Gold News

More Debt Please, We're Inflating

Rich get richer, right up until it pops...
YES, WE ARE doomed. So, we continue our jolly inspection of what doom will look like, writes Bill Bonner in his Diary of a Rogue Economist.
In short, we are in an Inflate-or-Die trap. No one wants to face the music and admit that the economy has been phonied up with fake money, unpayable debt, and falsified prices. Nobody wants to go through the pain and humiliation of rehab.
So what's the alternative? Inflation – more debt, more phony prices, and more fake money.
For the last 30 years, the Federal Reserve added money via underpriced short-term loans. Speculators, banks, and insiders took the money and used it to run up stock and bond prices.
The rich got much richer; the poor stayed poor. Almost no one complained, because they were told that the "wealth effect" was making us all better off.
Donald Trump even believes that the stock market is the measure of his success.
What is really at work, though, is the old fashioned "debt effect". Businesses, consumers, and the government go further and further into debt, borrowing at ultra-low rates from the future in order to live high on the hog in the present.
But there are limits. Time, for example. You can't stretch it. You can't fake it. You can't counterfeit it.
During the first 80 years of the last century, total debt averaged about 1.5 times GDP. That's another way of saying we learned that we could afford to borrow a day and a half's future output for every day of output in the present. And not more.
But then, after 1980, total debt increased to over $73 trillion – or 3.5 times GDP.
That extra debt – more than $40 trillion above and beyond the traditional 1.5/1 relationship, representing $1.7 billion hours of future work at today's average wage – is a debt that can't be collected...
And no one has any intention of paying it off.
Now, we are approaching a new stage.
With Biden tainted by Ukraine...and Bernie by age and infirmity...Elizabeth Warren is the likely Democrat nominee.
History always seems to bring forth the leaders it needs. Another way to put this is our old dictum: People always seem to think what they need to think when they need to think it.
When a nation is young and growing, people want little government. They are busy with their own lives...building their own businesses...and creating their own prosperity. Leaders generally stay out of the way, believing that a government governs best when it governs least.
But then, when the nation is big enough to throw its weight around, it turns to Roosevelts, Wilsons, and Johnsons, who are willing to stretch...enter wars of no importance...and undertake guns-and-butter spending programs that undermine the real economy.
Later, on the rocky downslope of empire, people just want to hold on to what they've got. And the nation needs a leader worthy of a Fin de Bubble catastrophe.
It needs a real numbskull – like Dubya, Trump, or Warren – who, with no sense of history or humility, will drive the nation into bankruptcy and despair.
Ms.Warren pretends to be smart, well-informed, and sophisticated. She believes she is on top of the issues, at home in university coffee shops, and at ease with the cognoscenti, literati, and transgenderati.
Mr.Trump, on the other hand, is a pro-wrestling fan...a tough, street-smart hustler who doesn't pay his bills, doesn't read books, and doesn't think he needs to study issues in depth. He trusts TV and his instincts, knows how to work a crowd, and thinks you win by making someone else lose.
But when push comes to shove in the next crisis, both Warren and Trump will push in the same direction: towards more inflation.
Mr.Trump has already taken the lead in what we believe will be the next step down on the dank, dark stairway to Hell. He increased federal spending by $185 billion per year. That's four times more than the Clintons and twice as much as Obama.
The money went right into the Swamp – particularly the Northern Virginia, military-industrial lowlands.
Meanwhile, the combination of spending increases and tax cuts caused an explosion in US debt. In the third quarter of this year, for example, the feds added debt at a rate of more than $2 trillion per year.
This is happening at the tail end of a boom – that is, just when it's not supposed to happen.
Here at the Diary, we have no truck with Keynesian meddling. But if you're trying to offset the business cycle, you have to at least try to do it right, increasing spending in a slump...and decreasing spending in a boom.
The Trump team did it backwards. It cut taxes and increased spending while the going was still good. Which raises the question: What will it do when the going is not good?
That is what we're going to find out. And here, Dear Reader, this is one tiny part of the future where we think we can see what is coming down the pike.
Imagine that the next crisis arrives...with stocks cut in half and unemployment headed towards 10%.
Imagine trillions of Dollars' worth of corporate bond defaults and a big rush to sign up for food stamps and unemployment comp.
Imagine all the lonely eyes turning to the White House: "Help us...Heal us..."
And then, imagine what Team Trump or Team Warren will do. Will they follow in the footsteps of Team Harding, which in the 1920-21 crisis raised interest rates and cut spending? (The downturn was over in 18 months.)
Oh stop it, Dear Reader...the thought is so bizarre, so out of sync with modern staggeringly obvious, correct, and's triggering our circuit breakers...The lights are flickering...
No candidate – neither Republican nor Democrat – is proposing to return to honest money, market-set price signals, and balanced budgets. Those artifacts of an earlier nation (when America really was great) have long been discarded.
Now, we have a President who thinks he knows better than the market where interest rates should be...
...and a leading lady on the Democrat side who thinks the whole economy can be marshalled to correct the world's she sees them.
Forgive student debt, tax the rich, raise Social Security benefits, enact Medicare for All, enter a $2 trillion Green Manufacturing deal...etc. etc. – and that is just the beginning. She has 48 plans, including:
Ultra-Millionaire Tax, Leveling the Playing Field for America's Family Farmers, A New Farm Economy, Our Military Can Help Lead the Fight in Combating Climate Change, Affordable Higher Education for All, A New Approach to Trade, Empowering Workers Through Accountable Capitalism, Tackling the Climate Crisis Head-On, Comprehensive Debt Relief to Puerto Rico, 100% Clean Energy for America, Fighting for an Accessible & Inclusive America, Expanding Social Security, Accelerating the Transition to Clean Energy, Leading in Green Manufacturing, Health Care Is a Basic Human Right, Defend & Create American Jobs, Safe and Affordable Housing, Universal Child Care, among others...
Some say Ms.Warren is "unelectable". But they said that about Mr.Trump too. Too bad they weren't right about both.

New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals