The Fed Made This Big Mistake Before The 2008 Crash — And It Just Happened Again

11 years ago, in August 2007, just as the markets and the US economy were on the threshold of collapse, the Fed proved for the umpteenth time that it is clueless, not just about the future, but even the present.

It issued these official words in the FOMC statement:


They were wrong here about both the economy and inflation, when it was perfectly obvious to some of us, if not most of us, that things were already going haywire.

But hey! What should we expect? They’re economists and central bankers. They never set foot in the real world.

Meanwhile, today, the data is telling us that maybe, just maybe things aren’t quite as “strong” as the Fed thinks – and this hard, factual, real time data on tax collections provided to us every day by the US Treasury proves it…

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The Fed Has Chosen To Ignore This Sinister Aspect of Tax Collection Data

Total withholding tax collections are available to us virtually in real time in the US Treasury’s Daily Treasury Statements, released with just a one day lag, which makes them an excellent analytical resource.

However, they are extremely volatile day to day so I rely more on a monthly moving average of the 11 day total collections, comparing that with the prior year.  Smoothing sacrifices a bit of timeliness to get a clearer picture of the trend without losing too much of the edge that the daily data provides.

Reconciling the data with the facts is difficult, but it seems clear that under any circumstance the Fed will stay the course and continue to tighten because it believes, or wants you to believe, that the “economy” is strong.

Yet the data shows that the economy is actually more vulnerable than ever.

The Treasury Borrowing Advisory Committee (TBAC), the virtually secret cabal of Primary Dealer executives and international bankers that tells the Treasury how much debt to issue, came out with its current quarterly report this week. It confirmed what we already knew, and what I have been warning about – supply is increasing.

And by increased supply, I mean an increase in the government’s issuance of Treasury bills, notes, and bonds, month in and month out.

The following chart reveals how a fall in tax collections, as a result of the Trump Tax Cut, is causing this increase in supply:

Witholding Taxes

As you can see, withholding tax collections were down year to year in July. Withholding tax collections fell to a 2.3% year to year decline at the end of July. There were down 1.4% at the end of June, and up 1.7% at the end of May.

Now we know that the tax cut passed earlier this year is responsible for the year to year decline. But we can tell that since February the trend of year to year change has been flat, and it has declined since June.

The declining trend suggests that the tax cut is not only costing the government revenue. In fact, the economy appears to have been slowing since May.

Withholding taxes weren’t alone in flashing yellow. Excise tax collections in July were also downbeat. Excise taxes are due twice monthly, paid with a half month lag, for large payers.

Here’s the chart:

Excise Tax Collections

As you can see, July excise tax collections were down 1.9% year over year. They were flat in June.  Prior to June they had been strong. The new tax law did not include most excise taxes.

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Don’t Listen to The Fed: They’re Leading You Down a Debt-Ridden Path

One month, or even two, of tax collections decline doesn’t constitute a trend. It may be something that, to borrow a favorite Fed word, is “transitory.” But it certainly doesn’t square with the current Fed or Wall Street narrative that the economy is strong.

Prior to June, the excise tax collections numbers had in fact been strong.

I wrote in mid-April: “The numbers suggest a booming economy. TV talking heads and policy makers will use that to pronounce that ‘the US economy is strong.’ And that’s the problem. It will encourage the Fed to continue QT (Quantitative Tightening). The Fed will tolerate a far greater selloff in stocks than it was willing to in the past.”

We have reached all but the last sentence of that prediction. The selloff hasn’t started yet. The progression is taking longer than my analysis suggested it would.  But I think this is a matter of timing, not of getting the likely result of this process wrong.

More important than speculating about the economy is the fact that Treasury supply is increasing, just as we knew it would, due to the Trump Tax Cut and the February Budget Busting Agreement with Congress, to increase spending.

Even government forecasters with the Congressional JCT and CBO, and now the White House Budget Office itself, are forecasting trillion dollar deficits for years to come.

This must be financed with new debt issuance. That issuance will hit a market from which the Fed is removing money, making it ever tougher to absorb all that paper.

Prices of bonds and stocks will decline as a result.

If there was ever a situation conducive to a market crash, that’s it.


Lee Adler

2 Responses to “The Fed Made This Big Mistake Before The 2008 Crash — And It Just Happened Again”

  1. I like looking at FEDS notes every once in a while. I know that may be weird. I find some interesting, like going back to the FRB/US model: A Tool for Macroeconomic Policy Analysis, April 2014. Figure 2, Stochastic Simulations has estimates running to quarter (Q) IV (or 4) 2018. It shows that their models have such a wide range that they could get a wide difference and show that they ended up in the predicted range. Unemployment starts at about 6.5%, falls to about 5% by Q42016 and stays there through Q42108. Actually, Unemployment fell to the 4% range and has stayed there (now 3.9%). But the range for Q22018 is about 2.8-6.8%. I don’t call that very accurate forecasting. I call it fudging big time, or WAG (a wild @ss guess). Nonetheless, interesting. Also, looked at “Predicting Recession Probabilities Using the Slope of the Yield Curve”, Mar 2018. Their models predict a very low, though slightly raised, possibility of recession. I’d like your take on the above FEDS notes or any other.

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