Yes, it is heartwarming, isn’t it? Almost inspiring.
We mean…seeing our leaders finally get together…embracing warmly…and agreeing on something.
No more trouble. No more strife. Oh, Lord, they’ve seen the light!
They are all on board now — Trump, AOC, Bernie Sanders, Powell, The New York Times…and hundreds, thousands of others, the great, the good, and the grandiose numbskulls.
Swaying together…singing…hugging…drinking cocktails…and giving each other high fives…
…as they ride along on the DebtBall Express.
Equivalence theorem
Like all government programmes, what works in financial policy is what doesn’t work in real life. The feds have put in about $15 trillion worth of stimulus (quantitative easing, budget deficits…not to mention artificially low interest rates) over the last 10 years.
This did not produce a stronger economy; instead, it produced a weaker one…with much more debt.
Still, Stimulus Theory has the backing of the public…the elite…and thousands of economists.
Over the last hundred years, PhD economists have multiplied faster than STDs. Today, we have at least 100 times as many as we had in 1919.
These know-it-alls advise our corporations and our politicians, often run our banks, and provide lame excuses for politicians’ failures. Surely, with so much learned brainpower, we are the smartest generation that ever lived.
But against this fancy new conceit, today, we offer some plain old common sense: Ricardo’s Equivalence Theorem.
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Joy juice
By the time Donald Trump got to the White House, the recovery was already limping, hobbling, and ageing fast.
What to do? Stimulus!
He gave it a jolt of joy juice with his tax cut at the end of 2017. That produced a little jumpiness in the hands, and legs, but by the end of 2018, the effect had already worn off; stocks were falling and the economy seemed to be sinking again.
But the whole fandango could have been avoided simply by reading David Ricardo’s Essay on the Funding System from 1820.
The 19th-century economist noted that a town could finance its spending by taxing its citizens…or it could borrow from them. Either way, taxpayers would have to foot the bill (what other source of revenue did the town have?).
But the townspeople — at least back then — weren’t idiots. They knew that the borrowing would eventually show up in higher taxes. So, they bought the town’s bonds themselves.
Then, they earned interest at exactly the same rate as the town paid it, and so, they stocked up the money with which to pay their taxes with no additional loss.
Borrowing? Taxing? Ricardo showed that it didn’t matter. The cost of town government was the same either way. Borrowing produced no stimulating effect.
Debt hangover
But with so many PhDs to help them think, today’s townsfolk can barely think at all. Somehow, they believe that they will never have to pay the government’s borrowings. They think borrowed money ‘comes from the Fed.’ Or that the economy will ‘grow its way out of debt.’
Or, drawing on the popular new fantasy called Modern Monetary Theory (MMT), they think that the feds can simply print the money needed to pay it off.
MMT fans, notably Bernie Sanders’ advisor with a PhD in economics, Stephanie Kelton, even argue that deficits are not too large…but too small. ‘Every dollar the government spends translates into a dollar of income for someone…’ she points out.
So, with this mischievous wisdom egging them on, instead of saving their tax reductions (which would have completely nullified the ‘stimulus’ effect), people spent them.
Alas, they did not invest in things that might actually increase output and wealth. Instead, the cheap money was consumed…used up…like a bottle of cheap booze.
Imports from China boomed to new record highs. Stock buybacks hit new records, too. And the result? From March to September, investors gained about $4 trillion in stock market wealth. The public was left with a hangover of unpayable debt.
And now, instead of renouncing the foolishness of it, today’s geniuses — PhDs prominently included — wait for the next drink.
Six months ago, speculators were wondering about the Fed’s next rate hike. Now, they’re betting on the next rate cut.
Economist Richard Duncan:
‘…we will see that the US economy has reached a tipping point.
‘It is going to take more than “patience” from the Fed to keep the US out of recession. It’s going to require rate cuts.’
Americans have been trained to believe that their votes decide important government policies. It is just a matter of choosing the right candidate…
But in the coming debacle, both parties…and all major candidates…PhDs…Nobel Prize winners…leading newspapers…pundits and politicians…will be on the same stimulus team — and all lined up against you.
Because the ‘stimulus’ program is simply a wealth transfer scheme pretending to be an economic policy.
And they — the elites, the political class, the Deep State, Washington, Wall Street, and The Swamp — benefit from it.
That’s all from us this week…
Regards,
Bill Bonner