Water, Water, Every Where

(Any views expressed here are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)

Water, water, every where,And all the boards did shrink;Water, water, every where,Nor any drop to drink.

– Coleridge, Rime of the Ancient Mariner

I love specialty coffee, but my home brews are utter disasters. I spend a decent amount of money on beans, but my cup always tastes inferior to one I sip at the café. To better my brews, I started taking the details a bit more seriously. One detail I realised I had been neglecting was the quality of my water.

It is now apparent to me how important water is to the quality of my brew. A recent essay in the 35th issue of Standart slapped hard.

A similar phenomenon occurred during my tenure as a barista when I learnt that over 98 percent of a cup of coffee and around 90 percent of espresso is water.

…

This realization tends to hit people much later in their coffee journey, possibly because it's much easier to throw money at a new machine marketed towards better coffee. ‘Ah, you have a cone grinder! That’s why your pour-overs are muddy. Switch to a flat burr!’ But what if the two percent wasn’t the issue? What if focusing on the solvent itself could heal our coffee woes?

– Lance Hedrick, On Water Chemistry

My next step was to digest the author’s suggestions and order an at-home water distiller. I know a local coffee shop that sells mineral concentrates to add to your water, which will create the perfect substrate to bring out the intended flavours of their roasts. By this winter, my morning cuppa is going to be delectable … I hope. I pray for the taste buds of my intrepid friends who will sip my black gold before skinning up Mt. Yotei.

Quality water is essential for brewing delicious coffee. Shifting gears to investing, water, or liquidity, is important to stacking sats. This is a recurring theme throughout my essays. But we often forget how important it is and focus on the little things we believe will impact our ability to make money.

It is very hard to lose money investing if you can recognise how, where, why, and when fiat liquidity is being created. Unless you are Su Zhu or Kyle Davies. If financial assets are priced in USD and off US Treasuries (UST), then it stands to reason that the quantity of currency and dollar debt globally are the most critical variables.

Instead of focusing on the US Federal Reserve (Fed), we must focus on the US Treasury Department. This is how we will determine the specifics of Pax Americana's addition and subtraction of fiat liquidity.

We need to refer back to the concept of “fiscal dominance” to understand why US Treasury Secretary Bad Gurl Yellen has made Fed chairman Jay Powel her beta cuck towel bitch boy. Please read my essay, “Kite or Board'' for a more in-depth discussion. During a period of fiscal dominance, the necessity to fund the state overrides any concerns the central bank may have about inflation. That means bank credit and, by extension, nominal GDP growth must be sustained at high levels even if it results in persistently higher than target inflation.

Time and compounding interest determine when power shifts from the central bank to the treasury. When debt-to-GDP crosses 100%, debt mathematically grows exponentially faster than the economy. After this event horizon, the agency controlling the supply of debt is crowned emperor. That is because the Treasury determines when, how much, and at what maturity debt will be issued. Also, because the government is now addicted to debt-fueled growth just to tread water, it will eventually instruct the central bank to cash the Treasury's checks using its money printer. Central bank independence be damned!

The onset of COVID and the government response in the US to lock folks in their homes and pay for their obedience with stimmie checks caused a dramatic surge of debt-to-GDP above 100%. It was only a matter of time before the transformation from Grandma to Bad Gurl Yellen occurred.

Before the US gets into an outright hyperinflationary scenario, there is a simple way in which Bad Gurl Yellen can create more credit and juice asset markets. The Fed has two pools of sterilized money on its balance sheet that, if they were to be released into the wild, would generate bank credit growth and raise asset prices. The first pool is the Reverse Repo Program (RRP). I have spoken at length about this pool of money whereby money market funds (MMF) park cash at the Fed overnight and receive interest. The second pool is bank reserves, and the Fed program, which pays interest on this pool of money, works in a similar manner.

While money is on the Fed’s balance sheet, it cannot be rehypothecated into the financial markets to generate broad money or credit growth. By bribing banks and MMFs with interest on reserves and the RRP, respectively, the Fed’s quantitative easing (QE) program created financial asset price inflation rather than an explosion of bank credit. If QE weren’t sterilized in this manner, bank credit would have flowed into the real economy, increasing output and goods/services inflation. Given the current gross indebtedness of Pax Americana, strong nominal GDP growth coupled with goods/services/wage inflation is precisely what the government needs to boost tax receipts and deleverage. Therefore, in steps Bad Gurl Yellen to right the ship.

Bad Gurl Yellen doesn’t give two fucks about inflation. Her goal is to create nominal economic growth so that tax receipts rise and the US debt-to-GDP ratio falls. Given that no political party or their supporters are committed to cutting spending, deficits will continue for the foreseeable future. Furthermore, due to the magnitude of the federal deficit, the largest in peacetime history, she must use all the tools at her disposal to fund the government. Specifically, that means coaxing as much money as she can off of the Fed’s balance sheet and into the real economy.