Lemon_tm
Lemon_tm
The recent records in US stocks and rising wealth inequality are divergent observations of an economy that is based on the fiat monetary system. The system can work well for low annual fiscal deficits but this has not been the case for over two decades. The current fiscal deficit to tax revenue reaches -38%, the development is alarming and worrisome.
The latest events of the expansion of the BRIC+ to 10 countries, the disruption of the financial clearing of the Ukraine war, and the economic and political changes of a US unipolar world call for an update of the past economic theories.
Below is a diagram of the origin of the current US$-based fiat monetary system, which came from the past money of gold and commodities.
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In today’s high-tech numeric world, the use of mathematics and physics principles can help modernize economics and finance.
Economics and finance are altered by major global events, so updates are required. Mathematical and physics principles are effective in accommodating the changes in numbers and equations format with displays. The basic techniques to start an analysis are:
Initialize (time) Digitize (numbers) Normalize (quantity)
Expressing economic and financial changes, even though as an inexact science, by formulas can model the occurrences. The formulas can be tuned over time as needed to fit the latest data, mainly to adjust major policy changes. Formulas are essential and advantageous for managing multiple and complex factors for quantifiable analysis.
The following is an attempt to address the fiat monetary conservation hypothesis and categorize each economic item for formulation.
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The money supplies from narrow to broad according to the Exter’s Pyramid are listed below. The migration of the volume control of money has drifted from the Fed to the Treasury, as the national debts are highly transferable and convertible with digital cash even with large sums. Moreover, Treasuries have been expanding faster since 2008.
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The relaxation of the concept about the usage of money supply allows for comparisons about the velocity of M2, GDP/M2, and Treasuries.
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The rapid rise in treasuries has played a major role, by more government spending, in supporting the economy, to the point that it is less than 1, meaning each dollar rise in national debt results in less than one dollar rise in GDP. The tendency seems perpetual.
By replacing GDP with the total market of stocks, the same analysis is applied. Both M2_v and Treasuries_v are more efficient in boosting stocks, with velocities higher than the GDP’s.
The net result is the taxpayers are getting poorer, and the shareholders are getting richer. Revealing true conditions helps to devise steps for corrections.
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The coordinated actions by the Fed and others have been successful in breaking new stock market records since October.
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The asymmetric power of the Fed in conjunction with the Treasury and Wall Street has been a global financial powerhouse. In a global reserve currency and trade world that is dominated by the dollar, the Fed is the sole supplier. The Fed’s tools can create cycles of interest rates and money supplies, which affect all global asset prices of currencies, bonds, and stocks, which can create profit opportunities for Wall Street and commercial banks. The Fed’s dollar Swap Agreements with only ally countries strengthen their markets and assets, while non-ally countries are at an anxious liquidity disadvantage. All other currencies must relate to the dollar by daily currency indexes. Other currencies and debts are mostly local, the dollar debts are global. A bigger pool of currency and debt links to more control and influence.
In a philosophical sense, the Fed’s cost of money is zero, and so are the credits from the commercial banks in the long run. However, these credit-based debts can produce great amounts of interest rates and the chance of seizing the collaterals globally in history. This is the bedrock of the dollar-based American financial exception.
Nonetheless, the unrelenting rise of national debts in the form of treasuries has been an unsolvable mess. The average interest rate will rise much longer, and the total interest will approach one trillion dollars annually by next year. Slowing down fiscal deficits is the most critical issue to avert financial disasters.
The following is the relative ranking of stock sectors, showing their daily rotations that can help with the timing for trading. The rankings are based on the sums of changes in price and momentum, a simplistic form of quantitative or intelligent analysis that has not been automated.
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Physical gold prices are rising above paper gold prices internationally. The Chinese central bank has been accumulating more gold at 1% per month for 16 months. Many other central banks are joining the bandwagon. A new consumer group of young buyers is accumulating physical gold, which forced prices up as much as $100 above the official exchange price in China. Physical deliveries are picking up too as the gold bullion on the Western exchanges diminishes.
The uptrend in gold prices will likely continue till year-end with many new records.
The miners will enjoy much improved earnings for the rest of the year if gold moves up. Miners are undervalued but the recent attention from fund managers is causing the bounce. The silver miners were in a depression in early March but with higher upsides. Seasonality favors an uptrend till early May.
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The great success of stocks is hiding the great failure of fiscal imbalances of rising national debts as a form of tradeoff. The reversal of these alarming trends, by increasing revenues and reducing spending, can bring a much better future for everyone. Otherwise, the shock of rising interest rates will resume as demanded by the creditors.
The global total debt situation is daunting with the combination of rising record amounts and high interest rates. In the last two years, Sri Lanka, Argentina, and Egypt, plus the UK and US, all experienced financial troubles. Only the Fed’s toolbox is keeping things calm for now.
Physical gold is a passive asset that has no counterparty risk and is mostly immune from fiat systematic risk. Suspiciously, some gold ETFs have lower gold holdings despite rising prices. Stars are aligning for gold to shine in 2024 after 4 years of moving sideways.
This article is for discussion only and is not intended for any investment advice.