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Volcanos, Bitcoin and remittances: A Tongan lord plans for financial security

A former lawmaker from the island nation wants to use Bitcoin to secure his country’s financial security.
A former member of the Tongan Parliament is behind a proposal to make Bitcoin (BTC) legal tender in the tiny Pacific nation…

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A former lawmaker from the island nation wants to use Bitcoin to secure his country’s financial security.

A former member of the Tongan Parliament is behind a proposal to make Bitcoin (BTC) legal tender in the tiny Pacific nation of Tonga, following in the footsteps of El Salvador. It’s due for a vote in Parliament in May and the early signs are encouraging.

Mataʻiʻulua ʻi Fonuamotu, Lord Fusitu’a told Cointelegraph that plans are in motion to use state-run volcano mining facilities to create wealth in Tonga. 

Tonga has 21 volcanoes. “That means one volcano for every 5,000 people.” He owns one volcano himself through his family’s hereditary land rights.

The proposed Bitcoin mining operations would use the geothermal energy of the volcanoes to generate power. 

“It takes two megawatts of electricity to service 5,000 people. So 40,000 megawatts will service the entire national grid. Each volcano produces 95,000 megawatts at all times leaving much to spare,” says Lord Fusitu’a.

“We will give every family hash huts. But, this is only 20,000 units, as there are only 20,000 families.” 

He suggests each volcano can generate $2,000 of Bitcoin each day, to be “gifted” to each family by the Tongan government.

For an Island of 120,000 people, economies of scale matter and the average person stands to benefit greatly.

Family Bitcoin hash huts:. Source: Lord Fusitu’a

Tonga needs $26 million for the cabling to build the operation, but the World Bank said Tonga didn’t have the collateral for that funding. 

Nevertheless, Tonga managed to raise the money through a Least Developed Countries grant. Given Lord Fusitu’a's influence in local politics — and the fact he claims to own a volcano himself — he might just pull it off. 

Lord Fusitu’a also claimed to have negotiated a gratis offer of the mining tech, but he has not revealed the terms of the deal. Chinese companies such as Bitmain have much market share in this space. It is also possible that refugee mining operations from China’s recent ban could be headed to Tonga. For now, that remains a mystery.

“For a nation-state, the math doesn’t change. The optimal state is for a state to have its own mining.”

Related: Tonga to copy El Salvador’s bill making Bitcoin legal tender, says former MP

Who is Lord Fusitu’a?

Once a barrister before he was a politician, Lord Fusitu’a is a member of the Tongan nobility.

Tonga is the only country in the South Pacific with a remaining indigenous monarchy. While it is a member of the Commonwealth, this was done so by choice in 1970. Tonga has never been colonized, despite pressures from imperial nations throughout history.

Lord Fusitu’a decided to step down as MP in November 2021 after recovering from operations for serious medical conditions and living in New Zealand for three years, especially with Tonga closing its borders due to COVID-19. However, his cousin has taken his seat in the Tonga Parliament, so according to Lord Fusitu’a, his domestic legislative agenda remains intact.

Two clinical deaths due to injury have informed his ambitious agenda at the Global Organization of Parliamentarians against Corruption, which includes anti-corruption legislation and gender empowerment and climate change policies. 

When he spoke to Cointelegraph, and as is common since a series of surgeries, he is shirtless and covered in tattoos (a Tongan word corrupted by Captain Cook) that depict a millennium of his clan’s tattoo history.

Lord Fusitu’a has been a “Bitcoin only guy” since 2013, but “don't let the exterior fool you:” He began coding when he was eight years old. 

It was his time stuck in hospital when he couldn’t speak or swallow and could only read when he reaffirmed his passions. Re-reading every printed word about Bitcoin.

Lord Fusitu’a is very visible in Bitcoin circles online where he waxes lyrical about why his country, which relies so heavily on remittance payments, should pursue Bitcoin adoption. 

It’s the soundest money ever devised. It’s the combination of digital scarcity and decentralized distributed ledger. The most democratic egalitarian money on the planet. It’s sound money, the most pristine asset ever devised. It has a 200% appreciation year-on-year. As a store of value, it’s the apex creditor asset.”

“But, if you’re a remittance-dependent country like El Salvador or Tonga, it’s life changing immediately. For hyperinflation ravaged countries like Nigeria or Venezuela, where you need a wheelbarrow of currency to buy a loaf of bread […] it could be a survival mechanism for four billion poor people,” he said.

The plan

Fusitu’a explained his four-part plan for changing the way Tonga operates its economy to Cointelegraph. 

The plan consists of financial education for Tongans about Bitcoin remittance payments, making Bitcoin legal tender, setting up Bitcoin mining operations in Tonga and creating Tongan Bitcoin national treasuries.

A key part of the plan revolves around fiscal education for Tongans whose economy is most heavily dependent on remittances.

Lord Fusitu’a says he is tired of families in the developing world losing so much of the badly needed income from middlemen when sending remittances home.

About 40% of the Tongan national economy is built upon remittances sent back to the country from its diaspora of almost 300,000 overseas workers, according to Lord Fusitu’a. They send money back to the island population of about 120,000. As more than double the population lives in the Tongan diaspora, remittances are crucial to the national economy.

He claimed that Tonga’s “GDP in 2020 was $510 million, 40% of that is just over $200 million. So, 30% of that, or $60 million, is fees alone to Western Union.” 

Lord Fusitu’a argues that feeless Bitcoin transactions would provide a 30% uptick for everyone on remittances, as the Western Union charges villagers 30% commissions, though a calculator on Western Union’s site suggests a fee of nearly three Australian dollars for transferring a 100 Australian dollar transaction.

However, Lord Fusitu’a says that this does not account for the fact that:

“The $2.90 on $100 shown on the website does not show that there’s a minimum fee of around 10–25% on ALL remittances, depending on where you’re sending from that’s not shown on the website. When your average remittance from El Salvador or Tonga is $50–$100, that’s a lot of your remittance. It also doesn’t show that you’ll be charged the forex slippage for the purchase of Australian dollars, its conversion into Tongan pa’anga and purchase of the TOP.” 

Tonga has already begun the financial literacy and “how money works” education programs in 2021, and teams were sent out for community outreach. What does the “how money works” discussion look like? Simple:

“People understand the three hours of travel and the $20 return fare bus ticket. Waiting in line at a Western Union to pay the high remittance fees. The $70 dollars that is at the counter instead of the $100 they thought they would get. And then there’s the beggar’s tax, as beggars sit outside. Three hours each way back to the village, makes a nine-hour day, you come home tired, hungry and having lost remittance fees and bus fares just to get $40-50 of your original $100 wire transfer.”

Related: Crypto remittances see adoption, but volatility may be a deal breaker

Importantly, there’s a high rate of mobile-first internet adoption in Tonga.

“A cell phone with an internet connection can change lives immediately,” Lord Fusitu’a says. For the unbanked, “a cellphone and warm wallet is their first participation in any financial system ever.”

Non-Know Your Customer wallets like Moonwallet can help those that don't have IDs. “It’s not about Bitcoin Bros, this is a viable mechanism for the billions of unbanked poor people globally. $200 billion of $700 billion lost in fees in annual remittances globally hurts the average family.”

Also, in 2005, Tongan instituted a consumption tax (GST) of 15%, rather than an income tax, which further penalizes the poor. If Bitcoin is adopted then more money in the pockets of average Tongans — and less for Western Union — will also benefit government coffers through the consumption tax.

Lord Fusitu’a also provides Bitcoin fundamentals talks weekly in the Tongan language.

The legal tender bill

Lord Fusitu’a looked to El Salvador’s bill for Bitcoin as legal tender before its release and seeks to pass “pretty much a carbon copy.”

Tonga’s bill has been ready to go since July 2021 and would make Bitcoin legal tender alongside Tonga’s currency, the paʻanga. 

Like article 7 of El Salvador’s controversial Bitcoin Law, the bill would make Bitcoin mandatory to accept if proffered.

The bill will be tabled at the next session of parliament in May 2022. To pass, it will require the approval of a parliamentary majority of at least 14 of the 26 members. 

Nine members of parliament are hereditary lords who “vote in a block” and supposedly “always” follow Fusitu’a’s lead as the only lawyer and barrister in parliament. Three other elected members have exposure to Bitcoin. Needing only two more of fourteen votes would seem to make a successful majority vote plausible.

Lord Fusitu’a expects there to be a natural uptick in remittances from the Tongan diaspora when and if the bill is passed into law. Bitcoin remittances back to Tonga have already seen an increase in 2021, he mentions.

It is pegged to five currencies keeping it artificially low to protect its exports of mainly produce, but this makes imports expensive. 

Related: El Salvador: How it started vs. how it went with the Bitcoin Law in 2021

Bitcoin National Treasuries

The final part of Lord Fusitu’a's four-point Bitcoin plan is building Bitcoin’s national treasuries as a hedge against inflation. The lord’s thoughts on Bitcoin’s utility have informed this decision that is controversial in traditional economic policy.

“Emerging markets traditionally hold theirs in ‘melting at 5% per annum’ USD, ‘devaluing at 2-6% per annum' gold and ’negative yielding since 2008’ U.S. bonds. We do this also. Had we moved our $700 million national treasuries into BTC in March 2020 they would have been worth $22.5 billion by February 2021.”

“With a 2020 GDP of $510 million, $22.5 billion is equivalent to 45 years of Tongan economic productivity earned in 11 months,” he says, adding, “When Nayib Bukele teases on Twitter that he’s ‘buying the dip,’ what he means is he’s moving his national treasuries from those three dead man’s assets into BTC with each purchase.”

Bukele has been criticized for his decisions, but part of this criticism stems from the nature of his governance. Lord Fusitu’a’s track record of participation in multinational groups suggests he is more amenable to working with international organizations to secure his country’s economic future.

What’s ahead?

But, if it’s so obvious, why don’t other countries follow his logic? “They see the logic but it takes the money from legacy finance,” Lord Fusitu’a says.

Another Pacific Island, Palau, is rolling out a stable coin on Ripple’s XRP. “Are they crazy? Their approach is more palatable because partnerships with XRP with Ripple include legacy finance rails.”

The international monetary policy risks are still there for Tonga. In October 2021, the Internal Monetary Fund released a report acknowledging that crypto ecosystems could replace official currencies in “unbanked” emerging economies unless regulators ensure financial stability. But, perhaps that showed that the IMF was paying attention to Tonga.

On both the legal tender and the Bitcoin mining plans, Lord Fusitu’a is optimistic. The “Bitcoin community likes seeing the underdog win.”

Like many in crypto land, Lord Fusitu’a is either a genius or a great showman. Or both.

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AMC CEO Looks To Refinance Debt Amid Dip In Stock Price

A skittish stock market and a struggling box office are complicating the theater chain’s attempts to turn around its debt situation.

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A skittish stock market and a struggling box office are complicating the theater chain’s attempts to turn around its debt situation.

Let’s give credit where it’s due. Most people don’t follow through with their New Year’s Resolutions, but at least AMC Entertainment (AMC) - Get AMC Entertainment Holdings, Inc. Class A Report CEO Adam Aron is trying.

Following a Tweet earlier this month in which the head of the beleaguered movie theater chain announced plans to “refinance some of our debt to reduce our interest expense, push out some debt maturities by several years and loosen covenants,” he’s now making moves to try to get the job done. 

Aron has reportedly been “in advanced talks with multiple parties” about refinancing, according to The Wall Street Journal. But the ongoing volatility of the stock market, amongst other factors, is complicating matters.

Irfan Khan / Los Angeles Times via Getty Images

Rough Years For AMC

To make it through the pandemic, AMC ended up having to take on a great deal of debt. It reportedly owed $5.5 billion as of last September and also owed $376 million worth of lease payments, which were deferred for a while during the pandemic. 

But as we’ve previously mentioned, the past few years have been tough for theater chains such as AMC. Even before the pandemic put a pause on theater-going in 2020, leading to an absolutely brutal total box office gross drop of 81.4%, general audiences were increasingly only heading out to movie theaters for blockbuster films and franchise installments, often from the Marvel Cinematic Universe or the “Fast & Furious.”

AMC had a reported net loss of $13.5 million in 2019, even as total revenue was up 2.4% to $1.44 billion from the year before. Things improved for the company last year once people felt safe returning to the theaters, as access to vaccines helped unlock some pent-up demand, and the box office rose by 112.5% to $4,468,850,254. 

A big chunk of that rebound is due to the jaw-dropping success of “Spider-Man: No Way Home,” which recently returned to the top of the box office, on its way to making $1.69 billion worldwide. (Will Peter Parker eventually conquer the blue aliens from “Avatar” to become the highest-grossing film of all time? Stay tuned.) 

But you can’t turn around a struggling industry based on the success of one film, and even Marvel and Disney  (DIS) - Get Walt Disney Company Report can’t put out a general-audience pleasing blockbuster every week. 

Even with a new “Scream” film out, last weekend’s box office total barely totaled more than $43 million, a far cry from five years ago. “That's down from a pre-pandemic $105 million in 2020, $73 million in 2019, $102 million in 2018, and $111 million in 2017, according to data from Box Office Mojo.”

Memes Saved AMC (For A Little While)

Last year AMC received an unexpected lifeline when it became the subject of an internet-driven rush that turned it into a short-lived meme stock. 

After a Reddit-incubated army of internet investors, who dubbed themselves “apes,” began buying shares in AMC through trading applications such as Robinhood, shares of the company temporarily rose to a robust $62.55 a share. Prices would eventually return to earth, hitting $35 a share after the hype dropped down. But the boost allowed Aron to buy the company some time. 

AMC used the cash infusion to repurchase $35 million worth of debt that carried a minimum interest rate of 15%, according to Yahoo! Finance. The deal cost $41.3 million, but it is expected to reduce the overall annual interest on its debt by about $5.3 million.

This year Aron is stepping up his efforts to refinance AMC’s debt, but it’s rough out there at the moment. 

Amid Wall Street’s current market contraction, AMC’s stock has dropped by 41% this year, erasing the meme stock gains, and AMC’s $1.5 billion in secured 10% bonds “traded as low as 92 cents on the dollar, down from 99.5 cents at the start of the year,” according to The Wall Street Journal. 

AMC isn’t looking to refinance all of its debt. Instead, it is targeting some of the bonds with especially high interest, as a way to cut expenses even as bond prices continue to drop.

But it seems like the meme stock rush has turned out to be a double-edged sword. 

AMC was able to stay in business by “selling new shares, taking on new debt, and getting landlords to agree to delay collecting rent payments.” But meme investors have objected to Aron’s plans to allow more AMC shares to be sold, out of fear that it would dilute what they’ve already purchased. 

Aron and AMC have a skittish-at-best stock market and an industry that is struggling to get people into theaters for all but event films. On the other hand, it has a loyal group of investors that are nonetheless limiting the company’s options. 

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Loonie Slides After Bank Of Canada Keeps Rate Unchanged, Says “Economic Slack Now Absorbed”

Loonie Slides After Bank Of Canada Keeps Rate Unchanged, Says "Economic Slack Now Absorbed"

For once, the majority of forecasters was correct, and moments ago the Bank of Canada kept rates unchanged at 0.25, in line with that 24 of 31 analyst

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Loonie Slides After Bank Of Canada Keeps Rate Unchanged, Says "Economic Slack Now Absorbed"

For once, the majority of forecasters was correct, and moments ago the Bank of Canada kept rates unchanged at 0.25, in line with that 24 of 31 analysts expected. The bank also said that while it is keeping holdings on its balance sheet constant, once it begins rising interest rates, it "will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds."

In its statement, the Bank of Canada said that with overall economic slack now absorbed, "the Bank has removed its exceptional forward guidance on its policy interest rate" but the Bank is continuing its reinvestment phase, keeping its overall holdings of Government of Canada bonds roughly constant

Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.

Some more from the BoC:

The global recovery from the COVID-19 pandemic is strong but uneven. The US economy is growing robustly while growth in some other regions appears more moderate, especially in China due to current weakness in its property sector. Strong global demand for goods combined with supply bottlenecks that hinder production and transportation are pushing up inflation in most regions. As well, oil prices have rebounded to well above pre-pandemic levels following a decline at the onset of the Omicron variant of COVID-19. Financial conditions remain broadly accommodative but have tightened with growing expectations that monetary policy will normalize sooner than was anticipated, and with rising geopolitical tensions. Overall, the Bank projects global GDP growth to moderate from 6¾ % in 2021 to about 3½ % in 2022 and 2023.

On inflation, the BoC said that "CPI inflation remains well above the target range and core measures of inflation have edged up since October. Persistent supply constraints are feeding through to a broader range of goods prices and, combined with higher food and energy prices, are expected to keep CPI inflation close to 5% in the first half of 2022. As supply shortages diminish, inflation is expected to decline reasonably quickly to about 3% by the end of this year and then gradually ease towards the target over the projection period. Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target. The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation."

The central bank also said that it will keep its holdings of Government of Canada bonds on its balance sheet roughly constant at least until it begins to raise the policy interest rate. At that time, the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds.

A redline comparison of the BoC statement:

Commenting on the move, Bloomberg's Ven Ram writes that this is a lot more dovish outcome from the Bank of Canada than one might have imagined. Not only did the central bank hold its rate, but it didn’t paint itself into a corner on when it may push the button: “Looking ahead, the Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.”

Add to that this guidance on balance-sheet runoff: “The Bank will keep its holdings of Government of Canada bonds on its balance sheet roughly constant at least until it begins to raise the policy interest rate. At that time, the Governing Council will consider exiting the reinvestment phase and reducing the size of its balance sheet by allowing roll-off of maturing Government of Canada bonds.”

Net-net this isn’t screaming, “Buy the loonie” and sure enough, in immediate reaction, the canada 2Y yields declined and the loonie weakened, dropping from 1.2560 before the BOC to 1.2640 before paring some of the losses, amid some trader disappointment that the bank did not hike.

* * * Earlier:

In what may be a teaser of what to expect from the Fed later today, the Bank of Canada rate decision is due at 10:00am EST followed by Governor Macklem press conference at 11:00am EST. While the bank is expected to leave rates unchanged, there is the risk of a surprise rate hike. Indeed, about a quarter, or 7/31 analysts, surveyed by Reuters expect a hike. If left unchanged, attention turns to guidance.

Below is a recap of what to expect from the BOC courtesy of Newsquawk

SUMMARY:

  • The Bank of Canada is expected to leave rates unchanged at 0.25% although there is the risk for a hike with 7/31 surveyed analysts expecting a 25bp hike to 0.50% at the January meeting, ahead of the current BoC guidance for the middle quarters of 2022.
  • If the rate is left unchanged, attention turns to guidance to see whether this is bought forward to the end of Q1 (ie March).
  • Market pricing looks for rates to be left unchanged, although this has unwound heavily from last week which saw up to a 90% chance of a 25bp hike in January after the BoC survey and CPI data.
  • The MPR will also be released, analysts at TD securities see 2022 growth being revised lower, while inflation is expected to be revised 0.1% higher for 2022 but revised down by 0.1% in 2023.

LIFT-OFF: The latest Reuters survey saw analysts generally believe the BoC will leave rates unchanged in January, although 7 of 31 surveyed expect a hike will occur. Therefore, the expectation for January is for rates to be left unchanged, although the risk of a hike is there. If the rate is left unchanged, attention will turn to its forward guidance, which currently looks for lift-off “sometime in the middle quarters of 2022”. If it is bought forward to the end of Q1, it will signal a March lift-off is coming. Analysts are currently split on whether the BoC will hike in March with 16/31 calling for rates to be left unchanged again, while the other 15 expect it will rise to 0.50% or more, however, all analysts noted the risk to the pace of rate hikes this year is that they come faster than expected. The median forecast is for the BoC to raise rates to 0.75% by the end of Q2 2022.

SURVEYS: The Business Outlook Survey sounded the alarm on inflation with 67% of firms expecting inflation to be above 3% over the next two years, although most predict it will return to target within one to three years. It also noted that demand and supply bottlenecks are expected to keep upward pressure on prices over the year ahead. However, the overall survey saw a continued improvement in business sentiment to see the indicator hit a record high, although it was held back by labour shortages and supply chain issues. Note, the Canadian labour market is back at pre-pandemic levels and has been for a while. A separate BoC survey showed consumer inflation expectations hitting a record high of 4.89% over the next year, noting most people are more concerned about inflation post-COVID than before, where consumers believe it is more difficult to control. Analysts at ING highlight that the latest survey saw respondents note they expect supply disruptions through H2 this year and that labour shortages are constraining output. ING write “where the economic outlook is robust, the jobs market is red hot and inflation is at generational highs, we see little reason for the BoC to delay tightening monetary policy.” Meanwhile, ING adds that Ontario has announced a three-step plan to allow a full reopening from COVID restrictions from the end of January “which should be the final green light for the central bank to hike rates 25bps”.

INFLATION: The latest CPI report saw the headline M/M and Y/Y metrics in line with expectations, although the core Y /Y measure saw a sharp rise to 4.0%, while the BoC eyed measures rose to 2.93% from 2.73%. Analysts at RBC, who expect the Bank to leave rates unchanged at this meeting, say “Inflation trends have evolved largely in line with the BoC’ s forecasts from the October Monetary Policy Report (4.8% vs actual 4.7% for Q4)”. However, this still shows price growth above the 2% target rate and RBC’s own tracking suggests not all that pressure can be explained by pandemicrelated distortions. As such, RBC expects rates to rise soon and believe the BoC will use this meeting to signal the start of lift-off.

MPR: The MPR will also be released, analysts at TD securities see 2022 growth being revised lower, while inflation is expected to be revised higher for 2022, before being revised marginally lower in 2023. In October, the MPR saw 2021 growth at 5.1%, 2022 at 4.3%, and 2023 at 3.7%. CPI was seen at 3.4% for 2021, while 2022 is expected to be revised higher to 3.5% (prev. 3.4%), and 2023 CPI is expected to be revised down to 2.2% from 2.3%. In the October MPR, the output gap was estimated at about -2.25% to -1.25% and is expected to close sometime in the middle quarters of 2022

Tyler Durden Wed, 01/26/2022 - 10:10

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Mainstream Suddenly Realizes Raising Interest Rates In A World Buried In Debt Might Be A Problem

Mainstream Suddenly Realizes Raising Interest Rates In A World Buried In Debt Might Be A Problem

Authored by Michael Maharrey via SchiffGold.com,

The Federal Reserve is talking about raising interest rates. But the US economy is buried under

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Mainstream Suddenly Realizes Raising Interest Rates In A World Buried In Debt Might Be A Problem

Authored by Michael Maharrey via SchiffGold.com,

The Federal Reserve is talking about raising interest rates. But the US economy is buried under piles of debt. I’ve been asking how this is going to work for months. Apparently, the question has finally occurred to the mainstream.

A CNBC article declared, “Fed rate hikes will intensify a global debt crisis, research warns.”

Well, yeah. Duh.

According to the study came from a UK non-profit the Jubilee Debt Campaign, debt payments rose in developing countries by 120% between 2010 and 2021. They are currently at their highest levels since 2001.

The sharp increase in debt payments is hindering countries’ economic recovery from the pandemic, the report suggested, and rising US and global interest rates in 2022 could exacerbate the problem for many lower income countries.”

The study and the CNBC article are really a pitch for debt cancellation, but their narrative swerves into an unpleasant truth for US policymakers. Raising interest rates in a world awash in red ink is going to be a problem. And not just for “developing countries.”

The US government is closing in fast on $30 trillion in debt with no end to the borrowing and spending in sight. The federal government managed to run a deficit in December despite record receipts.

In December alone, the federal government spent $508 billion. The was the highest December spending level ever. Through the first three months of fiscal 2022, the federal government has already spent $1.43 trillion. That’s a record for the first quarter of any fiscal year.

Raising interest rates will drastically increase the cost of servicing all of that debt. And it will increase the cost of borrowing more money for the Biden spending coming down the pike.

In the fiscal year 2020, Uncle Sam spent $345 billion in net interest payments alone, despite near-zero interest rates. The nonpartisan Committee for a Responsible Federal Budget found that even a 2% increase in interest rates would cause net interest payments to rise to a whopping $750 billion. And this estimate was calculated before the passage of the American Rescue Plan and the Bipartisan Infrastructure Bill. That was followed up with a big surge in interest rates on US Treasuries. In other words, $750 billion underestimates the cost.

On top of that, American consumers are buried under debt. Consumer debt jumped 11% year-on-year in November. It was the biggest single-month jump in consumer debt in 20 years. Total consumer debt now stands at over $4.41 trillion. And that doesn’t include mortgages.

Revolving debt – primarily credit card balances – grew by a staggering 23.4% year-on-year in November. That was the biggest increase since 1998.

And that’s not all. Businesses and corporations are also leveraged to the hilt.

The year 2020 set a record for corporate debt issuance with $2.28 trillion of bonds and loans, comprising both new bonds and bonds issued to refinance existing debt.

All of this debt is a feature of the Fed’s loose monetary policy - not a bug.

The Federal Reserve and the US government have built a post-pandemic “economic recovery” on stimulus and debt. It is predicated on consumers spending stimulus money borrowed and handed out by the federal government or running up their own credit cards.

Now, the Fed is threatening to turn off that easy money spigot. How is that going to work? How will consumers buried under more than $1 trillion in credit card debt pay those balances down with interest rates rising?  With rising rates, minimum payments will rise. It will cost more just to pay the interest on the outstanding balances.

Overleveraged companies have the same problem.

And so does the US government.

This does not bode well for an economy that depends on borrowing and spending to sustain itself.

The only reason Americans can borrow money is because the Fed is enabling them. It holds interest rates artificially low. That’s how the economy works. And that’s why I think the Fed will ultimately relent on any move it makes toward tighter monetary policy. As Peter Schiff put it, the Fed can’t do what it’s claiming it will do.

Tyler Durden Wed, 01/26/2022 - 08:29

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