“Nothing Stops This Train” | Lyn Alden on Fiscal Dominance
May 13, 2024
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Author and investor Lyn Alden discusses the Era of Fiscal Dominance, winners and losers in this new era, how to prepare for it, and the performance of Crypto. They delve into indicators of Fiscal Dominance, the impact on global economies, and the role of central banks. The discussion also includes the influence of fiscal policies on asset prices and currency values, as well as the importance of understanding macroeconomic conditions in navigating this environment.
Fiscal dominance shifts economic control to focus on fiscal tools over traditional monetary policies.
Congress and the President wield power in shaping winners and losers through tax adjustments and stimulus programs.
Federal Reserve's influence decreases in a fiscally dominant setting but is crucial for maintaining market confidence.
Escalating deficits and debt levels signal a gradual transition towards a long-term fiscal-centric economic landscape.
Deep dives
Transition to Fiscal Dominance in the Economy
The shift towards fiscal dominance is reshaping economic dynamics, moving away from traditional monetary control. The escalation of deficits and debt restructuring, coupled with the limited efficacy of conventional monetary tools, is driving this change. As fiscal measures take precedence, the economy's trajectory is increasingly influenced by expansive fiscal policies.
Impact of Fiscal Dominance Levers
Under fiscal dominance, Congress and the President gain leverage over economic steering through fiscal tools. Decisions on tax adjustments, spending allocations, and targeted stimulus programs become paramount. With a potent firehose of funds, the economic winners and losers are determined by fiscal policies, shaping sectoral strengths and weaknesses.
Central Banking Illusion and Influences
While the Federal Reserve's influence diminishes in a fiscal dominant setting, maintaining public confidence remains pivotal. Central bankers, like Powell, navigate a delicate balance of perceived control to guide market expectations and financial stability. Their role may be less potent, yet still pivotal in nudging economic trajectories.
Challenges and Warning Signs of Fiscal Dominance
Challenges around societal expectations hinder substantial austerity measures, making fiscal dominance a long-term economic driver. Warning signs manifest in escalating deficits, disparate sectoral impacts, and muted central bank actions. The interplay of debt levels, fiscal policies, and evolving economic momentum signals a gradual embrace of a fiscal-centric economic landscape.
Impact of US Tax Dollar Allocation
US tax dollars allocation breakdown reveals 11 cents of each dollar paid to the IRS go to net interest, benefiting bondholders primarily. This payment does not contribute to entitlement programs or defense, showing the implications of fiscal choices.
Indicators of Fiscal Dominance
Fiscal dominance is indicated when fiscal deficits exceed bank loan creation rates. Net corporate bond issuance plays a role in this relationship as well. A high debt-to-GDP ratio further contributes to fiscal dominance, influencing monetary policy effectiveness and economic outcomes.
Long-Term Transition to Fiscal Dominance
The episode discusses a gradual shift towards fiscal dominance since 2019, highlighting a prolonged process. Countries like Japan have sustained fiscal dominance due to structural current account surpluses and careful economic management.
Consequences of Fiscal Dominance
Fiscal dominance may lead to default scenarios as debt payments become challenging. Historical examples like financial oppression in the 1940s show ways countries addressed high debts. The narrative of rising populism, increased inflation, and potential capital controls emerge in a fiscally dominant environment.
------ Bankless listener, if you want to survive this decade as an investor, as a market participant or even just as a citizen, you have to tune in to this episode with author and investor, Lyn Alden.
We’re entering a new era. “Nothing Stops this Train” as Lyn would say. We’ve entered the Era of Fiscal Dominance.
- What era is this? - Who will be the winners and losers? - What about capital controls? - How can you prepare? - How will Crypto perform?
We get into all this and much more in what is a must-listen Fiscal Dominance Masterclass.
0:00 Intro 5:25 Nothing Stops This Train 15:15 Fiscal Dominance vs Monetary Dominance 34:23 A World of Fiscal Dominance 46:39 Federal Reserve Role 50:34 Fiscal Dominance Indicators 1:08:06 Winners & Losers 1:18:29 Living in a Fiscal Dominance Era 1:24:16 Capital Controls 1:33:06 Federal Reserve Signals 1:36:14 How to Prepare 1:40:19 How Will Crypto Perform? 1:42:52 Closing & Disclaimers