Global Opportunities Beyond the Radar

Federal Stimulus Expansion Will Lead to More Economic Crises

American election campaign fight as Republican Versus Democrat represented by two boxing gloves with the elephant and donkey symbol stitched fighting for the vote of the United states citizens for an election win.

American election campaign fight as Republican Versus Democrat represented by two boxing gloves with the elephant and donkey symbol stitched fighting for the vote of the United states citizens for an election win.

The early light hits the top of the mountain on the other side of the river. It lights up in a bright red, then marches down the mountainside.

In 10 minutes, it has lit a broad band of gray…almost white…and then a few minutes later, the lower hills have turned orange.

Sunrise over the valley

The sun has to brighten up the entire world every 24 hours. With a circumference of 25,000 miles, that doesn’t leave it much time for us.

In about 20 minutes, the whole valley is lit.

Quiet comfort

We are here partly by order of the local gendarmes. And partly because we want to be.

But the forced isolation has focused our attention…

First on our surroundings…and second on the most dramatic phase of economic/financial history that we have ever seen.

A lot of money is changing hands. Even more is simply evaporating. We have never faced such a challenge.

Yes, Dear Reader, it is now or never.

If we master this, we will probably spend the rest of our lives in quiet financial comfort. If not…well, we leave that to your imagination.

Essentials only

Back in Maryland, our home state, Governor Hogan has proclaimed a shutdown for all but essential businesses.

Fortunately, he has deemed liquor stores essential; otherwise, Baltimore could never survive. It depends on its liquor stores the way some cities depend on water.

Here in San Martín, we are well stocked in wine…and our water comes, freely, out of a spring in the desert.

How the water gets there is a mystery, since it so rarely rains…but the locals claim the spring runs year-round.

We heat with wood…and cook with wood. Here is our stove…remarkably efficient and easy to use:

Cooking with wood

But let us move along…We have serious work to do.

What’s next for money politics

This week we are studying the consequences…That is, we are trying to figure out where this leads.

We are in the deflationary stage now…when the bubble pops and asset values are suddenly marked down to where they should have been in the first place.

But what comes next? Is that all there is to it?

Alas, the answer is simple: No…There’s much more to come.

And today, we focus on one part of it — politics. How does this crisis change our government?

Just-in-time economy

We begin by noticing that the C virus is a natural thing.

Though there are rumors flying around the World Wide Web that it was created by the U.S. Army at Fort Detrick, Maryland…or by the Chinese Army in Wuhan…it is most likely the product of chance encounters of the normal variety.

But the economy…how it reacts to the C virus…and the feds’ own response — all are matters of politics.

We use the word ‘politics’ in a broad sense.

We’re not talking about Democrats against Republicans…but about the whole realm in which things are decided not by voluntary win-win compromises, but by the intrusion of the feds in one form or another.

We have seen, over the last 20 years, how the feds queered the economy. (Longtime Dear Readers have had their fill of it, no doubt.) Fake money and fake interest rates gradually undermined the economy’s immune system.

Extraordinarily low interest rates discouraged savings and drew forth speculation, debt, buybacks, bonuses, windfalls, inequality, and all the other fragilities and oddities we’ve chronicled over two decades.

In short summary, they created a ‘just-in-time’ economy, where everyone — from ordinary householders, gig workers, corporate chiefs, and the feds themselves — believed that the supply of money and credit were essentially unlimited.

And that in a pinch…they would always be made available by the feds.

On this faith did stocks, debt, government spending, deficits, and bonds rise to levels never before seen in the history of man.

But there was always a fly in that ointment…

Fly in the ointment

Real money — like real time and real skills and real resources — is not unlimited. And when the limits are passed, bad things begin to happen.

One of those things is that politics itself is corrupted…corroded…and twisted into grotesque new shapes.

First, the feds get more power simply because they are the ones handing out the money. The latest stimulus bill, sitting in Congress, calls for $2 trillion of giveaways.

Lobbyists are lined up for favors, exemptions, and bailouts. Citizens, too, are already contacting their dealers, bookies, bootleggers, and creditors…anticipating the ‘helicopter’ money coming their way.

The little guys will get $1,500 each, or a total of only about $300 billion. What happens to the rest of the $2 trillion?

The New York Times reports on a lobbying gold rush:

Restaurants say they need $325 billion in federal assistance. Boeing wants $60 billion. The travel industry has requested $250 billion and manufacturers are seeking $1.4 trillion in loans to deal with the economic devastation being wrought by the coronavirus.

And that’s to say nothing of the casinos, airlines and franchise owners, all of whom have signaled that they, too, will need relief from the federal government to survive.

Lean years

Let’s stick with Boeing, for further enlightenment.

In the fat years, Boeing took almost all its earnings over the last 10 years…and handed them out to shareholders and executives — via buybacks and bonuses.

Now, come the lean years, it finds it lacks the capital to survive a downturn.

But Boeing — the real business — is not going away. Its riveters are not going to forget how to rivet. Salespeople won’t lose their contacts. Engineers aren’t going to forget what holds an airplane aloft.

In an honest capitalistic system, management and owners pay for mistakes like this. They lose their jobs and their money. That is how it is supposed to work.

If a company needs to be recapitalized, the owners, managers and investors can reach into their pockets, disgorge some of their profits, and come up with the money.

But not anymore. Now the losses are ‘socialized’ — put onto the backs of people who never earned a penny from Boeing. The crony capitalists will keep their money; the government will pay!

Biggest money power grab since Roosevelt

Of course, the government has no money. It is already running trillion-dollar deficits. All it can do is print more money — inflate — to pay for these bailouts, giveaways, and stimulus efforts.

Inflation then infects everything…and always leads to more government power.

Here’s Ludwig von Mises:

[Inflating the economy] is not an isolated phenomenon. It is only one piece in the total framework of politico-economic and socio-philosophical ideas of our time.

Just as the sound money policy of gold standard advocates went hand in hand with liberalism [he means what we would call monetary and fiscal conservativism] free trade, capitalism, and peace, so is inflationism part and parcel of imperialism, militarism, protectionism and socialism.

How does it work?

The feds have the (fake) money. Like a thief giving raw meat to a guard dog, they use it to buy off the opposition.

That explains why real conservatives have practically disappeared from the Republican party. Why ‘conserve’ anything…when money is apparently unlimited?

And so today we have the spectacle of a supposedly ‘conservative’ president at the head of a supposedly ‘conservative’ Republican party making the biggest power grab since Franklin Roosevelt.

Nobody seems the least bit concerned about deficits — neither Republicans nor Democrats. (This is one thing they can agree on…since it leads to more power for them all.)

Balanced budgets? The Constitution? The hallowed principles of finance? The rule of law?

Damn them all!

Never let a good money crisis go to waste

Here in the Calchaquí Valley, legend has it that the local Indians would kill their leaders in times of famine or plague, as an offering to the gods.

Today…we give them more power.

‘Never let a good crisis go to waste,’ says Rahm Emmanuel, Obama’s former chief of staff. Use it to make big government bigger.

Here’s just one particularly obnoxious example. Politico reports:

The Justice Department has quietly asked Congress for the ability to ask chief judges to detain people indefinitely without trial during emergencies — part of a push for new powers that comes as the coronavirus spreads through the United States.

The most important rule in the justice system is habeas corpus. In the 12th century, it arose to restrain the power of Henry II:

No Freeman shall be taken or imprisoned, or be disseized of his Freehold, or Liberties, or free Customs, or be outlawed, or exiled, or any other wise destroyed; nor will We not pass upon him, nor condemn him, but by lawful judgment of his Peers, or by the Law of the land.

Well, you can throw that one out too…if the Trump administration gets its way.

Big, wise government

A week ago, another high official of the Trump administration came out with yet another jackass plan to get money into the hands of Wall Street shysters. Stansberry Research’s Thursday Morning Market Commentary reports:

White House economic adviser Larry Kudlow suggested the administration may consider equity stakes in companies that need coronavirus aid.

There are many ways for the politicos to get control of the ‘means of production.’

They can seize them…as the Bolsheviks did in Russia in 1917. Or they can enlist them in a great war economy…as the Nazis did in Germany in the 1930s. Or they can ‘nationalize’ them…as France did in 1944-1946.

Or, they can buy them with fake money — under cover of a national emergency, of course.

Many are the voices — on the left as well as the right — urging the feds to make big government even bigger.

Professor Margaret O’Mara at the University of Washington:

Not only will the U.S. need a massive dose of big government to get out of this crisis…but we will need big, and wise, government more than ever in its aftermath.

War economy

And here’s Bloomberg columnist Joe Nocera yesterday:

‘Heavy Hand of Government’ Is Just What Crisis Needs

Probably the dumbest opinion we’ve seen so far comes from economist Jack Rasmus, who argues that we must mobilize for war:

The enemy has already effectively shut down much of our economy, is making millions jobless, threatening to sabotage our banking & financial system. The war-like destruction of our economy is already underway.

The response must be no less an economic war as World War II economic mobilization was a war to defend the lives of millions of our citizens.

America’s capitalist system has already been severely weakened by decades of fake money and federal meddling. Now it lies in a fever, its chest rattling as it tries to take in air…

…and along comes Mr. Rasmus (and many others) to press a pillow onto its face.

A war economy puts the feds in command of everything. And a centrally planned, command economy is always a disaster.

That, too — like the rule of law, the gold standard, the virtue of peace, and the need to keep the government on a leash — is a lesson learned at great expense from the suffering of millions of people.

But let’s look now at what happens…

Gang of thugs with money

Many are the cases in history of governments that overspent…and then resorted to the printing press to make ends meet.

We know what happened financially — they suffered hyperinflation. Millions of people were wiped out. Industry was crippled. Wealth was destroyed.

But what happened politically?

The episode that clutters most minds was the one that took place in Germany in the early ’20s. We’ve written about it many times. No need to rehearse the financial details.

But the callout worth remembering is that it was the feds who caused the disaster.

As we’ve pointed out many times, inflation is always, and everywhere, a political phenomenon.

The German feds financed a war by printing money. Then, after the war, they tried to finance the peace by printing more money.

War…pandemics…revolutions…there is always something that brings a crisis. Then, printing money seems like the best way to get through it.

Karl Helfferich, writing in 1923, described the Germans’ reasoning for why they shouldn’t stop the printing presses:

It would mean that in a very short time the entire public, and above all the Reich, could no longer pay merchants, employees, or workers. In a few weeks…factories, mines, railways, and post offices, national and local government, in short, all national economic life would be stopped.

(Is that different from the feds’ response to the C virus crisis?)

And then what happened?

The resulting hyperinflation so destroyed faith in normal institutions — democracy, free markets, property rights, and civilized behavior — that a gang of thugs, led by Adolf Hitler, was able to rise to power.

But that example is perhaps too well-known. It has lost its power to surprise or elucidate. So let’s turn to more recent examples…

Default, regret, inflate, repeat

Here in Argentina, the pattern is well established. The government spends too much, borrows too much, prints too much, and then defaults…regrets…and inflates.

The process began in the 1940s, as Juan Perón learned — from visiting Mussolini’s Italy — how to exploit mob sentiments. But it wasn’t until the early ’70s, when Juan Perón came back from exile, that things went really bad.

Perón promised the masses freebies in exchange for their votes. After he died, his third wife, Isabelita, took over the presidency and continued the tradition.

But by 1975, the inflation rate was picking up; it would average about 300% per year for the next 14 years. Did the voters wise up, throw her out, and return to modest, more sensible fiscal and monetary policies?

Are you kidding? It doesn’t work that way. Instead, a group of generals staged a coup in 1976. And then the whole country seemed to sink into a pit of violence, upheaval, and inflation.

As many as 30,000 people were ‘disappeared’…the generals launched a pointless war with Britain ending in a humiliating defeat…and hyperinflation finally peaked out in 1989 at 20,000%.

And let’s look at the current example, Venezuela…

Oil money

In 1996, consumer price inflation in Venezuela hit 100%. What do people do when prices are doubling in a single year? They elect a demagogue…a rascally opportunist…or a committed True Believer.

In Venezuela, it was Hugo Chávez — a socialist, promising to make everything better by expanding the reach of the government — who gained power. And how did that work out?

It is very hard to separate government policies and their effects on the economy from the oil market in Venezuela.

Venezuela is practically a one-industry country…and it became more and more dependent on oil revenues as socialist controls crippled the rest of the economy.

Chávez used his oil money like the U.S. now uses its fake money — to extend his control and influence. Then the government nationalized the oil business. Naturally, oil output declined…along with revenue.

Aside from oil, the country has been in recession throughout the 21st century, with inflation rates gradually and ineluctably increasing.

As the real economy deteriorates, the feds need to exercise more and more control to keep things from falling apart. And as new money fails to ‘stimulate’ the real economy, they increase the dosage.

Prices rise. People try to get their money…and themselves…out of the country. Things get crazy. And the economy eventually gets the shakes.

Any different?

Chávez died in 2013. By 2017, the Maduro government had full control of the economy.

Price controls, tariffs, crony-industry subsidies, inside deals, corruption — all the usual byproducts of a command economy were running rampant.

So was inflation. Consumer prices rose 17,000% that year. After that, the government stopped counting. But the International Monetary Fund estimated inflation in Venezuela last year at 10 million percent.

The government is more powerful than ever. The insiders are still rich (though much less so). Almost everyone else is now a wretched pauper.

Will it be different for the U.S.?

Of course. How different? We will find out.



Bill Bonner


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