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Biggest Financial Story to 2040

What happens to America's debt? Stay tuned...
 
LAST WEEK there was no follow through to Tuesday's strong showing in the US stock market, writes Bill Bonner in his Diary of a Rogue Economist.
 
The Dow flatlined, gold rose above the $1300-an-ounce mark. US stocks don't seem to know what direction they want to go. Gold seems to want to go up.
 
Our guess is that gold won't go up much...not yet. There's little inflation pressure (officially measured, at least). And the expectation that QE would lead to higher prices has largely faded from investors' imaginations.
 
The more experience we have of the Fed's "improv" policies, the more we realize that they stimulate neither a genuine economic recovery...nor genuine inflation.
 
We're in Japan, in other words.
 
And we may be there for a long, long time. Buenos Aires will have to wait!
 
Yesterday, the Senate went along with the House. No debt ceiling problems this year, it said.
 
Government finances are looking better. January's deficit was only $10 billion – down from $100 billion for the same period a year ago. The Congressional Budget Office is calling for a $514 billion shortfall for this year...and a $478 billion deficit in 2015.
 
That's good news, isn't it? Well...it depends on your point of view.
 
Deficits are a way for the feds to waste money on their favorite projects. Billions for the bankers. Billions for retirees. Billions for the weak and the lame.
 
Take away these billions, and we're better off in the long run. Government spending is consumed, not invested. It does little to build a real economy.
 
But deficits are also "stimulus". When the banks won't lend, and citizens won't borrow, deficit spending is about the only way to get money into the hands of consumers.
 
In the short run at least, this money keeps the lights on and the wheels turning.
 
Economists are simpletons. They believe this spending by the government is as good as spending by the private sector.
 
Nor can they tell the difference between demand that comes from real people, with real money they get from real wages...and the 'demand' that comes from borrow-and-spend policies, helped along by the Fed's artificially low interest rates.
 
The difference is critical. One leads to real growth and wealth. The other leads to a disastrous debt bubble and poverty.
 
But remember, that's the long run. In the short run, we're in a spell of Tokyo-style deleveraging. And the Fed's QE and ZIRP policies have not been enough to break the private sector's resistance to taking on more debt.
 
As in Japan, only government – bless its stupid, shriveled little heart – goes deeper into debt.
 
Already, the feds have more debt than they can repay. The biggest financial story of the next quarter century will be what happens to that debt.

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, 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 more recently the election of President Trump.

See full archive of Bill Bonner articles

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