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2017-12-01 — davidstockmanscontracorner.com

... the promised balance sheet shrinkage process is going to rapidly escalate from $10 billion per month of Fed bond sales now, to $30 billion by spring and $50 billion by next October. That amounts to a $600 billion annual run rate; and when the ECB and other banks join the "normalization" party in 2019 and beyond total central bank bond sales will pierce through the $1 trillion per year level.

And that's a very big deal because the law of supply and demand has not yet been abolished, meaning prices and yields in the global bond market are heading for a big reset. For instance, if the UST 10-year benchmark note normalizes to a yield of 4.0%, its price will fall by more than 40% from current levels (2.35%).

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But what they will be talking about soon is a US Fiscal Cliff like none before. It now seems that the desperate GOP politicians of Capitol Hill have come up with so many fiscal gimmicks that they may actually cobble together 51 votes in the Senate.

But the emerging Rube Goldberg Contraption, which sunsets all of the individual tax cuts after 2025, and then piles on top a "trigger tax", which most surely would turn the whole things into massive ($350 billion) tax increase after a 2024 "growth" test, is actually a giant debt trap... between 2018 and 2024 the emerging Senate "compromise" would generate upwards of $1.4 trillion of new debt including interest on the added borrowing... the massive front-loaded borrowing embedded in the Senate tax bill would come on top of the $6.1 trillion already built into the CBO baseline for the 2018-2024 period and another $1 trillion that will be needed for disaster relief and the Donald's massive defense build-up and dramatically heightened pace of global military operations.

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In a word, we do not think you can finance $8.5 trillion of new Federal debt in an environment in which the Fed and its convoy of fellow traveling central banks are also selling bonds by the trillions. That is, without triggering a "crowding out" effect of the kind that has been in hibernation ever since Greenspan's cranked up the Eccles Building printing presses after the 22% stock market plunge in October 1987.

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