economics

Fed Activity

The Federal Reserve Bank cut the funds rate by another quarter point last week, and at the same time, it is buying about $350 billion in Treasuries. This should be causing interest yields on long term T-bills to drop.

But it isn’t.

This is, in my opinion, an ominous sign. When the Fed buys treasuries and cuts rates, it is putting more dollars into circulation, which should have the effect of having more dollars chase a (slightly) smaller number of Treasuries. This increases demand for treasuries while reducing supply, which should drive down rates, but it isn’t. This seems counterintuitive.

The Fed controls short-term rates.
Markets control long-term rates.
It appears that right now, markets don’t believe inflation, deficits, or Treasury supply are under control.

For years after 2008, the term premium was near zero or negative because:

  • Inflation was dormant
  • Deficits felt manageable
  • Global demand for “safe assets” was enormous
  • Central banks suppressed volatility

That era is over.

Now investors demand compensation for:

  • Persistent inflation risk
  • Fiscal dominance (monetary policy subordinated to debt financing)
  • Political dysfunction
  • Rising debt-to-GDP
  • Uncertain future Fed independence

This term premium alone is adding 100–150+ basis points to long yields, kind of like people with poor credit paying higher interest rates.

In a normal cycle:

Fed cuts monetary supply→ growth slows → inflation falls → long rates drop

Today:

Fed cuts monetary supply→ deficits widen → Treasury issuance rises → inflation risk persists → long rates stay high

This is called a supply-driven yield curve.

In this case, investors are looking 10, 20, and 30 years into the future, and the risks of holding IOUs from the Federal government are no longer near zero. They are somewhat higher, and therefore the risk of a potential deadbeat Federal government not being able to repay you, or repaying you in inflated, less valuable dollars is higher, and investors want to be compensated for this increased risk.

Markets see:

  • Structural labor shortages
  • Re-shoring and inflationary monetary policies
  • Aging demographics
  • Entitlement growth with no funding (Social Security)
  • Defense and geopolitical spending locked in

So the belief is that the Fed may cut rates now, but inflation or fiscal pressures will force higher rates later on down the road. This is becoming more and more possible the longer you peer into the future. That expectation keeps long rates high.

As more and more people come to realize that the national monetary issues are going to be a problem, the more that they will be apprehensive about the future. Perception is what drives faith in the dollar, and once we reach a critical tipping point, the dollar WILL collapse.

Spending = Taxes + Borrowing + Inflation (monetization)

For spending to constantly increase, as it has been doing, then the other three must increase. Since we know that spending CAN’T decrease because any politician that proposes meaningful cuts can measure his career with a cesium clock, the three supplies of cash (taxes, borrowing, and inflation) must continue to rise. The probability of a crash caused by a loss of financial credibility is low, but rising (10–20% over the next 20 years).

There are only two sustainable endgames:

A. Explicit choices

  • Raise taxes
  • Reform entitlements (drastic cuts to Social Security and Medicare)
  • Reduce spending growth
  • Painful, honest, stabilizing.

This isn’t likely to happen in today’s environment- the younger generation is screaming for MORE spending, not less. You think the dollar is taking a beating now? Wait until the government passes Medicare for all. Democrats spending more when they win in 2026 (which is looking more and more likely) and again in 2028 (also looking more and more likely) will result in vastly increased government spending.

B. Implicit choices

  • Debase and inflate the currency so you can pay yesterday’s debt with today’s less valuable dollar
  • Suppress rates by pressuring the Fed and QE
  • Let purchasing power erode

Politically easier. Economically stealthy. Socially corrosive, kicking the can down the road.

History suggests governments choose B until forced into A.

Bottom line

The future is not collapse, but it is painful. At least for the next decade. (The US economy is large and has a lot of inertia). Absent reform, the U.S. likely faces:

  • Higher average inflation
  • Lower real returns
  • More volatility
  • Less policy credibility
  • A gradual transfer from savers to debtors

The danger is not that everything breaks tomorrow. The danger is that everything slowly works worse, and by the time the costs are obvious, the choices are far harsher. The last item, above, means that you need to hold things that aren’t denominated in dollars. The goal is not to “beat the system,” but to avoid being silently taxed by it. Historically, people who do best focus on resilience, diversification, and optionality, not prediction.

Assets that tend to be hurt most in inflationary markets:

  • Long-duration bonds
  • Large cash balances
  • Fixed pensions not inflation-indexed
  • Assets dependent on stable real rates

Cash is liquidity insurance, not wealth storage.

  • Hold 3-6 months of expenses in cash or T-bills
  • Use short-duration instruments (T-bills, money markets)
  • Avoid long-term fixed-rate instruments unless yields are clearly compensating you.
  • High T-bill rates right now are actually helpful because they reduce cash drag temporarily. Just don’t take bills that are long term. In the longer term, you will be beaten by inflation.

Gold and other PMs are non productive assets. Because of this they historically:

  • Protect against monetary disorder
  • Do not reliably produce real growth
  • Best used as insurance, not an engine. Don’t hold more than 15% of your investments in PMs

Skills and income resilience beat portfolios

This is the part people underestimate. In every inflationary / fiscally stressed era, earners with scarce skills outperform savers and investors. If you can adjust income, negotiate pay, shift roles, or add consulting or side income, you are far more protected than someone relying solely on fixed returns.

The risk ahead isn’t sudden ruin for most people, it’s slow erosion of purchasing power and forced choices at bad times.

Individuals who:

  • stay liquid but invested,
  • avoid fixed claims,
  • own pricing power,
  • diversify quietly,
  • and keep their earning ability strong

tend to come through these periods intact and often ahead of those who tried to time the crisis.

Build skills, build wealth, build a stable base.

By Divemedic, ago

Reader Mail

A reader sent me this by email, rather than simply commenting on the post, and I usually throw those out. However, this one seemed a bit interesting to me, so here we go:

JFK had a top income tax rate of 90% and this was the period of highest growth in our economy.  Perhaps you need to check your assumptions.

Obviously, he knew what he was doing.  Back then, in figuring out your income, you could deduct things like starting factories and doing research on consumer products.  In short. doing things that benefited other people allowed the brainiac to pay less tax.  

Even though top marginal tax rates were 70%–91% in the 1950s–1970s, the actual effective tax rates paid by high-income individuals were dramatically lower. Almost nobody really paid 91% — or anything close to it.

In the 1950s and early 1960s:

The top marginal rate was 91%, but it applied only to taxable income above about $400,000 (over $4 million in today’s dollars), and “taxable income” was drastically reduced by:

  • Unlimited business expense deductions
  • Oil & gas depletion allowances
  • Real-estate depreciation
  • Investment tax preferences
  • Income shifting to corporations
  • Trust structures
  • Foundations
  • Tax-exempt municipal bonds
  • Deferral strategies

Thus, almost nobody actually reported enough taxable income for the 91% bracket to matter. Economists often say the 91% rate existed mostly on paper. Congressional and Treasury studies from the era showed that the average effective tax rate for high-income earners was typically 30–40%, but many wealthy individuals paid 15–25% after shelters while some paid near zero using aggressive loopholes (especially in real estate and oil).

President Kennedy even complained publicly that: “A millionaire may pay less taxes than his secretary.”

Sound familiar? This wasn’t a new phenomenon.

The 1986 Tax Reform Act (Reagan) slashed rates by 50% to 28% but eliminated many shelters — and ironically, many high-income individuals paid more tax after the reform, despite the lower rates. Because the tax code back then allowed:

  • Unlimited itemized deductions
  • Very generous depreciation schedules
  • Income averaging
  • Tax-free corporate perks (cars, housing, travel)
  • Tax-exempt investments
  • Turning salary into capital gains
  • Family foundations and trusts
  • Personal holding companies
  • Business losses used to offset income
  • The famous “oil depletion allowance”

In short, the rich could make most of their income disappear for tax purposes. This is why economists say the old system was “high rate / high avoidance,” whereas today’s system is more “lower rate / broader base.”

The other part of this was the minimum tax rate of 20%, which applied to everyone up to $2,000 per year ($20,000 per year in today’s dollar). Picture this- a person making $20,000 a year would owe $4,000 of it in taxes, and the poor didn’t have loopholes to exploit.

So don’t tell me how they were so good at taxing the rich back in the 60’s. It was JFK who advocated for a cut in tax rates and the elimination of many tax loopholes. The Revenue act of 1964 was passed after his death, and cut the top rate from 91% to 70%, but eliminated many tax loopholes. Still, there were many of them left, and most weren’t eliminated until Reagan lowered the tax rate even further while eliminating many tax write-offs. See the Laffer curve on how lowering taxes actually increases revenue.

By Divemedic, ago

Smoke and Mirrors

I know that I tackled this one 16 years ago, but after eighteen years of running this blog, there are very few topics that I haven’t mentioned. The left loves to claim that Clinton ran a budget surplus when he was President. That is false. The national debt actually went up every single year that he was President. The reason that they can claim this, is the money was moved from one account to the other.

Let me explain:

Let’s say that your wife is angry that you are spending all of your money on guns and booze, and is afraid that you are maxing out the credit cards. You show her the bank statements from the checking account, and low and behold, your balance is larger now than it was a year ago: “See?” you say, “We have a positive cash flow.”

But what you didn’t show your wife was that the only reason your checking account is larger is that you borrowed the money from the kids’ college fund. It’s cool, your kids are only 8 and 6 years old. You have more than a decade to pay yourself back. It will be fine. It doesn’t count as debt, because you owe it to yourself.

That’s going to cost you later, because your wife is going to be pissed when she gets ready to send the crotch critters off to college, but that’s a problem for future you to deal with.

Well, that is exactly what the government did. They took the money from the Social Security Trust fund and used that money to cover the deficit. Every administration since 1983 has used Social Security surpluses to mask deficits elsewhere.

Politicians love the unified budget because it lets them:

  • Spend more
  • Claim fiscal discipline
  • Avoid raising taxes
  • Increase total debt hidden inside trust fund obligations

Gen Z keeps bitching about how “Boomers” are making life hard on them because housing costs or something. This is not how the previous generations really screwed them. The Silent Generation (those born between 1928-1945- my parents’ generation) were young adults when President Franklin D. Roosevelt signed the Social Security Act in 1935, establishing it as part of the New Deal to help workers and the elderly during the Great Depression. The architects of this deal were the Greatest Generation (born 1901-1927), led by FDR.

What Social Security was, was a plan for the Silent generation to be made whole because the Greatest generation screwed up the nation’s economy. In order to prevent the silent generation from stringing people up from lampposts, the Social Security Ponzi scheme was invented. This permitted the Silent generation to be taken care of in their older years, despite the fact that the Greatest generation had wiped out everyone’s retirement nest eggs.

At the same time this was being done, FDR also eliminated the domestic gold standard. In 1933, Franklin D. Roosevelt:

  • Prohibited the private ownership of gold bullion
  • Stopped redeeming dollars for gold inside the U.S.
  • Devalued the dollar

But at this time:

  • The Greatest Generation (born ~1901–1927) were young adults
  • The Silent Generation (born 1928–1945) were children
  • Baby Boomers had not yet been born

So this step did NOT involve Boomers.

The greatest generation had spent all of the silent generation’s money on booze, coke, and hookers, so the silent generation was reimbursed by stealing the future earnings of their children, the baby boomers. Like all Ponzi schemes, the people who got in early made the most money, and those who got in late are paying the bills. The older generations got way more than they paid in, but have ignored how badly they shafted their descendants.

In 1971, Richard Nixon permanently ended the ability of foreign governments to convert U.S. dollars into gold and this is what truly created our modern fiat currency system. This is the event almost everyone refers to when they ask about “who eliminated the gold standard.” Who were the key players?

  • Richard Nixon (born 1913) → Greatest Generation
  • His advisors (Shultz, Connally, Burns) → Greatest & Silent Generations
  • Baby Boomers (born 1946–1964) were young adults, entering the workforce, or still teenagers.

Although Boomers didn’t decide the change, the fiat-dollar economy that followed became the system they lived their entire adult lives under, and which they defended politically as they took leadership roles in the 1980s–2000s. To understand how bad of an idea Social Security really is, let’s look at the math:

Let’s say that a person put $4100 per year into a retirement account that is earning 8% per year. This would simulate a person making $33,000 per year and the 12.4% Social Security tax is invested instead of being given to the government, who will quite literally spend it on booze and hookers. We will compare that to Social Security.

After working for 47 years, the person turns 65 and decides to retire. They have contributed a total of $192,700 into their account. If that money had gone to Social Security, their monthly benefit would be $2800. If they had instead invested that money as above, the balance on the account would be $1,856,890. It would earn $12,379 per month in interest. We have all been screwed out of our money.

So now generations that comprise the Millennials and GenZ are likely not going to get anything near what they are paying in, because all of it is gone. It’s been spent. That fund is nothing but a file cabinet full of several trillion dollars in IOU’s, but there is no money in there.

That is why the younger generations should be angry- they were robbed of their future earnings nearly 100 years before they were even born. They were born into a life of slavery. It wasn’t the Boomers who did it- it was the Greatest generation and the Silent generation- if you are GenZ, you were robbed by your great-great grandparents.

The system is insolvent. There isn’t enough money in the world to cover the debts created by that system. Currently, Social Security owes everyone about $75 trillion more than we have to pay- an amount that is double what our national debt already is- in other words our national debt isn’t $34 trillion, it’s more like $107 trillion. If you total all of the money in the world: every nation, every currency, every ounce of gold, it comes up to $134 trillion.

In other words, we are on the cusp of owing more money than actually exists. Even the official national debt of $34 trillion wouldn’t be eliminated if the government confiscated every 401k, IRA, 457 plan, and all other retirement accounts. The retirement accounts of US citizens are only worth about $31 trillion.

We are about to see a collapse of the US economy, and with it, the world economy. It’s inevitable.

By Divemedic, ago

Inheritance?

The left’s constant refrain is that rich people don’t get rich through hard work and wise decisions- they do so because of inherited wealth and privilege. There are multiple points of evidence to show that this is incorrect. Having a net worth of over $1.5 million places you into the top 10% of wealth in the US, and 79% of millionaires are first generation millionaires.

First generation millionaires share a few core characteristics:

  • setting ambitious goals
  • seeking mentorship
  • taking calculated risks
  • learning from failure
  • managing time effectively
  • diversifying their investments

Five careers produce the most millionaires:

  • engineers
  • accountants
  • management
  • attorneys
  • teachers

In other words, regular people. The Walt Disney, Elon Musk, Steve Jobs, Bill Gates types are the rare exception- those rare visionaries who shaped their industry. But that isn’t how the left sells it- they claim that people who are “rich” somehow cheated the system and stole the money from those who are poor.

That isn’t reality. Becoming part of the top 10% isn’t magic or cheating- it’s simply the result of hard work and math. To reach $1.5 million in 40 years at an 8% annual return, person only needs to save about $430 per month. If you were to start at 22 years old and contributed to an employer 401K plan that has a 1:1 match up to 5% of your salary, it would look like this:

  • You would contribute $215 per month, but because it is pretax income, it would reduce your take home pay by $167 per month.
  • Your employer would contribute $215 per month in matching funds
  • Your fund grows by the historical average of 8% (It’s an average. This year, my investments grew by 15%, but there were years when I actually lost money. Some years, like 2020, I doubled my money.)

If you do this, the year that you turn 58 you would have a value of $1.5 million in your 401k, even though it only reduced your take home pay by a total of $80,500 over that same time span. In exchange for not having that $167 per month, you can safely live out your retirement years as one of the top 10%.

It isn’t that hard to get there, and it doesn’t require luck or cheating the system. It just takes discipline, wise decisions, and time.

Some years it takes a bit of a calculated risk. For example, when the stock market crashed in 2020 as a result of the COVID shutdown, we saw this as an opportunity. We bought stocks with every spare cent we had. Since we were locked down for a couple of months, we also had fewer expenses. We went on a stock buying spree.

We watched as Royal Caribbean went from $120 per share to $25 per share and began buying. The average price we paid was just over $22 per share. The first buy was at $25 per share, and we bought $5k worth. We also bought shares in Darden Restaurants, Hilton, Smith and Wesson, and Marriott. When I sold my stock in 2021 to collect the profits, RCL was selling at $90 per share. Overall, we more than doubled our money.

By Divemedic, ago

Poverty Calculation

We always hear about poverty, but just how does the government decide what poverty is? In the 1960’s, a formula was created to define poverty. It was assumed at the time that food comprised one-third of a family’s budget, so any family that earned less than three times the amount of money that it took to buy food for the household was assumed to be poor.

Every year, the government calculates what they think it should cost to feed a family, then multiplies that number by three to arrive at a figure for the poverty line. How do they calculate that? How do they know what it costs to feed a family? Easy. They look at what it cost a family in 1963 to sustain itself, then adjust that number for inflation. Nowadays, there are idiots claiming that this number isn’t accurate- and I will grant you it isn’t- but they are using that to claim the new poverty number is 16, that is, a family needs to make 16 times what it costs for food in order to not be poor: $140,000 per year for a family of four. If you are poor, you should get government assistance. By this math, 60% of our nation would be living in squalor.

That’s ridiculous.

Where is that number coming from? The leftists claim that this is because the cost of childcare, Internet, and cell phones. First off, if you can afford cell phones and Internet, you aren’t poor. There are people all over the world who manage to exist without those things. Social safety nets are there to make sure people don’t starve. They aren’t there to buy Pizza Hut, video games, and cell phone porn.

The left is invested in making this economy look bad. They want Americans unhappy with the economy. There is an election next year, and Americans vote with their wallets. The press needs to hammer this home every day: “The economy sucks, but Joe Biden’s 9% inflation was the best economy in the past 50 years. Vote for us.”

Instead, let’s use the World Bank’s definition: Making less than $3.00 per person, per day. Under that definition, a family of four would be living in poverty if they had a household income of less than $4,400 per year. I will even be generous- we live in the richest nation in the world, so make that $10 per person, per day. A family of four who makes less than $14,600 is below the poverty line.

Would it suck to make that little? Sure it would. Being poor sucks. However, $10 per person, per day would make you more wealthy than 61% of the planet. That’s why we can’t afford to keep importing more and more poor people- they aren’t enriching us, they are dragging us down into poverty with them.

By Divemedic, ago

Class Envy

The left is pushing wealth taxes to the top of their agenda. This article from Reuters tries to make the case that Norway is an example of how wealth taxes can work. Norway is always used as the socialist dream, with all of the social programs that the left loves. What the left ignores is that Norway is not analogous to the US.

For starters, let’s recognize that Norway ranks among the world’s wealthiest thanks to oil, shipping, and fishing. In Norway, the government owns those industries. All of the profits from those industries gets funneled into a government wealth fund, which is in turn invested in companies in other nations, especially the US. However, Norwegian law says that they can only spend 3% of the fund’s $2.1 trillion balance each year. This means they need to find other forms of income to enable them to support the welfare state.

That means a wealth tax on unrealized capital gains. The entire nation is a welfare state, living off of investments made in countries with actual free markets. Since there are no nations that the US could siphon money from, this plan will never work here.

By Divemedic, ago

Alarm Bells

Alarm bells should be ringing with the news that the government sold $694 billion in Treasury securities spread over 9 auctions in only three days. Yeah, our national debt now stands at $38.2 trillion. The most alarming thing about this news is that T-bill yields are rising. The 10-year Treasury yield is now at 4.15%. At that rate, the interest on our debt will be more than $1.5 trillion per year. Since Americans only pay about $2.4 trillion in Federal taxes each year, we are edging closer to the point where our debt will begin to grow like a snowball rolling down a mountain.

The only way to keep the government solvent at that point would be to inflate the currency in order to pay it with lower valued money. At that point, inflation will be higher than interest rates, and it will no longer be financially possible to invest in government bonds. This will in turn cause higher rates, which will also create a need for higher inflation. In other words, hyperinflation is the only way out, but that will cause a complete collapse of the US dollar.

Anything you own that isn’t a physical asset will evaporate overnight: currency, stocks, bonds, bank accounts. As you can imagine, the government can’t let that happen, so what they will do to deal with it is the real question…

By Divemedic, ago

Whiny Children

Listen to this rant, then read all of the comments about how “Boomers” have ruined it for today’s youth because they used up all of the opportunity by living life on “easy mode.” .

In 1960, the U.S. homeownership rate stood at 62.1% of households, meaning a majority but not all adults achieved it through steady work. Labor force participation for adults 16+ averaged about 59% in the early 1960s, with prime-age men often exceeding 90%, though many worked multiple jobs amid economic growth. Poverty afflicted 22% of Americans in 1959 (around 39 million people), dropping to 14.7% by 1966 due to expanding opportunities and policy shifts, yet struggles persisted for the unskilled or disadvantaged.

As of late 2024, the U.S. homeownership rate hovers around 65.7% of households, higher than 62.1% in 1960 despite rising costs. Civilian labor force participation for those 16+ is 62.3%, up slightly from the early 1960s’ 59% average, though prime-age rates remain strong amid dual-income norms. The official poverty rate dropped to 10.6% in 2024 (35.9 million people), far below 22% in 1959, reflecting broader access to opportunities even as entry barriers feel steeper for youth.

So total people in poverty dropped, both in real numbers and per capita. Homeownership rates are higher than in 1960, and labor participation is up.

Now there are some of these kids pointing out that houses were cheaper in 1960, but they are missing that wages were lower, and houses are now much larger. They talk about “tiny homes” as if buying a 500 square foot house is something that they just invented a couple of years ago.

The original video poster is a student. Students are always broke. Living on Ramen noodles and hot dogs is what people do when in college. Get a roommate. Stop being a whiny bitch.

By Divemedic, ago

Econ Failure

Thought experiment: If this actually happened, how would it play out? What would you do?

Most people would stop going to work. So now what? How are you going to buy anything? Everyone quit, because they all have half a million bucks. What you don’t have is any food, electricity, water, or anything else that you need.

You see a guy with some food, so you offer him money for some of his food. He doesn’t want your money, he has half a million bucks and sandwiches. You are hungry, so you eventually get to the point where you offer him $50,000 for one of those sandwiches. Others see this and do the same.

Now dude is selling $50,000 sandwiches, but has no one to help make more. So he tries to hire someone, but because sandwiches are so expensive, he has to pay $45,000 per hour. Still, people do it because they need more money to buy things at the newer, higher prices. I mean, everyone is using their $500,000 a year to outbid everyone else. Prices are crazy high.

Now we have a nation of millionaires who are all paying $50,000 for a sandwich.

That’s how increases in the minimum wage work.

By Divemedic, ago