Everything seems to be lining up perfectly for individual investors with Joe Biden and Kevin McCarthy making a debt ceiling deal. In fact, a sentiment poll reflects an ebullient investor class. According to an Investors Intelligence article titled “Assume the Positioning” (reprinted in Almost Daily Grant’s, June 1, 2023), “Just 23.3 percent of respondents are bearish on stocks, the lowest since January 2022, [when] the market scaled the summit of the everything bubble.”
But that same debt ceiling fix will unleash a torrent of US Treasury issuance that will overwhelm the markets leaving stock investors in its wake. Cem Karsan of Kai Volatility Advisors told Maggie Lake on Real Vision, “By most estimations . . . we’re going to have to issue $1.4 trillion in debt before the end of the year. That is a massive sucking sound out of asset markets.”
“There’s got to be buyers of that debt,” Karsan said, stating the obvious, “which means that money is going to come from somewhere. And if that means interest rates go higher, as that supply comes on the market, demand has to be met. That means equity markets or somewhere else, some other risk asset has to reduce liquidity.”
Another expressing concern about liquidity is Eurodollar University‘s Jeff Snider who says those who think the Fed is just printing money are missing the real story. Snider told Raoul Pal on Real Vision,
Nobody ever stops and thinks about what are these bank reserves and what do they actually do? Are they actually a form of base money? And the answer is no. And they haven’t been in decades. In fact, this was a major problem that Paul Volcker confronted in the late 1970s and early 1980s. Banks had found different ways of doing money in liquidity that didn’t involve these bank reserves.
The hyperfocus on the size of the Fed’s balance sheet and in turn that its increase obviously means more money has been created is wrong, says Snider, who points out that people don’t see the money destroyed in the shadow system. He also points out that it’s not the amount of the money stock that’s important but the circulation of money and credit in the real economy.
This year money is leaving the banking system and not returning. According to Reuters, “The FDIC said the $472 billion in deposit outflows in the first quarter was the largest it had recorded since it began collecting such data in 1984.” This deposit exodus in search of higher yields likely continued in the second quarter.
While we’re left believing that the Fed has printed a bunch of money that’s highly inflationary, in certain circumstances—especially 2008, 2009, and to a degree 2020, 2021, 2022, and now 2023—we know that there’s more deflation in the monetary system than whatever the Fed might have created in terms of bank reserves. Snider says banks are supposed to do intermediation as well as money creation but haven’t done either since 2008. Banks, he says,
want to just hold to the safest and liquid assets, and just try to pick up as many nickels as they can. Understanding that whether it’s in a couple months or a couple years, they’re going to go through another liquidity problem again, and have to worry more about safety and liquidity than they do about risk-taking.
In the simplest terms, banks just haven’t created enough money. Murray Rothbard explained how banks create money in The Mystery of Banking. Banks create money by lending to individuals and businesses, not, for instance, by parking money at the Fed’s reverse repo facility, where balances have grown from zero in March 2021 to over $2.1 trillion currently, earning 4.3 percent.
So, in Snider’s view, “Even though the Fed is creating all these trillions of bank reserves, there isn’t enough bank money around in the Eurodollar system which leaves it susceptible to what should be nothing. The smallest little thing can set off this major issue, because it’s that fragile.” Banks aren’t taking risks, and neither are money market funds, which are looking for safety before return.
If this reminds you of 2008, it should. According to Snider,
The 2008 crisis wasn’t really about subprime mortgages. That’s just where it began. And once it started to infect all of these major functions in the banking system, it led to the situation that we’re confronting now, where money didn’t circulate freely throughout the global Eurodollar system, which led to all sorts of problems.
Likewise, falling commercial real estate prices are infecting other things, leading to disruptions in the market, which leads to a lack of liquidity and more risk aversion. And more risk aversion means more lack of liquidity in these markets. Don’t count on the Fed to fix this mess. As Snider said, “The Federal Reserve and central banks are always looking backwards. They don’t see these things coming so there’s no help from them either. And pretty soon before you look around, markets are illiquid. Banks are struggling for funding. Some more of them are failing.”
Lyn Alden is another who is being kept up at night worrying about liquidity. She tweeted on June 1, “However, now that the Treasury cash drain is finished, and we start looking ahead past the debt ceiling, we are potentially encountering the next period of negative liquidity (rather than sideways liquidity).”
She wonders what will break next. Last September it was the United Kingdom gilt market and nearly the US Treasury market. In March a few regional banks with unusually high duration exposure and uninsured deposit exposure failed, and now she says we have to watch the small banks and the Treasury market.
Jeff Snider has his eye on September for a liquidity crisis. “So, if you’re thinking ahead, there’s probably a really good chance that something happens in September, if not beforehand.” Karsan echoes that view: “It’s not a coincidence that mid-August into mid-September is often a scary time.”
You can talk with your registered investment advisor about your stocks’ fundamentals, but as Karsan says, “It hasn’t been about fundamentals for decades now. That’s the narrative you hear on CNBC.” It’s liquidity that moves stock prices.
Stock investors—danger lurks, and Uncle Sam is going to crowd you out.
About the Author
Douglas French is President Emeritus of the Mises Institute, author of Early Speculative Bubbles & Increases in the Money Supply, and author of Walk Away: The Rise and Fall of the Home-Ownership Myth. He received his master’s degree in economics from UNLV, studying under both Professor Murray Rothbard and Professor Hans-Hermann Hoppe.
Article cross-posted from Mises.
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Two Storms, One Harvest
Every food crisis in living memory has been a one-shock event. The 2008 price spike was a commodity bubble. The 2020 shortages were a logistics failure. The 2022 grain scare was a war on one exporter’s ports. Each time, the system bent, adjusted, and recovered, and each time the experts assured us afterward that global markets are simply too big and too diversified to fail.
What nobody in Washington seems eager to discuss is that 2026 is shaping up to be something the modern food system has never actually faced. Two independent shocks, one climatic and one geopolitical, are converging on the same harvest cycle at the same time. Not sequentially. Simultaneously.
Start with the weather. The Pacific Ocean is currently building toward what forecasters now openly call a record event. NOAA’s Climate Prediction Center puts the odds of at least a strong El Niño near 88 percent, with roughly two in three odds it reaches “very strong” status, the tier reserved for perhaps three or four events in the entire satellite era. Every major global model now projects a median peak in Super El Niño territory, and most of them project it exceeding the 2015-16 event, which until now held the modern record. Sea surface anomalies were already brushing the super threshold in mid-July, months before these events normally peak. The atmosphere has already shifted into El Niño mode, and the event is forecast to crest in late fall and early winter.
This is not about “climate change.” It’s about the standard cycles of weather, and the cycle we’re currently in is one that has likely devastated societies in the past. We’re better prepared as a society today, but not all Americans are equally prepared.
Serious households have started doing the quiet math on their own. Grocery bills tell part of the story, and the forecast maps tell the rest, which is why long-term food storage has moved from fringe hobby to mainstream line item in the family budget, with established suppliers like Heaven’s Harvest seeing demand from people who five years ago would have rolled their eyes at the idea. That instinct is not paranoia. It is pattern recognition, and the pattern is worth walking through carefully.
Editor’s Note: Heaven’s Harvest IS a sponsor, but the warnings of this article are real and would be written even if we didn’t have a survival food sponsor. With that said, those who take advantage of what they offer can use promo code “Patriot” for 15% off.
The Fertilizer Clock Is Already Running
While the Pacific warms, the second shock has been unfolding in the Strait of Hormuz. The conflict with Iran turned the world’s most important energy chokepoint into a contested waterway, and the consequences reach far beyond the gas pump. Roughly a third of global fertilizer trade moves through Hormuz, and the disruption sent urea prices up 86 percent year over year by March, with a 53 percent jump in a single month.
The World Bank projects energy prices rising about 24 percent in 2026 and fertilizer about 31 percent. By its own accounting, fertilizer prices ran 35 percent higher in the first five months of this year than the same period last year.
Here is the mechanism the nightly news will not explain. Fertilizer is not a grocery item. It is a time-delayed input. The nitrogen a farmer in Iowa or Punjab could not afford to apply this spring does not show up as a problem this spring. It shows up as a thinner harvest six to twelve months later.
The World Bank’s own food security brief concedes that the effects of reduced applications earlier this season “are likely to become visible only later in harvest outcomes.” Translate that from institutional language into plain English and it means this. The damage is already done, it is already in the ground, and we are simply waiting for it to arrive on the shelf.
Now check the calendar. Six to twelve months from the spring planting season lands us squarely in late 2026 and early 2027. Which is precisely when the strongest El Niño in the instrumental record is forecast to peak, bringing its signature droughts to Southeast Asia, Australia, southern Africa, northern Brazil, and South Asia, the very regions that grow the world’s rice, sugar, and oilseeds.
The World Bank warns openly that a strong El Niño “could disrupt multiple crop belts simultaneously” on top of the conflict-driven input costs. Their baseline projection assumes the Middle East disruptions ease by autumn. What in the last two years of Middle East history suggests that assumption is safe?
The System Has No Slack Left
The comfortable answer is that global markets always adjust. But adjustment requires slack, and the slack is gone. Global cereal production is expected to decline from last year’s records even before El Niño does its work. The UN World Food Programme, hardly a den of right-wing preppers, is calling this the most significant disruption to its supply chains since Covid and the invasion of Ukraine, and its supply chain director put the stakes bluntly.
Today’s supply chain challenges are tomorrow’s hunger crisis.
There is also a political dimension that markets cannot price. When food gets scarce, governments do not behave like economists. They behave like politicians. Export bans, hoarding mandates, and panic buying at the national level turned the modest rice shortfall of 2008 into a global crisis, and analysts are already warning that import-dependent nations are the first dominoes.
The 2015-16 Super El Niño, a far weaker event than what is now forecast, threw tens of millions into food stress across Africa and Asia. This one is projected to be stronger, and it arrives with fertilizer already rationed by price and shipping lanes already contested by missiles.
What Joseph Knew
Scripture does not treat preparation for lean years as faithlessness. It treats it as wisdom delivered in advance to those willing to act on it.
Behold, there come seven years of great plenty throughout all the land of Egypt: And there shall arise after them seven years of famine; and all the plenty shall be forgotten in the land of Egypt.
Joseph did not respond to that warning with a hashtag or a committee. He stored grain during the years of abundance, and when the famine came, Egypt stood while its neighbors begged. The lesson is not that famine is certain. It is that the time to prepare is precisely when preparation still looks optional.
Nobody who filled a pantry in a year of plenty has ever regretted it, and nobody standing in an empty aisle has ever been glad he waited for certainty.
None of this calls for panic, and panic is the enemy of sound judgment anyway. It calls for the same unglamorous prudence our grandparents considered ordinary. Keep some cash margin, know your local growers, and put real food in deep storage while it is cheap and available, because the entire arc of this story is that cheap and available is a closing window.
Families looking for a straightforward place to start can visit Heaven’s Harvest and use promo code Patriot for 15 percent off long-term storable food. The forecasts may yet soften, the strait may yet reopen, and we should pray they do. But hope is a fine thing to hold and a foolish thing to eat.