End of the Empires

US government interest payments on debt are now approaching $900 billion annually; they exceed the $722 billion defence budget by about 20% and are growing far more rapidly. Some weeks ago we covered the amount of US government debt that will need to be refinanced in the next 18 months, all of which will be paying upwards of 4%.

The silence on the debate around balanced budgets is deafening. Nobody really expects America to ever balance its budget again. It’s more a question of not letting things get too obviously bad, too quickly.

There is a perfect example of how this plays out in Japan. In equivalent terms the economics of the Japanese government are roughly this:

• Income: $31k
• Expenditure: $100k
• Debt $700k

With Japanese treasury yields rising the debt burden is starting to crush them.

The response? The government buys the bonds to keep the yields down and in January they bought more bonds than they ever have before. 23.7 trillion YEN is about 50% of Japan’s GDP in any given month. The Bank of Japan now owns over 50% of the outstanding debt in the country. Predictably the Yen is collapsing, down 20% in a year, which for an economy the size of Japan is a whopping decline.

The Americans will do the same, although I expect them to be far more subtle about it. Indeed when you look at the major currency pairs USD/EUR, USD/YEN and USD/GBP you’d have to say that the USD isn’t up against much because they all have the same issue and if they collapse at similar rates nobody will notice.

If you had a genuinely hard currency it would simply waltz home with the points and the prizes. I’ll leave that thought with you.

The early crow

The battle is lost, he says. I wonder.

Of all the unelected alphabet soup agencies, the Bank for International Settlements is perhaps the most opaque. Aside from being very unelected, they produce their accounts in an entirely invented currency known as Special Deposit Reserves; their Board of Directors enjoys special taxation rules internationally meaning they pay no tax on their earnings; and in the general scheme of “do as I say, not as I do”, it is a world-leading organisation.

More specifically though “technology doesn’t make for trusted money” could not be further from the truth. Technology is absolutely the solution to trusted money because when built correctly it can be impervious to political interference and bribery (which the tax free salaries of your favourite BIS official effectively are).

In essence the claim of fiat money is that it is better simply because the government says so. It has no feature in itself which is superior. You might point to wide acceptance, that is by decree though and nothing to do with the product itself. The fact is even the stated parameters of fiat money are notably inferior; at best their value will decline by 2% per year at a minimum if the government hits its inflation target. A prime example of why it is a second class asset.

Carstens’ claim is baseless and while fiat won the 2022 battle, it is very clearly losing the war. Special Deposit Rights having lost 99% of their value versus bitcoin since it launched. By way of mathematical reminder, there is no limit to the number of times it can repeat that achievement and I fully expect it to.

A microchip ate your lunch

Google this: “before expectations become embedded”.

Every result on page one is about inflation and many are from central bank papers or news reports suggesting they need to do x or y before inflation expectations are embedded in wage demands. The reality is often very different. Here are the Reserve Bank of Australia’s wage expectations versus reality. They have always overstated the wage expectation, every single time.

This anchoring of expectations is a game. In a weird twist of human psychology, it seems people can live with 8% inflation and a 2% rise provided everyone else gets the same or less. If what happened to other people didn’t matter, everyone would be insisting on 8%+ rises.

What’s more, the pressure from technology is continuing to eat wages and it’s no surprise that the RBA clearly finds it very difficult to forecast. Perhaps they need some new technology to help. Only three months ago, I could not write code on a computer to do anything. Now with the advent of AI, I can program any simple task on a computer without having to pay someone else to do it. No big deal, but repeat that across the now 200 million+ users and I’m pretty sure somebody somewhere is out of a job.

The advent of AI came up at a recent event I attended. I happened upon a Professor from a well-known university. In discussing AI he was quite upset; essentially his argument was that the power of AI has been directed at what he called “lowest common denominators”. Essentially, what he considered menial tasks like low level programming, replying to emails, drawing logos, etc. “Corporate tasks” he called them, as though there was no greater horror. He believed that the resources should have been directed at ‘truly intractable problems’ including the great unsolved problems of mathematics.

He concluded “now wages will really collapse and we will need universal basic income when we should be going to Mars”.

From a commercial perspective, I would have chosen what Open AI chose, which was to roll it out and let people choose what problems to work on. If they are sending emails and programming with it then the market has spoken. There is of course room in the world for people with an alternative view. I must say his has a lot of merit and I’m struggling to find reasons why he’s wrong.

Eth upgrades

Ethereum’s staking upgrades are now in the testing phase. Throughout March they will launch on the various test platforms, and with history as our guide, we will see further delays. Even so, eventually investors who staked ETH will finally be able to withdraw their assets. The suggestion is that this will lead to a stampede for the exit, personally I think the reverse is true. Once you know you can un-stake at any time you wish, you are much more likely to consider staking in the first place.

This thesis seems to be playing out. An additional $613m was staked this week in a single deposit (one of the largest ever). A ‘money where your mouth is’ vote of confidence.

Euro-Trash

It’s Annual Report time at the ECB. Normally the Central Bank absolutely kills it because it has a complete monopoly on both money and information; it’s almost impossible for them to lose but somehow this year they managed it.

In a remarkable twist of accounting fate, the provisions released for bad debts by the ECB brought the profit to exactly zero. Incredible! What are the odds of such a thing happening?  There is no way in the world a private company would ever get away with this. Selecting a number that brings your profit exactly to zero would just be too obvious and too embarrassing, so nobody would even think about it. These guys obviously have no shame at all.

The issue is some of the bonds the ECB bought during the pandemic were a bit whiffy. During the year their bond portfolio took an impairment hit of €1.8 billion when the value of garbage they had been buying collapsed under the weight of their own interest rate rises.

Christine and the gang are going ok though. Despite their spectacular failure on inflation (their only job), and the massive losses they socialised during the year, things are looking good. Here the Annual Accounts declare some of the goodies for the leaders at the ECB.

Members of the Executive Board and the members of the Supervisory Board employed by the ECB receive a basic salary and a residence allowance. In the case of the President, a residence is provided in lieu of a residence allowance. Members of the Executive Board and the Chair of the Supervisory Board also receive a representation allowance. Subject to the Conditions of Employment for Staff of the European Central Bank, members of both boards may be entitled to household, child, education and other allowances, depending on their individual circumstances. Salaries are subject to a tax for the benefit of the EU, as well as to deductions in respect of contributions to the pension, medical, long-term care and accident insurance schemes. Allowances are non-taxable and non-pensionable.

I mean, not only did the EU pay Christine, they gave her a house. They also get a “representation allowance” for turning up. Presumably their salaries are for some other purpose.

Also note that “salaries are subject to a tax for the benefit of the EU”. That nuanced language means they are not paying tax in their host country but some invented tax rate to make it look like they pay income tax. The EU does not have tax raising powers so we can assume they are paying over a small amount so the accounts can say they pay tax.

It’s a good deal for people whom I regard as some of the most abject failures of their generation.