Bill Bonner: The Feds’ Economic Hypotheses Are Empty

Note: Today's article is from Bill Bonner. You can read the original here.

Enjoy!

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Civilization Is Restraint

Whenever and wherever there is great inflation, so is there great trouble.

The French Revolution and the inflation of the assignats and land warrants, for example…

Hyperinflation in Russia and the Bolshevik Revolution…

Germany’s Weimar Republic inflation and the rise of the Nazis…

Yugoslavia, 1994-1996… inflation of 62% PER DAY… and the end of the country.

Civilization is restraint, as Sigmund Freud put it. It requires rules… discipline. Weeds must be pulled up. Trees must be pruned. Property must be protected. Roofs must be fixed. Contracts must be respected. Two plus two must equal four.

And money must be neither dear nor cheap, but true.

Order must be maintained. And order requires energy… expense… and time.

Slack off… or squander your time and energy – How many women are on your board? Sanction the Russians? More stimmy money for everyone! – and things fall apart…

…and then blow up.

Empty Gestures

At least, that’s our hypothesis.

To which we add… that by our count, in the U.S., the nitro and the glycerin have been edging towards each other for two decades.

People still go about their business, more or less as before. Congress still meets and pretends to govern. People still vote, pretending to select worthy representatives.

Wall Street still pretends to allocate precious capital to productive businesses. Prices still pretend to reflect the real value of stocks and bonds. The press still pretends to report the news. The Federal Reserve still pretends to offer real money.

But the gestures are empty… the facts are fake… and the numbers don’t add up.

Outgo > Income

Forty years ago, in the month of March, the federal government collected $44 billion in tax revenue and spent $53 billion. Even then, the feds were $9 billion in the hole.

But they could borrow the money honestly; no big deal.

In March 2021, the feds collected some $267 billion in tax receipts. But they spent $927 billion – a new record. And a record monthly deficit of $660 billion, approximately equal to the entire U.S. annual budget during the Ronald Reagan administration.

Not only do income and outgo not match… they’re never going to get together.

Losing money at this rate implies a loss for the year of about $8 trillion… More likely, March was an outlier, and the loss will be “only” about $3-$4 trillion, still far more than can plausibly be borrowed.

And this is on top of other big numbers that don’t add up, either.

Trouble Ahead

And here is where it leads. Here’s Business Insider:

“…In our view, the risk is investors are going to experience an acceleration in economic growth and inflation of a magnitude economists and the Fed are totally unprepared for,” said Hans Mikkelsen, head of high-grade credit strategy at Bank of America.

And here’s economist Nouriel Roubini:

Over the next few years, loose monetary and fiscal policies will start to trigger persistent inflationary – and eventually stagflationary – pressure, owing to the emergence of any number of persistent negative supply shocks.

Make no mistake: Inflation’s return would have severe economic and financial consequences. We would have gone from the “Great Moderation” to a new period of macro instability.

Even Larry Summers, former director of the National Economic Council, who is rarely right about anything, sees trouble coming. Speaking on Bloomberg TV, he said:

This is the least responsible fiscal macroeconomic policy we’ve had for the last 40 years.

Nothing to Worry About

But wait… What are we worried about?

The Biden team “modeled” various scenarios. It found that inflation will not be a problem. Here’s The New York Times:

A monthslong effort to monitor and model economic trends inside the White House and the Treasury Department found little risk of prices spiraling upward faster than the Fed can manage.

What a relief! No cause for concern, sayeth the feds’ models.

Of course, Rudolf von Havenstein, who ran the German central bank from 1908 to 1923, had models, too. So did Gideon Gono, jefe of the Reserve Bank of Zimbabwe from 2003 to 2013.

And Ben Bernanke, in charge at the Federal Reserve from 2006 to 2014, had models that told him that the mortgage finance crisis was nothing to worry about, either.

On Thursday, May 17, 2007 said the great man:

We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

The models sound scientific. But they are nothing more than voodoo guesswork.

Regards,

Bill

Who’s to Blame for America’s Decline? - by Bill Bonner

Note: The article below is courtesy of Bill Bonner. In the article below (original link here) he briefly describes the decline of the US, which really started to look more obvious right after 9/11. The last 20 years are synonymous with war, spending, and immorality – from War on Terror to the ongoing Covid War; from mad spending to crazy spending; and from a society with some resemblance of civility to one now marred with incivility.

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Our view, for the benefit of new readers, is that the U.S. went badly off the rails around 20 years ago.

Since then, by almost every measure, it has been slipping and sliding downward. In everything, from life expectancies to income to GDP growth to freedom… to marriage rates and church attendance… America has lost ground.

Here’s the latest from Wolf Street:

The global share of US-dollar-denominated exchange reserves dropped to 59.0% in the fourth quarter, according to the IMF’s COFER data released [at the end of March]. This matched the 25-year low of 1995. These foreign exchange reserves are Treasury securities, US corporate bonds, US mortgage-backed securities, US Commercial Mortgage Backed Securities, etc. held by foreign central banks.

Since 2014, the dollar’s share has dropped by 7 full percentage points, from 66% to 59%, on average 1 percentage point per year. At this rate, the dollar’s share would fall below 50% over the next decade.

On the global stage, in other words, the role of the U.S. is in decline.

Politically Correct Approach

But “declinism” has been, well, on the decline in academic circles. It suggests a moral failing… as if things might have turned out much differently had not people done stupid things.

“Risism,” on the other hand, is perfectly acceptable. Nothing negative or prejudicial about it.

Even the “fall” of Rome is now viewed not so much as a “fall” but a “transition.”

Yes, after the decline came the collapse. And then, the Barbarians took over and perhaps a million people died…

The Vandals, the Goths, the Sueves, and the Alans enslaved many more… burned down cities… destroyed libraries (they couldn’t read or write, so what good were the ancient manuscripts?)…

…and Europe fell into a “dark age” for at least three centuries.

But that is a very “judgmental” view.

Even the word “civilization” is no longer considered intellectually respectable.

All cultures are equal. All languages are equal. All people are equal. None, according to this politically correct approach, are more “civilized” than others.

Different View

Here at the Diary, we take another view.

In the eyes of God (and sometimes, the courts) all men may be created equal. But we humans look at every single one of them differently.

Equality is neither a fact… nor a useful goal. After all, if we were all equal, we would be bored to death. No jokes, no lovers, no jackasses, no geniuses.

But don’t worry… Equality is just what we don’t have and don’t want. We are always comparing… contrasting… sizing up and looking down…

One is more handsome… One is smarter… One chose the wrong spouse… One has no sense of color coordination!

There are roughly 250,000 adjectives in the English language… and every one is a way of making distinctions. Not even identical twins are the same.

Humans are never equal, one to another. (Otherwise, why would some be judged and others do the judging? Why would some lead and others follow? Why would some govern… and others allow themselves to be governed?)

All human life is unequal… and governed by moral rules, based on unequal conduct.

You make decisions. Decisions have consequences. You leave a nail sticking up on the job site. Inevitably, someone will step on it.

And there are always cycles – cycles of learning and forgetting… cycles of building up and tearing down… of civilizing and uncivilizing.

Most of the time, most people go about their business… doing their win-win deals… exchanging goods and services as best they can.

And then, along come the jackasses… just when you need them, to rob, murder, and legislate… and thus complete the full cycle – the rise and fall, the ups and downs, the booms and busts.

The cycles are inevitable. But it’s still a “moral” world, in the sense that somebody left the damn nail sticking up!

Who’s to Blame?

Who’s to blame for America’s decline?

American economist Milton Friedman forged one of the nails. That is, he was instrumental in creating the new money system put in place in 1971.

People were already limping in the late 1970s – U.S. inflation was already in the double digits.

But then, Federal Reserve chairman Paul Volcker rescued the money system in 1980.

Then, quietly – and to the delight of millions – the new money did its damage, undermining the nation’s economy and its political institutions for the next 40 years.

Today, thanks to all the feds’ fake money, U.S. GDP growth rates are barely half of those from the 1970s and 1980s… and the nails are getting tossed out like confetti.

Last month, Congress passed a $1.9 trillion “relief” program… and is now considering $2.3 trillion more.

And last month, U.S. debt passed the $28 trillion mark, an increase of $4.7 trillion in the last 13 months.

But back in the 1990s, the momentum of growth and progress was so strong that the nation continued on an upward trend, until finally reaching the apogee of its imperial glory in 1999.

Then, measured in gold, U.S. stocks hit their highest levels ever. They began a decline in 2000, and have never recovered.

Bad Emperors

Alas, then came a succession of bad emperors.

George W. Bush launched the War on Terror – $7 trillion down the drain.

Barack Obama bailed out Wall Street after the crisis of 2008-2009, and added nearly $10 trillion to the national debt over his eight-year term.

The third in this parade of clowns was Donald J. Trump, who went on the biggest spending spree in U.S. history… with another $8 trillion added to federal debt in just four years.

Government spending, as a portion of GDP, rose to over 40% during his term in office.

Worst of a Bad Lot

But The Donald’s contribution went far beyond the numbers.

He also remade the Republican Party in his own image. No longer a party of ideas or principles… it is now just another group of hacks and grifters with a nativist/corporatist bent.

This is especially important because now, we have the fourth – and perhaps, worst – of an awful lot, in the White House.

And, with no effective conservative opposition, there is no one to stop the federales’ boondoggles or America’s eventual collapse.

Watch where you step.

Regards,

Bill

The Federal Reserve Is Wasting Tons of Money - by Bill Bonner

Note: Courtesy of Bill Bonner. The original article can be found here.

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“Go too far. Stay too long. Can’t get back.”

– Words of an old preacher

YOUGHAL, IRELAND – The bond market is on the move.

It packed up in August of last year, which now appears to have marked the top of the bull market in bonds that began 41 years ago.

And last week, Treasury yields (which rise and fall inversely with bond prices) topped 1.75% after Federal Reserve chief Jerome Powell let it be known that he was okay with rising inflation threats.

One-point-seventy-five percent doesn’t sound like much. It’s not… still barely zero in real terms. (Consumer prices are rising at a 0.4% rate.)

But it’s more than three times what it was last August.

Cash is on the move, too. Last Thursday, $271 billion of it bolted from the feds’ vaults, mostly to fund the stimmy checks. That was more than the entire GDP of Finland.

Has the Fed already gone too far and stayed too long? Now, with rising rates in the bond market, and an almost infinite demand for new cash, can it ever get back?

Trillion-Dollar Wonders

Just to remind readers, “inflation” refers to the act of increasing the money supply.

And just to be even clearer, while there are many factors that come into play, as the quantity of dollars increases, eventually… sooner or later… before Hell freezes over… ceteris paribus – so should prices.

The money supply – using the Fed’s balance sheet as a convenient, though incomplete, measure – rose from under $700 billion in 1999 to $7 trillion today.

That is, in two decades, the Fed inflated the money supply by 10 times as much as all the Treasury secretaries and Fed governors had done in the previous 21 decades.

Meanwhile, the goods and services available to buy with this money, measured loosely by GDP, only doubled, from $10 trillion to over $20 trillion.

The idea behind the post-1971 “monetarist” scheme was that the Fed would control money growth, allowing it to rise by about the same measure as the general economy. This was supposed to maintain price stability as well as eliminate sudden credit shortages.

But as you can see, so far in the 21st century, the money supply grew nine times faster than GDP.

And now it will have to grow even more – to replace the cash that just got away. And more after that… to pay for the $1.9 trillion American Rescue Plan… and more still… to pay for new infrastructure… and all the other wonders that the feds have in store for us.

So, we shouldn’t be too surprised that prices rose, too.

Money bids for goods and services. If the quantity of money goes up faster than the supply of available goods and services… logically, prices will rise.

Waste of Money

To this bare skeleton, we add some fat.

Included in GDP is government spending. But the services offered by the government are not the kind that you are usually looking for.

Few people wake up in the morning and say, “Today, I’m going shopping for an F-35 Joint Strike Fighter.” Instead, they want the things the government doesn’t make.

Government spending is almost completely focused on the consumption of wealth, not the creation of it. In other words, it doesn’t add to the supply side of the supply/demand teeter totter. It subtracts from it.

So, when government spending increases as a percentage of GDP, that too should be cause for higher consumer prices.

After WWII, total government spending – state, local, and federal – shrank to a bit more than 25% of GDP. Last year, it was over 40%.

Flood of Liquidity

Economists describe inflation as more and more dollars “chasing” consumer goods. But dollars are not always ready to run.

Sometimes, people choose to save, rather than spend. And if the feds create a dollar and it goes nowhere, it has little effect on prices.

Where it decides to go matters, too. Most of the additional money generated in the 21st century was dropped off in the capital markets.

The Dow rose from around 11,000 in 2000 to over 30,000 today.

Bitcoin was worth nothing (it wasn’t invented until 2008) and now sells for more than $57,000.

Non-Fungible Tokens (NFTs) didn’t appear until 2014. Since then, more than half a billion dollars’ worth of NFTs have been traded.

Don’t Fight the Fed

A flood of liquidity lifted most boats… but not all of them. Some 40% of U.S. stocks are still underwater from the washout of ’08-’09.

As the feds pumped more and more liquidity (dollars) into the markets, the old timers – with their Graham and Dodd on their desks… and an autographed photo of Warren Buffett on their walls – were unsuited to it.

They knew how gold provided protection from inflation, but they weren’t sure about bitcoin. Was it a protection against inflation… or just a measure of it? And NFTs? What the heck were they? Where were they going?

Nobody knew for sure… but they were on the move.

But then, just about everything is on the move now – the bond market… the way we work… gender… politics… culture…

…but to where?

Wall Street legend Marty Zweig’s famous line – “don’t fight the Fed” – turned out to be the best advice of the last 20 years.

The Fed was inflating. And like plastic bottles on a sour tide, up popped the lightest – and often the trashiest – assets.

What will happen in the next decade is our subject for tomorrow.

Will the old-timers get another chance? Will the Fed keep inflating, even as bonds go down? Or will it be able to get back to a more “normal” monetary policy?

We will see. Stay tuned…

Regards,

Bill

We’re Dealing With Modern Money Madness - Bill Bonner

Note: Courtesy of Bill Bonner. The original article is here. As I read the note I remember some words from John M. Kaynes who said that the market can remain irrational longer than you can remain solvent. The disconnect between Wall Street and Main Street has never been wider. I do not believe that difference is sustainable - in the short-term anything is possible, but in the long-term reality will set in. 

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We’re Dealing With Modern Money Madness

YOUGHAL, IRELAND – This is a wacky week… with more exotic mysteries and marvels of modern money madness.

And today, we look at NFTs… non-fungible tokens.

By “non-fungible,” they mean they are one-of-a-kind. And by “token,” they mean… well… it’s not necessarily anything at all.

Oh, and by the way, the “blockchain” is involved, too.

The “token” is placed on the blockchain, where it will be safe and sound; you won’t have to worry about anyone stealing it… if there were anything to steal.

Iconic Importance

And that is where it gets interesting, because you can tokenize practically anything.

You could take a picture of yourself clowning around in the garden, for example, and put it on the blockchain… and there, it will be forever… an NFT… like a wedding ring resting at the bottom of the ocean.

Most often, NFTs have some iconic importance. One company, for example, takes an image – of, say, LeBron James dunking a basketball – and turns it into an NFT.

Note that there may be millions of photos of LeBron James dunking the very same basketball… even the same photo that became your NFT. But you… and only you… have the tokenized, encrypted, blockchained version with your number on it.

Wild-Eyed Wonders

What it is worth is not the subject of today’s Diary. Because the answer to that is obvious – nobody has a clue.

Our subject today is merely the wackiness… weirdness… and the wild-eyed wonders of a late-stage Bubble Epoch.

Yesterday, for example, the headline news was this, from MarketWatch:

Nasdaq soars 3% as falling bond yields fuel tech bounce; Dow back above 32,000

Fall in bond yields? Really?

Checking, we find that the 10-year Treasury yield fell from 1.59% on the 8th of March to 1.55% on the 9th. That this 0.04% one-day drop would trigger a 3% rise in the Nasdaq is nutty enough.

But when the money goes bad, everything gets a little nutty.

Tesla (TSLA) stock, for example, rose nearly 20% yesterday – adding more than $100 billion to the value of the company. Maybe investors are imagining how a 0.04% decline in auto finance rates will trigger millions of news sales!

More likely, they’re anticipating all the fancy new automobiles people will buy with the “stimmy” money they’re getting from the feds.

Even more likely still… they know that a lot of that stimmy money will be used to buy Tesla stock.

Performance Art

But back to the NFT…

Once you have the LeBron James… NFT… which you might have paid $200,000 for – after all, it’s the only one! – then, it might be cool to destroy it.

We got the idea from that great, pull-your-leg artist, Banksy, after his own leg was just pulled by a company calling itself Injective Protocol.

In 2018, Banksy famously destroyed one of his own works, “Girl With Balloon.” It was being sold at auction… But as soon as the hammer came down, a shredder built into its commodious frame suddenly ripped it to pieces right in front of the whole assembly, including the woman who had just bid $1.4 million for it.

She graciously accepted the now-shredded – and now-cooler-than-ever – painting, renamed by the unidentified Banksy, “Love is in the Bin.”

Sotheby’s, the auctioneer, said it “marked the first time a piece of live performance art had been sold at auction.”

Morons in Flames

Last week, Injective Protocol – a blockchain company, according to CBS News – took a big step forward in the nuttiness of the late Bubble Epoch genre.

It bought a Banksy 2006 work entitled “Morons (White)” for $95,000. The (master) piece shows a crowd at an art auction gawking at an ornate frame, in which it is written, “I can’t believe you morons actually buy this sh*t.”

Then, Injective Protocol made a digital version of it and turned it into an NFT… before destroying the original Banksy work, calling the destruction “BurntBanksy.” This destruction, they live-streamed on Twitter.

And lest the clin d’oeil be missed, the person who set a match to Banksy’s “Morons (White)” painting was wearing a mask… and a shirt with the “Girl With Balloon” on it.

Now, in its post-physical, digital form, “Morons (White)” is supposedly worth $380,000.

Expensive Amusement

But “What is something like that worth?” is a question that could only be asked by someone who is not in on the joke.

As we pointed out yesterday, for a company, earnings are a drag… They bring the company down to Earth. And for an NFT, any attachment to the real world threatens to break the spell.

A real Banksy has value. Based on the example above, an NFT of it is four times more valuable.

But at least the show is amusing. People pay for amusement. And the betting at this stage of La Bubble Epoch is that they will pay more and more – for amusing tokens, both fungible and non-fungible.

Shares in Tesla, for example. As we recently covered in these pages, Tesla’s share price cannot be explained as a function of expected earnings. It must have some additional, token value.

Sillier and Sillier

As silly as it is, the “silly season” is probably going to get sillier and sillier… as the feds add another $1.9 trillion to last year’s $3 trillion “stimulus”… to be followed by another trillion-dollar infrastructure boondoggle… and perhaps, another few trillion on a Green New Deal.

Prices – for NFTs… Tesla… techs… cryptos… SPACs – might go much higher.

And all of the silliness – in the art world, as well as the financial world – must be financed by the Federal Reserve’s “printing” of its own fungible tokens, of equally mysterious worth.

All we know for sure is that it will take trillions more of these “dollars”… most as electronic tokens, some as paper tokens… to keep the bids coming in.

And then… some joker strikes a match, and it all goes up in smoke.

Regards,

Bill