Sunday, July 16, 2023

Why Does The U.S. Economy Need $154 Billion-737 Million In Stimulus PER MONTH?

 So there I was, idly scrolling through the

Monthly Treasury Statement
Receipts and Outlays of the United States Government
For Fiscal Year 2023 Through June 30, 2023, and Other Periods

Noting the One Trillion, Three Hundred Ninety Two Billion dollar nine-month deficit when once again I ask myself "Self, what would happen to the U.S. economy if we stopped the stimulus?"

And though I don't have experiential knowledge, I'm pretty sure the answer is "the economy would collapse."

That is the very definition of a Ponzi scheme, always hustling the new money to keep the game going just a little bit longer until...

Until what? Until the current batch of politicians can retire and get on with their lobbying businesses? Until the Sweet Meteor of Death strikes and clears the books for this go-round?

I was reminded of a March 2009 post:

The optimal design of Ponzi schemes in finite economies

Some observers are suggesting that the entire Golden West/Fannie Mae/AIG/Goldman Sachs enterprise of the last half decade was a gigantic Ponzi scheme. Here's an eight year old paper via Science Direct:

Utpal Bhattacharya


As no rational agent would be willing to take part in the last round in a finite economy, it is difficult to design Ponzi schemes that are certain to explode. This paper argues that if agents correctly believe in the possibility of a partial bailout when a gigantic Ponzi scheme collapses, and they recognize that a bailout is tantamount to a redistribution of wealth from non-participants to participants, it may be rational for agents to participate, even if they know that it is the last round. We model a political economy where an unscrupulous profit-maximizing promoter can design gigantic Ponzi schemes to cynically exploit this “too big to fail” doctrine. We point to the fact that some of the spectacular Ponzi schemes in history occurred at times where and when such political economies existed—France (1719), Britain (1720), Russia (1994), and Albania (1997).

The original ScienceDirect link has rotted but here's an earlier version at SSRN.

TL;dr: You don't play in the late stages of a pyramid or Ponzi scheme unless you know there will be a bailout.
It's alright to play the game* for all it is worth but always, always be aware that things may not be as they seem and keep in mind the lesson of the children's game musical chairs: know where you are going to land when the music stops.

And speaking of things not being as they seem—or more accurately, as they are presented, we've been sharing the idea that the the ideas behind the official words are what we want to look for.

Here's an example from 2012:

The Real Problem With Stimulus

I've mentioned a few times that Keynes was all about the countercyclical thing.
In the U.S. we have devolved to perma-stimulus, every dollar of deficit spending being stimulus, and have no plans to ever stop. Anyone who argues that stimulus isn't stimulus unless it is labeled stimulus is being sillier than I felt when I typed this sentence.
Deficit spending is stimulus whether you call it ARRA, sweet, sweet Biden love or Democracy's flaw.....
The Biden reference is to the fact the former Vice-President was overseer of the ARRA stimulus in 2009 - 10 and the Recovery Summer in 2010.....
*See for example Citigroup CEO Charles Prince on the bank's actions leading up to the Great Financial Crisis:
“As long as the music is playing, you’ve got to get up and dance.” “We’re still dancing."
That bank along with many others was bailed out.
Riding the South Sea Bubble
This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare’s Bank, a fledgling West End London bank, knew that a bubble was in progress and nonetheless invested in the stock: it was profitable to “ride the bubble.” Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by such institutional factors as restrictions on short sales or agency problems....MORE

That bank was not bailed out, they left the dance floor as the band returned for the encore.

So, for what it's worth we haven't changed our outlook since May 15's "U.S. Equities: Time For An Old-Fashioned Blow-Off Top":

....but for our purposes Apple, which is about five bucks below its all-time high, is even more important.

So three things to keep an eye on:

1) the VIX trading down to maybe a 14-handle as happy, happy, joy, joy complacency sets in

2) AAPL turning over

3) the Treasury refilling the TGA
One of the three has happened (the VIX from its May 15 high of 18.16 to Friday's settle of 13.34), one is happening (the TGA refill) and one has not yet happened (Apple turnover). So our best advice?