- The private sector balance increased by over $181B in November thanks to federal government fiscal support and commercial bank credit creation.
- Credit creation from commercial banks was a robust $92B.
- Month over month, the level of fiscal support from the monetary currency sovereign supported markets through November and looks to continue into and year's end.
- Sentiment events such as the election result and the COVID vaccines could make for higher highs and higher lows.
The purpose of this article is to examine the USA sectoral flows for November 2020 and assess the likely impact on markets as we advance. This is pertinent as a change in the fiscal flow rate has a one-month lagged impact on asset markets and so is a useful investment tool.
The table above shows the balance of financial flows from the USA national accounts since April this year when the federal government response to the COVID crisis started and in effect ushered in a new fiscal epoch that said monetary policy useless, fiscal policy effective. Good bye Friedman and hello again Keynes and welcome back it has been awhile
The flow to the private domestic sector (where the asset markets are) was down 21% percent from last month, but still a large nominal input of over $181B. Asset markets can be expected to keep climbing as the injection of more money is factored into their prices.
The $181B is made up of a $146B injection of funds from the federal government, plus, a robust $92B of credit creation from commercial banks (I may have to update this figure as it is only up to the 25th November), and less the -$56.67B that flowed to foreign bank accounts at the Fed in return for imported goods and services (aka the trade deficit). The imported real goods and services did add to the capital stock and lead to future productive gains.
One cannot overstate the importance of the impact of the change rate on asset prices. The month-over-month change rate is a downward 21% and therefore not supportive of private sector assets. The nominal amount is of secondary importance and is still positive.
The table below shows that the overall federal expenditures were still large in November with a 5% increase from last month and a maintaining the strong levels seen in the last three months of this year. Higher overall spending lifts asset prices, and markets can rise even in the face of a pandemic and its associated unemployment and lower consumption and production levels. The market can rise even in the face of an irrational and dysfunctional lame duck presidency.
The CBO made the following statement with regards to the November 2020 budgetary result:
Coincidentally, the same CBO included a comment on the budget result for the calendar year so far and is shown below.
The Trump election result denial process is still playing out and should conclude once and for all with the result of the electoral college vote on the 14th December This will remove one more element of uncertainty from the picture and allow markets to rise further.
The dysfunctional debate over a fiscal stimulus package goes on. There are no urgent reasons for the Republicans to give in to demands for blue state bailouts (apart from wanting to help win the runoff election) -- there is also no urgent reason for the Democrats to eliminate those demands as they expect to win in the Georgia run-offs and control the entire Congress. The Democrats can wait until the runoffs are over in January.
If this is indeed the result we could well see the original $3T+ package that the Democrats passed through Congress (shot down by the Republican controlled Senate) earlier this year. Then there would be boom times indeed.
In the mean time many small businesses and individuals, deprived of income, can go bankrupt while complying with government sanctioned lock downs and closures. The provision of income during a government sanctioned business closure must be made into an automatic mandated process so that this cannot happen again and so that businesses and individuals are not at the mercy of arbitrary and poorly thought out government pandemic responses and petty politics.
Despite the talk of funding the federal government and possible government shutdowns there is still over $1.5T in the federal governments bank account at the Fed. It is not that the federal government does not have money in its bank account, the problem is that it does not have authority to spend those funds and so a government shutdown is possible even though its bank account has hardly ever been fuller.
The chart shows that the federal government is net adding to the private sector.
The following is a formula for the national accounts:
GDP = Federal Government Spending + Private Sector Spending + Net Exports
The essential foundation of this market logic is simple. Within the bounds of inflation, more dollars grow the economy and fewer dollars shrink the economy. Dollars that are not in the private sector cannot be saved, spent, or invested by the private sector, and they cannot count towards GDP. The federal government has no need for tax dollars, as it is the currency issuer and has no shortage of dollars, and indeed, creates new dollars as it spends. Creating and regulating the currency is one of its sovereign privileges. The federal government, via its central bank, has dollars in the same way that a referee at a football game has points to award.
The national debt is the net money supply and simply represents the balance of federally authorized spending that has not yet been taken back as tax.
The federal deficit = the private sector surplus.
The currency issuer // The currency user.
The good news is that at present, the bias is towards a net add to financial assets with more money being spent into the economy by the currency issuer than taxed out.
The chart below shows the balance of financial flows going back to 2007.
It is interesting to note that there is more than a $3.7T mismatch between the sum of the federal government deficit spending and the national debt that it is supposed to add up to.
$1.5T is accounted for in the treasury cash balance shown above in the daily treasury statement. Where could the rest of the the $2.2T be. I pose this question in the hope that some SA readers might be able to help me solve this conundrum. I have received no reply to my emails to the government on this matter so far.
Looking forward, the chart below shows the expected likely path of asset markets into the end of the calendar year based on the flow of funds at the macro level.
Timewise, we appear to be at the point on the chart where the M2 money supply from the five largest central banks makes its lagged impact on asset markets. This is an important inflection point that comes parallel with the USA election result and a possible resolution of the COVID pandemic by a vaccine from Pfizer (PFE) that is now being rolled out in some countries. Positive news and events lift sentiment and can make for a higher high and vice versa. Such a positive sentiment event appears to be coming together now and could produce a higher high in markets than might otherwise have been justified by macro-financial flows alone. The human element.
The Fed maintains low-interest rates and quantitative easing that since 2008 have lifted markets from the GFC lows. Inflation is low despite a large amount of money being created by central banks around the world. The reason is that it might be large but it is still not large enough and it shows how much slack there is in the economy that it can absorb all that extra spending without inflation.
Economies across the world have suffered a dearth of spending over generations and this is reflected in the poor state of infrastructure generally such as the "D" classification given to US infrastructure by the American Society of Civil Engineers. Bad and out of date infrastructure is a cost burden on business and everyday life.
(Source: American Society of Civil Engineers)
Given a large amount of unemployment in the world at present, one can expect actual inflation and inflation 'expectations' to remain well-anchored at a low level and thus allow for a lot of stimulatory spending from the currency issuer and also loans from commercial banks.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.