMINANCE
CHANGES DURING LAST WEEK Ended 16th September 2018:
1. COAL ETF (KOL) — Changed to DOWN Arrow Dominant
NOTE — RED ARROWS INDICATE BOOM PRICE PULSE DOMINANCE in the present moment (as indicated by the date of the chart and taking into account the 3 year time frame shown). The charts are now arranged in PRICE PULSE RED ARROW DOMINANCE. NOTE: All Charts are WEEKLY Charts over the last 3 YEARS time frame. Arrows indicate PAST price action (not future). No predictions are implied from past action.
Comments refer to past PRICE PULSE (Red Arrow DOMINANCE) over the last 3 years, the week ended 16th September 2018. You can RIGHT CLICK a chart and OPEN in a New Tab. Make your own conclusions, do your own research. BOOM does not offer investment advice.
PLEASE NOTE — Many charts are ETF’s from NY Market (not the base commodity or currency etc). The NY Stock Code is in the Top Left Hand Corner of each chart.
Charts are produced from http://www.stockcharts.com
Return to the BOOM Main Website – BOOM Finance and Economics at http://boomfinanceandeconomics.com/
NOTABLE PRICE PULSE CHANGES OVER THE LAST WEEK ENDED 16th September 2018:-
COAL ETF (KOL) — Changed to DOWN Arrow Dominant
PRICE PULSE RISING — (RED ARROW UP DOMINANCE)
# TRIM TABS US FLOAT — UP Arrow Dominant
# US HIGH GRADE CORP BONDS (LQD) — UP Arrow Dominant
# US INFLATION PROTECTED BOND PRICES — UP Arrow Dominant
# US UTILITIES STOCKS — UP Arrow Dominant
# AGGREGATE US BOND PRICES (BND) — UP Arrow Dominant
# US LONG BOND PRICE (TLT) — UP Arrow Dominant
# RWR (US Real Estate REIT Fund) — UP Arrow DominanT
# AUSSIE ALL ORDS INDEX — UP Arrow Dominant
# INDIAN STOCKS — UP Arrow Dominant
# VALE STOCK (Iron Ore) — UP Arrow Dominant
# US BIOTECHNOLOGY INDEX — UP Arrow Dominant
# WEST TEXAS OIL PRICE — UP Arrow Dominant
# US DOW STOCK INDEX — UP Arrow Dominant
# RUSSELL 2000 INDEX — UP Arrow Dominant
# US TRANSPORT INDEX — UP Arrow Dominant
# US INSIDER SENTIMENT (KNOW) — UP Arrow Dominant
# NASDAQ COMP INDEX — UP Arrow Dominant
# US JUNK BOND PRICES — UP Arrow Dominant
# US 3 MTH T BILL YIELD — UP Arrow Dominant
# LIBOR — UP Arrow Dominant
# FRANCE STOCKS — UP Arrow Dominant
PRICE PULSE FALLING — (RED ARROW DOWN DOMINANCE)
# COAL ETF (KOL) — DOWN Arrow Dominant
# TED SPREAD — DOWN Arrow Dominant
# GOLD PRICE (in Aus Dollars) — DOWN Arrow Dominant
# COPPER PRICE — DOWN Arrow Dominant
# INDUSTRIAL METALS ETF (DBB) — DOWN Arrow Dominant
# YUAN (AGAINST USD) ETF — DOWN Arrow Dominant
# HANG SENG — DOWN Arrow Dominant
# GOLD PRICE in USD —DOWN Arrow Dominant
# SOUTH KOREA STOCKS — DOWN Arrow Dominant
# SINGAPORE STOCKS — DOWN Arrow Dominant
# THAI SETI INDEX — DOWN Arrow Dominant
# AUSSIE DOLLAR AGAINST US DOLLAR — DOWN Arrow Dominant
# CANADIAN DOLLAR AGAINST USD — DOWN Arrow Dominant
# BRAZIL STOCK INDEX — DOWN Arrow Dominant
# ARGENTINA STOCKS — DOWN Arrow Dominant
# BRITISH POUND AGAINST USD — DOWN Arrow Dominant
# NOMURA HOLDINGS — DOWN Arrow Dominant
# EURO (AGAINST $US) — DOWN Arrow Dominant
# SWISS FRANC (AGAINST $US) — DOWN Arrow Dominant
# PLATINUM PRICE — DOWN Arrow Dominant
# SHANGHAI STOCKS — DOWN Arrow Dominant
# PALLADIUM PRICE — DOWN Arrow Dominant
# BITCOIN INDEX $NYXBT — DOWN Arrow Dominant
# DEUTSCHE BANK SHARES — DOWN Arrow Dominant
# FOOD INPUT PRICES (DBA) — DOWN Arrow Dominant
# EURODOLLAR INDEX ($XED) — DOWN Arrow Dominant
# COMMODITIES INDEX (USCI) — DOWN Arrow Dominant
PRICE PULSE UNCERTAIN NON-DOMINANCE OF RED ARROW –
# SWISS STOCKS — Changed to No Arrow Dominant
# TAIWAN STOCKS — NO Arrow Dominant
# DENMARK STOCKS — NO Arrow Dominant
# YEN (AGAINST $US) — NO Arrow Dominant
# JAPAN NIKKEI STOCKS — NO Arrow Dominant
# RUSSIAN RTSI STOCK INDEX — NO Arrow Dominant
# FVL — VALUE LINE — NO Arrow Dominant
# US KBW BANK INDEX — NO Arrow Dominant
# NATURAL GAS (SPOT PRICE) — NO Arrow Dominant
# GERMAN DAX — NO Arrow Dominant
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