Global Liquidity with Michael Howell: Trump 2.0, US Dollar Influence, and the Next Economic Era

Summary

In this insightful discussion, Michael Howell, an expert in global macroeconomics, explains the impact of monetary and fiscal policies on global markets. He highlights the role of liquidity expansion in driving asset inflation, particularly in Bitcoin, gold, and prime real estate, and its potential as a hedge against monetary inflation. Howell also addresses the challenges posed by the strong dollar and how different economies are affected. He emphasizes that while risks of a financial crisis exist, historical trends suggest the resilience of monetary systems. Howell shares his work through his book, Substack, and website for institutional clients.

Takeaways

• 😀 The U.S. government’s fiscal policy and spending are leading to increased deficits and balance sheet expansions by banks, which ultimately creates more liquidity in the financial system.
• 😀 Banks prefer holding short-term instruments like 3-month Treasury bills over long-term bonds due to the volatility of deposits, which contributes to liquidity expansion.
• 😀 The U.S. deficit is effectively being monetized through the purchase of Treasury bills by banks, which expands the money supply.
• 😀 Increased government spending, particularly on social programs like Social Security and Medicare, along with high interest payments, make drastic cuts to spending politically unfeasible.
• 😀 Despite growing deficits, the U.S. Treasury's strategy involves maintaining liquidity at the short end of the curve, which will likely continue for the next few years.
• 😀 Europe faces significant challenges, including a large debt-to-GDP ratio in Southern Europe and a reliance on Russian energy and Chinese demand, which creates vulnerabilities in its economy.
• 😀 The European Central Bank (ECB) is likely to continue supporting the Euro through liquidity injections, but the region's disparities in debt will put long-term pressure on the currency and economy.
• 😀 China is facing pressure due to its dollarized economy, with a growing trade surplus in U.S. dollars that increases demand for the dollar, leading to further Yuan devaluation risks.
• 😀 China may subtly devalue its Yuan against gold to manage its currency situation while maintaining control over its exchange rate against the U.S. dollar.
• 😀 In the medium term, as liquidity continues to expand, assets like gold, Bitcoin, and prime residential real estate are seen as strong hedges against monetary inflation.
• 😀 Despite concerns about future financial crises, the long-term trend suggests the dollar’s purchasing power will continue to erode, but the political and economic systems will persist in a form of welfare-state capitalism.

Q & A

How do US banks affect monetary inflation according to Michael How?

Michael How explains that US banks play a critical role in monetary inflation by absorbing short-term government debt, such as Treasury bills, to match their liabilities with assets. This process expands their balance sheets, effectively increasing the money supply in the economy. The government's large deficits are monetized through this mechanism, injecting more liquidity into the system.

What is the impact of the US Treasury's deficit on liquidity in the economy?

The US Treasury's deficit increases the demand for short-term debt instruments, which banks purchase to balance their books. This drives an expansion of the money supply, thereby increasing liquidity in the economy. The more the deficit is funded through short-term debt, the more liquidity is created, which can lead to inflationary pressures.

What alternative funding method could reduce the liquidity expansion caused by US government spending?

An alternative funding method would involve the government borrowing through institutions like pension funds, rather than relying on banks to purchase short-term Treasury bills. This method would involve reallocating existing savings, not expanding the money supply or increasing liquidity.

How does increasing interest rates relate to monetary inflation, according to Michael How?

Michael How argues that rising interest rates can be positive for the economy in the context of fiscal spending. As interest rates rise, the government’s interest payments on debt increase, effectively transferring more money into the private sector. This process is monetized through government borrowing, and while interest rates rise, they don't necessarily dampen inflation but instead expand monetary liquidity.

What is Michael How's view on the future role of the Federal Reserve in managing liquidity?

Michael How believes that the Federal Reserve will continue its approach of managing liquidity by funding the deficit at the short end of the yield curve. However, he anticipates that this practice can only continue for a limited time before it leads to significant risks in the economy. The long-term solution might involve appointing an inflation hawk to control inflation while balancing liquidity.

How does Michael How compare the fiscal challenges of the US and the Eurozone?

How compares the US and Eurozone by noting that both face large deficits, but the Eurozone faces an even larger problem due to the disparity in debt-to-GDP ratios between its core and southern countries. Southern Europe has much higher debt levels, creating strain on the Eurozone's monetary system. He suggests that inflation or deflation pressures could either resolve these disparities or exacerbate tensions within the Eurozone.

What is the main economic issue Europe is facing according to Michael How?

Michael How identifies Europe's overdependence on China and Russia for energy and commodities as a major economic issue. These dependencies, especially in light of geopolitical instability, put Europe in a vulnerable position. The region also faces significant disparities in debt-to-GDP ratios, with southern Europe carrying much higher levels of debt than the north.

What is the potential impact of a strong US dollar on global markets, especially Europe and China?

A strong US dollar can have negative impacts on global markets, particularly in Europe and China. For Europe, it exacerbates the region's fiscal difficulties by increasing the burden of debt repayments in a stronger dollar environment. For China, the strong dollar reduces the competitiveness of its exports and worsens its financial position, as many of its trade transactions are still dollar-denominated.

How does Michael How view China's currency policy and its effect on global liquidity?

Michael How suggests that China faces a dilemma with its currency policy. While China needs to devalue its currency to remain competitive and manage its debts, it cannot do so easily without destabilizing its financial system. He believes that China will attempt to subtly devalue the yuan, particularly against gold, but this could affect global liquidity by increasing demand for dollars and pushing the greenback higher.

What does Michael How believe about the future of Bitcoin and its correlation to other assets like stocks?

Michael How argues that Bitcoin is a highly sensitive asset to liquidity conditions, often moving in sync with changes in liquidity, both on the upside and the downside. He suggests that while stocks, particularly NASDAQ, are also sensitive to liquidity, Bitcoin's behavior is more pronounced. Over the next few years, as liquidity continues to expand due to growing government debt, Bitcoin, along with gold and prime real estate, may perform better as a hedge against monetary inflation.