All Aboard the DebtBall Express

Stocks are chugging along, with the Dow nudging back to nearly 26,000.

But the economy seems to be giving way beneath them. Economist Gary Shilling:

The recessionary indicators are numerous. Tighter monetary policy by the Federal Reserve that the central bank now worries it may have overdone. The near-inversion in the Treasury yield curve. The swoon in stocks at the end of last year. Weaker housing activity. Soft consumer spending. The tiny 20,000 increase in February payrolls, compared to the 223,000 monthly average gain last year. Then there are the effects of the deteriorating European economies and decelerating growth in China as well as President Donald Trump’s ongoing trade war with that country.

Recession ahead? Surely. But when?

DebtBall Express

We’ll wait to find out, along with everyone else. And then, we will find out something else — that President Trump’s budget projections are pure fantasy.

POTUS’ budget comes in at $4.7 trillion. A $750 billion increase to the military and $8.6 billion for The Wall. It also presumes a 3% annual growth rate in GDP, with no recession. Neither of those things will happen.

A half century ago, both Democrats and Republicans rolled along in good order, on the firm footing of mostly balanced budgets. They had little choice. If not, federal borrowing would drive up interest rates — ‘crowding out’ private borrowers — and force a general correction.

Then, in order to avoid reckoning with the results of over-spending on the war in Vietnam and the Great Society, the Nixon administration switched tracks. It changed the money system.

The new dollar, not limited by gold-backing, gave the financial engineers more to work with. They could add cash and credit almost at will. Consumer price inflation went to 10%.

The whole system would have crashed by now had Paul ‘Casey Jones’ Volcker not stuck his head out the window, seen the dangerous curve coming, and slammed on the brakes.

Volcker raised the federal funds rate to an all-time high of 20% in 1980, thus whipping inflation before it got too out of hand.

But rather than learn their lesson, Volcker was replaced by Alan ‘Bubbles’ Greenspan…and both Republicans and Democrats climbed aboard the DebtBall Express. ‘Deficits don’t matter,’ they said.

And now, the runaway train gathers speed. The federal deficit was $587 billion in Obama’s last year. Mr Trump’s budget increases it to $1 trillion.

 

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Unpayable debt

Yesterday, we were wondering who pays this unpayable debt… along with what stops an unstoppable force and what moves an unmovable object — the subject fascinates philosophers.

But it bores the public. Debt? There are so many more interesting things — walls, Russian meddling, Michael Cohen, the China trade.

The Donald’s sans souci budget would add $4 trillion to the nation’s debt over the next four years; not until 2030 would it deliver a balanced budget, and that assumes good economic times for the next 11 years.

Our own estimate is that, by then, the US will have federal debt totalling around $40 trillion. But who pays? Who cares?

Eventually, someone cares. And someone pays. That’s why a little foreign travel may be instructive. Here in Argentina, it is obvious who pays — the common householder, through inflation. His money loses its value like day-old bread.

The inflation rate here in Argentina has gone up to over 50% per year. As we reported yesterday, life is still pleasant…especially if you have dollars that you can exchange at 44-to-1 for pesos.

‘Yes, it is good for foreigners,’ our lawyer commented. ‘But a lot of people here are in bad trouble. The price of electricity is up 300%. The price of gasoline has more than doubled in the last year. Farmers can’t make ends meet.’

This morning, driving through a small town, we saw a long line of people in front of a bank. They were getting cash — so they can spend it. Nobody wants to leave money in the bank.

Living with inflation is an indispensable skill in Argentina; in America, too, it might prove more useful than a degree in economics. Never has there been a DebtBall Express that failed to run off the rails. This will be no exception.

But wait, can nothing be done to prevent the coming train wreck? Is there no Volcker who can take the controls? Why can’t debt just be ‘written off’?

Tomorrow…let’s take a trip to Canada…and see what happened there.

 

Regards,

Bill Bonner


Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.


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