As if the US government didn’t have enough to panic about, let’s throw on top worries about the debt ceiling. But before we get to that, let’s review our COVID bingo card to see if we have a winner yet…
Since the WHO sidestepped Nu because it sounded too much like ‘new’ and Xi because of the Chinese Communist Party, they’ve settled on omicron as the latest variant coming out of South Africa. Unfortunately, Nu and Xi will never get used. What a bummer! We almost had a BINGO!
Back to the debt ceiling. Now if you remember from last time, Congress kicked the can to December back in October. Even though Democrats hold a majority in both houses, they couldn’t get a deal done without Mitch McConnell. Mitch gave the Dems two months to get their act together. Instead of tackling the problems, the Democrats passed two budget busting bills which only added fuel to the fire.
The Treasury Secretary, Janet Yellen, announced last week that the US will run out of funds on December 15th. This puts the ball back in lawmakers hands to negotiate a full-year funding package. The consensus is that this won’t happen in time. In reality, Congress needs to have something in place by this Friday, December 3rd. Instead lawmakers will come up with a funding bill that will keep the federal government open until later in December or Early January. In other words, another short can kick.
Politicians have been playing this game for time immemorial. You can see that it really took off under GW Bush. The pace quickened under Obama. Then big spender Donald Trump continued the tradition. Biden has certainly accelerated the process, however.
This equates to roughly $85k for every man, woman, and child in the US today. This will not be paid back by raising taxes and what can’t be paid back, won’t be paid back. The Fed knows this. With their targeted inflation policy, they were attempting to inflate the debt away. Big spending politicians have thrown a monkey-wrench in the plan by spending ever larger amounts of money. The Fed has to monetize all their spending. This in-turn drives inflation higher.
Murray Rothbard wrote in his book “American’s Great Depression” exactly how the supply of money and the demand of money interact to influence the price of goods. What he observed was that when supply of money is up and the demand to hold money is up, prices will stay flat. This is the scenario we saw at the beginning of the lock-downs. Personal savings rates shot up. This indicated that people had a demand to hold onto money and not spend it. We still saw inflation during this period because the supply was so high. It outpaced the demand to hold balances. On Wednesday last week, we saw that the personal savings rate had reverted back to the prior trend. This means the demand to hold money is now steady to what it once was. Supply of money up, demand to hold money steady, equals prices rising.
The Fed is already behind the ball. They really need to start playing catch-up if they want to remain in control. I’ve heard rumblings from some of the major banks that the most recent minutes released from the last FOMC meeting could indicate that the taper of asset purchases could increase. The end of the taper is an important step. It has to happen before the central bank will raise interest rates. If the herd shifts and begins spending in an attempt to protect their purchasing power, the supply of money will be up and the demand to hold balances will be down. This is when prices will really take off. The Fed needs to avoid this scenario.
I spent some time crunching numbers again on nuclear energy and uranium miners. What I came up with is that there are 784 active nuclear reactors in the world with the current consumption of uranium as follows:
This means that uranium miners need to be extracting a minimum of 55,840 metric tons of uranium out of the ground on an annual basis. This is just to keep up with current demand. Current production has not be able to keep up.
The red line indicates production at 56k tons. You can see, we’ve been below that number for three consecutive years. This is leading to a supply crunch. In addition to a problem with under supply, a new fad has taken over the sector. This is the introduction of the physical trusts. This effort has been spearheaded by the Sprott Physical Uranium Trust, the Uranium Royalty Corp., and Kazatomprom which have all been buying physical uranium on the open market.
Now Sprott has increased the size of the physical buying program. This is the third time they have increased the fund. It started at $300 million but has now quickly ballooned up to $3.5 billion. Currently the Sprott Trust holds 40 million pounds of physical uranium. This is roughly 20,000 metric tons, the equivalent of 1/3rd of the total annual production. With an expanded fund, they will increase their buying program. This will put a real squeeze on the utilities that rely on uranium to power their 784 active nuclear reactors. It could make the Hunt brother silver squeeze look like child’s play.