Notes From Underground: There’s a Hole In Daddy’s Arm Where All the Money Goes

The headline is from one of my favorite John Prine songs. The great wordsmith died due to complications related to COVID-19, so in a tribute to one of his great songs , “Sam Stone” (about a Vietnam wet who comes home a heroin addict), I use this to define the recent work of the FED and the U.S. Treasury.

The global addiction to cheap debt has built the edifice of massive borrowings built upon ever lower interest rates. Fear of a negative feedback loop is palpable for the world’s central banks because if rates were to EVER go higher it would create a bear market in equities, bonds or both.

When the equity and bond markets dropped in response to Bernanke’s May/June 2013 QE TAPERING comments, the then-FED chairman reversed course and held off on the unwind for a bit. When the global markets collapsed in response to a falling Chinese yuan in August 2015 and threats of hedge funds shorting YUAN in February 2016, then-Chair Yellen removed any threat of FED tightening. Currently, Chairman Powell cowered in the face of bond and equity BEAR markets by reversing his path of rate hikes and shrinking the balance sheet, also known as the Powell Pivot of January 2019.

The ECB and BOJ have acted in similar fashion. Every time the financial markets are declining in fear of rising interest rates and less liquidity, the central banks bend to the desires of financial markets. This has created the environment for lower for longer, resulting in increased debt on the balance sheets of private and public sectors. The Covid-19 crisis did not cause the current financial stress but unveiled the fragility of debt within the system. If corporate America hadn’t borrowed so much for the sake of stock buybacks and ever-increasing dividends, the balance sheets of all corporate America wouldn’t have been as stressed.

But hey, uber cheap money reveals the efficacy of the work of Hyman Minsky. The complacency of the feedback loop caused by the world’s central banks has left the entire system overextended and unable to absorb the demand shock caused by the CORONA SHUTDOWN. Everybody is lining up at the trough in the U.S. as the FED and Treasury have promised to satisfy the needs of all economic actors looking for some cash to smooth the way through rapidly declining economic activity.

The Fed’s balance sheet is in a race with the U.S. Treasury to see who can spend faster or accumulate assets in a whirlwind of acronyms. In the weekend Financial Times there was an interview with the madam of Modern Monetary Theory, Stephanie Kelton. In my view it is a PUFF PIECE as it fails to challenge the theory in a meaningful fashion even as it been the target of criticism of so many highly regarded economists.

MMT will be a recurring a theme of NOTES FROM UNDERGROUND (again) as we begin to challenge the money addiction and the financial irresponsibility of policy makers. In the interview, Kelton notes that Congress always had the authority to spend unlimited amounts because they have a printing press, or in Kelton’s theory, “the idea that if a government is in charge of its own currency, no inherent budget rule constrains it from spending more than it taxes.”

For Kelton this truth is similar to Dorothy in the Wizard of Oz. She continued, “It’s like Dorothy with the red slippers. You’ve always had the power, you know?”

Unfortunately for Kelton she neglects to mention that while Dorothy wore the red slippers, SHE FOLLOWED THE YELLOW BRICK ROAD.


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17 Responses to “Notes From Underground: There’s a Hole In Daddy’s Arm Where All the Money Goes”

  1. asherz Says:

    Yra-The Powell Pivot…He swung around waving the White Flag. He now is a POW, held captive by the markets. We are on our way to a $10T Fed balance sheet…and it won’t stop there.
    Instead of “Creative Destruction” we now have “Zombie Preservation”, with Chairman Powell pushing the panic button and will be buying all kinds of “Whatever it Takes” paper, including junk and who knows, maybe even equities a la the Bank of Japan. We have reached the Minsky Moment. This could lead to the final nail in the Bretton Woods coffin, as the dollar as the sole reserve currency may be replaced; and possibly the end of the glorious economic experiment known as Capitalism and free markets, as governments overwhelm the markets. Sic Transit Gloria.
    The yellow brick road will be paved with this.

    • David Richards Says:

      asherz, that’s a photo of some Central Banks’ reserve currency of choice today, and perhaps the sole reserve currency circa 2022-23. I understand that the Fed balance sheet is now on its way to $57T, the amount necessary for the Fed to bail out the USD synthetically short Eurodollar system and stave off systemic collapse, like we got a small taste of last month.

      Already, the IMF proposed the SDR replace the dollar, but the US strongly objected. However, just as you can’t have your cake and eat it too, so you can’t go Zim-dollar and retain the reserve currency privilege for long. USD is increasingly being replaced by numerous central bankers for reserve purposes, and the US threw the SDR idea under the bus, so instead expect gold to sometime be catapulted into the de facto reserve position by default, against howls of terror by any unprepared central banker.

      Thereafter the only thing that will matter will be, how much real physical gold does your CB or you own? So we probably better all become our own personal central banker. Buy gold.

  2. David Richards Says:

    From the perspective of Stephanie Kelton and Bernie Sanders, life can be cruel, as Donald Trump beat them to be the first to implement their MMT and uber-socialist utopia for which they’d long campaigned and hoped to lead themselves.

    And it’s refreshing to read somewhere for a change that the fragility of the debt rather than the virus is the primary cause of the financial stress and extraordinary reactions.

    I’d explain more but I can’t due to the virus. Like how I was gonna wash the dishes and laundry, but sorry honey I couldn’t due to the virus.

  3. kevinwaspi Says:

    In the spirit of John Prine’s song, “I used to care about these things, but I take a pill for that now.”
    We’re all socialists now.

  4. Bosko Kacarevic Says:


    Many silver-bugs say that in the original L Frank Baum manuscript of the Wizard of Oz, Dorthy’s slippers were actually SILVER and that silver represents the magic power Dorthy has been searching for to go back home. Apparently the yellow brick road leads her to the right place to discover the Wizard hiding behind the curtain is a false power, but silver is the answer. I haven’t verified this story but why not keep both metals to be safe. Besides, I can’t think of anything that’s cheaper today then it was in the late 1970’s after the Nixon gold shock. Silver is still the only precious metal that has not yet broken its 50 year high.


    • Chicken Says:

      Wow, I just learned John Prine passed from this…. Rest in peace Mr. Prine, one of my favorites also.

  5. ShockedToFindGambling Says:

    Yra- great article

    The thing that strikes me, is that as the FED/Treasury buy up credit products, they are transferring the Credit Risk to the FED/Treasury/Taxpayer.

    Therefore, you are injecting significant credit risk into Treasuries.

    You can print unlimited amounts of $Dollars to bail out everybody/everything, but if your currency ends up worthless, you still end up effectively broke, even if no one goes bust.

    Modern Monetary Theory puts us on the road to Weimar Republic monetary policy, IMHO.

  6. asherz Says:

    In case you didn’t notice, May Crude settled today at NEGATIVE -37.63. June was at +20.43. Anyone ever see anything like this? Some traders or hedgies must have gotten blasted.
    Before this period is over we will see other unprecedented things that are mind blowing.

    • ShockedToFindGambling Says:

      Yea….gotta’ feel sorry for anyone who got caught in this. I didn’t know it could go below Zero…….guess the FED isn’t printing enough.

      • The Bigman Says:

        Who are the counterparties caught in this downdraft? I suspect some of them are the airlines who were hedging their fuel costs. when it rains it pours

    • David Richards Says:

      For every action, there’s an equal and opposite reaction. Shares of shipping tankers soared even during the meltdown, as their rates skyrocketed a month or two ago because tankers were desperately needed for crude storage by producers as the oil price tanked. (That trade has already left the station).

  7. Pierre C Says:

    I thought it would be fun to pull up a gold to oil ratio chart today.

  8. Pierre C Says:

    Historical average since 1946 has been that one ounce of gold would buy 14.83 barrels of oil.
    If we are now at that one ounce of gold will buy 169,580 barrels of oil. Maybe its time to sell gold and buy oil.
    We’re going to need a bigger boat! =)

  9. yraharris Says:

    From Yra: we will get to this.Bosko on the silver slippers the allergory was to have been the 1896 Cross of Gold Speech by WJ BRYAN and you are right silver slippers following the yellow brick road—-the scarecrow is Kudlow,the Tinman Mnuchin and the lion is not defined—where has Bob Lighthizer gone or now known as Professor Marvel.Jay Powell lives in emerlad ink city behind the curtain pulling the levers.I went to open a checking account today and was given one oil contract for every ten thousand dollars

    • The Bigman Says:

      And that leaves only the witches- evil witch Stephanie of the MMT and the good witch Christine of the Euro with cameo roles for the Fed governors as The Munchkins. Let the production begin- roll ’em

    • Bosko Says:

      Yra, doesn’t look like this fairy tale has a happy ending– for those without gold or silver?

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