Trump and Xi talk, but Trump and Musk spar. I don’t know which headline matters more for markets, but shares of Tesla didn’t like the news ending the day down 14%.
As economist Brad DeLong posited, “Musk thought he had a deal—he backs Trump all the way, and in return Trump would provide him with EV subsidies, tariff carve-outs, and control of the NASA budget. Musk was wrong. And so we get to watch what happens next…”
With the Trump and Musk spat centered on Trump’s “One Big Beautiful Bill”, the fiscal talk isn’t going away.
Repressing Emotions
Yesterday I talked about monetary rules as a pre-commitment policy and in the past I’ve talked about the possibility of financial repression.
In a substack post, economist Josh Hendrickson married these two ideas (monetary policy pre-commitment and financial repression). In his post Hendrickson expresses a growing recognition that the U.S. government lacks a commitment to fiscal discipline and as a result he sees inflation or financial repression as the likely answers to the current fiscal problems. So where does that dovetail with Central Banking? Well, Hendrickson provides a history lesson on the origins of the Bank of England.
Hendrickson’s lesson - central banks that own or require the financial system to hold more government debt than it otherwise would effectively create a poison pill that in essence aligns private interest with that of the government because a default would significantly disrupt the financial system (and likely topple the government). Said more plainly, if you distribute the risk of default on government debt to the banking system you raise the stakes of a default, because default permanently impairs economic activity via the banking channel. “The cost of purchasing this commitment is that there will be less private investment in the economy than there would be otherwise.”
And if you thought central banks were independent, Hendrickson would agree and as a result of that Federal Reserve independence, he doesn’t believe that the Fed would simply not respond to an attempt to inflate our way out of the debt problem. And that’s where Financial Repression comes in.
As independent as the Federal Reserve is, Hendrickson posits that “Congress could always change the statute to eliminate the Federal Reserve’s authority to pay interest on reserves and declare that the Federal Reserve can determine reserve requirements above some explicit, statutory amount.” as means of forcing banks to hold more Treasuries while allowing the Federal Reserve to maintain its large balance sheet, effectively financed at zero from banks.
Hendrickson’s overall warning, “It is naive to think that the U.S. will not attempt to use this tool in the event that politicians perceive a looming debt crisis. And, unlike the other options, the connection between the actions of the government and the costs are largely hidden from the public….Or maybe AI will save us.”
Rolling In The Mud
Speaking of Central Banks that aren’t immune to having to deal with debt crises, we had the ECB lower interest rates to 2%. Remember when the focus was on PIGS debt back in 2008? This is what we’ve come to….and Trump would definitely be happy with 2% treasury yields…if only there were a way to make that happen - hello financial repression.
At least we’ve got jobs….right?
I guess we’ll find out this morning, though jobless claims seemed to be going in the wrong direction.
Literary Therapy for the Disoriented Investor
You’ve got Kyla Scanlon out there on X saying, "In order to understand the present moment you must read the screwtape letters this is not a joke”, while also reminding us to read Rilke (if you’ve never read Letters To A Young Poet, you’re missing out).
And you’ve got author Luke Burgis out there on X saying to understand the current environment you need to understand mimetic rivalry, how it erodes social structures, and how our often preferred solution, the “scapegoat mechanism”, creates just an illusion of order. Ask your favorite AI to interpret the meaning of this X post from Luke, “It's time for everyone to read, or re-read, I SEE SATAN FALL LIKE LIGHTNING—the most important book so far of our century.
Published in French as "Je vois Satan tomber comme l'éclair" in 1999, and in English as the above on January 1, 2001. It was the perfect book-end to the turn of the millennium, and a dire warning. Satan continues to cast out Satan.”
Until next time.
XTOD’s
XTOD: Who gets custody of Joe Rogan?
XTOD: Time to drop the really big bomb: @realDonaldTrump is in the Epstein files. That is the real reason they have not been made public. Have a nice day, DJT!
XTOD: Elon’s stance is principled. Trump’s stance is practical. Tech needs Republicans for the present. Republicans need Tech for the future. Drop the tax cuts, cut some pork, get the bill through.
XTOD: The problem w/MMT charlatans is that they naively take a static equality (assets = liabilities), even a tautology, & forget it is reached via a stochastic process. It is equivalent to saying: there are necessarily always equal numbers of buyers and sellers therefore let's forget about price fluctuations in the financial markets. Aside from resource allocation, dynamically, you have supply & demand for debt, w/the price of debt varying as a function of demand, with consequences.
XTOD: One of the best hacks in the investment field is learning to be happy doing nothing.
- The Joys of Compounding.
https://x.com/0liviajulianna/status/1930717965487624451
https://x.com/elonmusk/status/1930703865801810022
https://x.com/naval/status/1930721134368129164
https://x.com/nntaleb/status/1930629872122052932
https://x.com/joyofcompoundin/status/1930449335503774207
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