We’re caught in a trap
I can’t walk out Because I love you too much baby
Elvis Presley’s rendition of Suspicious Minds topped the record charts in 1969. The lyrics portray a romance that couldn’t work, but was also impossible to escape. That’s also a good way to describe our relationship with government debt. We know it can’t last, but we can’t walk out. We love government spending and its benefits (like Medicare, Social Security, and unemployment insurance) too much.
By David Haggith – Re-Blogged From The Great Recession Blog
I mentioned in a recent article that the weird thing about this recession is that it is the only one in which personal income has gone up during a recession. That, of course, is because of government assistance, which is making it so we don’t have to feel the pain of a recession that the government, itself, caused — through its massive debt, tax breaks for the 1%, reliance on the Fed to solve government’s problems, and most currently through its forced economic shutdown as a response to COVID-19 — something that even the WHO now says was failed policy that should never have happened — even though they helped make sure it did happen!
Before I wade into my Q4 strategy analysis, I have to tell you that prior to last Tuesday’s “debate”, I was leaning toward a “neutral” investment strategy largely based upon the 2016 outcome where heavily-favoured Hillary Clinton was upset by the Trump Train at the last hour and in direct opposition to what EVERY poll was predicting. I have a theory about the 2016 election and just exactly WHY the pollsters got it so completely wrong. I will explain.
GLOBAL ROYAL FAMILIES:
The disruptions caused by the pandemic of Covid-19 forced people, companies, governments, and organizations to challenge their basis assumptions about their ways of life and conduct. Some of them might be trivial such as more frequent and thorough hand-washing, but others are much more important, amongst them putting more emphasis on health that came suddenly under threat and social relationships that were so missing during the quarantine. So, the key question is when the epidemic is fully contained, what will be the “new normal” – and how it will affect the gold market?
The first characteristic feature of the post-pandemic world will be more people working and getting things done from home. The digital transformation has already started before the coronavirus jumped on human beings, but the Covid-19 epidemic has accelerated its pace, with further expansion in videoconferencing, online teaching, e-commerce, telemedicine, and fintech. After all these long years, it turned out that all these boring meetings really could have been e-mails or chats via Zoom, Skype or Teams. What does it mean for the economy and society?
True enough, statistically speaking. But the hardships of being jobless will be more easily borne by millions of Americans to the extent they are cushioned by generous checks from The Government. The handouts have in fact been so unstinting that two-thirds of those laid off due to the pandemic are eligible for benefits that exceed what they made working .
Ordinarily, we might infer that it is deflationary for unemployment checks to be used to retire debt. But because no taxes have been levied to pay for the benefits, and because the benefits will decrease the burden of debt for millions of down-and-out workers, the net economic result is neither inflationary nor deflationary, at least for now. Factor in the bullish effect stimulus has had on the stock market, and inflation wins out, just as the Fed had intended. How long can the central bank continue to cancel gravity? It’s impossible to say, although we do know that the felicitous effects of helicopter money cannot last indefinitely.
We also know that every penny of it will have to be paid by someone at some point. Hyperinflation or deflation are the only conceivable avenues to achieve this, but it would be overly optimistic to assume we will have a choice. Politicians will always opt for the former, but they should have noticed by now that the trillions they have shot at the problem so far have inflated only stock prices. Judging from the headlines, one might infer that most of these pandering fools actually believe that Fed alchemy is an actual example of free lunch and that the bull market will continue indefinitely. The alternative is too scary to ponder — not just for politicians, but for all of us.
With stockmarkets barely ruffled, few are thinking beyond the very short-term and they are mostly guessing anyway. Other than possibly the very short-term as we emerge from lockdowns, the economic situation is actually dire, and any hope of a V-shaped recovery is wishful thinking or just brokers’ propaganda. But for now, monetary policy is to buy off all reality by printing money without limit and almost no one is thinking about the consequences.
Transmitting money into the real economy is proving difficult, with banks wanting to reduce their balance sheets, and very reluctant to expand credit. Furthermore, banks are weaker today than ahead of the last credit crisis, and payment failures on the June quarter-day just passed could trigger a systemic crisis before this month is out.
We start this week’s commentary with some rather depressing news from Reuters:
The ratio of downgrades to upgrades in the credit ratings of leveraged loans has spiked to a record level, five times above that hit during the last global financial crisis, reflecting the unprecedented stress in risky assets due to the coronavirus pandemic. Leveraged loans, which are loans taken out by companies that have very high levels of debt, usually with non-investment grade credit ratings–tend to be used by private equity firms as a way to fund acquisitions of such companies. The U.S. leveraged lending market has grown to more than $2 trillion, up 80% since the early 2010s, according to credit rating agency Moody’s Investors Service.
Add in the $1.2 trillion junk bond market and the $3.2 trillion in BBB debt, which is just barely above the junk category, and you end up with nearly six and a half-trillion dollars’ worth of corporate debt that is primed for varying degrees of default. The catalyst for this default is the worst economy since the Great Depression.
Gold surged on Monday after a spike in coronavirus cases worldwide dashed hopes of a quick economic recovery. Within 24-hours the number of infections globally rose 183,020, a new record, the World Health Organization reported, Reuters said the US saw a 25% increase in new COVID-19 cases over the week ending June 21st.
There are lies, damned lies, and economists. Whether these economists work for the government or a bank, they spend all their time on the computer extrapolating current trends with minor adjustments.
If you want to understand the future, don’t spend your life preparing and constantly revising an Excel sheet with masses of economic data. Collective human behaviour is extremely predictable. But not by spreadsheet analysis but by studying history.
We are reading now about possible regulations for air travel. In brief: passengers might be forced to spend hours at the airport. Authorities will perform medical checks, including possibly needles to draw blood, no lounges, no food or drink on board the plane, masks required at all times, and even denied the use of a bathroom except by special permission.
We would wager an ounce of fine gold against a soggy dollar bill that people will hate this. The majority of vacationers will not want to fly. A holiday is supposed to be fun, and air travel promises to be a lot less fun that it was in March.
Dollar-denominated financial markets appeared to suffer a dramatic change on or about the 23 March. This article examines the possibility that it marks the beginning of the end for the Fed’s dollar.
At this stage of an evolving economic and financial crisis, such thoughts are necessarily speculative. But an imminent banking crisis is now a near certainty, with most global systemically important banks in a weaker position than at the time of the Lehman crisis. US markets appear oblivious to this risk, though the ratings of G-SIBs in other jurisdictions do reflect specific banking risks rather than a systemic one at this stage.
A banking collapse will be a game-changer for financial markets, and we should then worry that the Fed has bound the dollar’s future to their fortunes.
The dollar could fail completely by the end of this year. Against that possibility a reset might be implemented, perhaps by reintroducing the greenback, which is not the same as the Fed’s dollar. Any reset is likely to fail unless the US Government desists from inflationary financing, which requires a radically changed mindset, even harder to imagine in a presidential election year.
Mike Gleason: It is my privilege now to welcome back Michael Pento president and founder of Pento Portfolio Services. Michael is a well-known money manager, market commentator, and author of the book, The Coming Bond Market Collapse: How to Survive the Demise of the U.S. Debt Market. He’s been a regular guest with us over the years, and it’s always a pleasure to have him on with us.
Well, Michael, it’s been a few months since we’ve had you on last and just a little bit has been going on in the world. COVID-19 has hit the states to say the least and caused major disruptions in the economy. Governors have instituted stay-home orders. Tens of millions of people have filed for unemployment. Now we’re seeing major rioting and social unrest in many cities throughout the country over the police killing of a black man in Minnesota last week.
And in the face of all that, the markets are seemingly doing just fine. Stocks are still rallying and it doesn’t seem like Wall Street is all that concerned about any of this. So, let’s get your take on what’s going on there, Michael, because it’s pretty hard to connect the dots between Wall Street and Main Street these days. Help us out there.
Michael Pento: Yeah. So nothing is going on that much this year at all, right? It’s been pretty boring. </sarc> The divide between the rich and the poor, which was already humongous coming into this year has grown exponentially. And you have to ask yourself the question, gee, if GDP, according to the Atlanta Fed is going to drop in the second quarter by over 52%, that is a seasonally adjusted annual rate, Mike. GDP is going to be cut in more than half during the second quarter of 2020, how in God’s name could it be possible that stocks are close to all-time record highs? And by evaluation metric at all-time record highs. There are about over 150% of GDP.
If Americans thought the U.S. Government would be in serious trouble as its ability to service its ballooning debt would become unmanageable, guess again. After the U.S. Government added nearly $3 trillion more debt in just the past eight months (fiscal year), the interest paid on the public debt actually declined versus last year.
According to TreasuryDirect.gov, the U.S. public debt increased from $22.8 trillion to $25.7 trillion during fiscal 2020 (October to May). Thus, total U.S. federal debt has increased by nearly $3 trillion in eight months compared to $1.2 trillion last year… for the entire year!! So, with $3 trillion more debt on the U.S. Government’s balance sheet, you would think the interest expense would have also increased.
NOPE… the U.S. Government paid $337 billion of interest expense so far this year (Oct-May) compared to $354 billion during the same period last year:
As Great Lockdown was positive for the gold prices, the Great Unlock will be bad, right? We invite you to read today’s article about the Great Unlock and find out whether it really must be negative for the gold prices.
It’s all government’s fault, right? After all, the Great Lockdown was introduced by the federal and state governments, wasn’t it? Well, not quite.
Before I will explain why, let me clear one thing up: I’m a liberty lover and I’m skeptical about the government regulations. And the economic shutdown was obviously untenable – the only reason to shut down the economy was to buy some time to prepare the healthcare system for better handling of the epidemic. So, it’s good that the Great Lockdown is ending.
I’ve missed a few predictions along the way, but usually only in part. When I missed, it was because I took the bad too far. The bad has almost always happened exactly when I said it would but hasn’t always been as bad as I said it would be. Now, it has all arrived and is turning out to be fully as bad as I said it would be.
It took the kick of a virus to set everything in place, but all the parts are now falling where I said they would once the next recession began.
Powell gave a much-awaited speech yesterday, in which he sent one bearish and two bullish messages for gold. What exactly did he say and what does it mean for the yellow metal?
Jerome Powell gave a speech yesterday at the Peterson Institute for International Economics. The Fed Chair acknowledged the unprecedented depth of the coronavirus crisis, and its disastrous impact for the US labor market, something we also noted many times:
The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II. We are seeing a severe decline in economic activity and in employment, and already the job gains of the past decade have been erased. Since the pandemic arrived in force just two months ago, more than 20 million people have lost their jobs.
Since the Great Recession hit in 2008, central banks have been in the business of keeping insolvent governments from defaulting through the process of pegging borrowing costs near zero. These money printers are now in the practice of propping up corporations–even those of the junk and zombie variety–by ensuring their cost of funds bears absolutely zero relationship to the credit quality of the issuer. To be clear, central banks have been falsifying public and now private bond prices to historic and monumental degrees just as the intensity of issuances and insolvency deepens.
And now, the Fed is bailing out bankrupt consumers with helicopter money in the form of enhanced and extended unemployment, grants through the Payroll Protection Plan and direct UBI to consumers through the CARES Act Recovery Rebates clause. All together there has been about $2.8 trillion worth of deficit spending so far.
Things appeared normal, and then everything changed…
U.S. COVID-19 official cases on March 7: 338.
U.S. COVID-19 official cases on April 28: over 1,000,000, if you believe the Johns Hopkins numbers. Exponential growth in sickness, debt, and expenditures are “killers.”
The economic, emotional, and physical scars from the virus will torture us for a long time. Disneyland and Disneyworld are closed indefinitely.
One of the many bothering issues about the coronavirus crisis, is whether it will turn out to be inflationary or deflationary. What do both of these scenarios mean for gold ahead?
Many people are afraid that the coronavirus crisis will spur inflation. After all, the increased demand for food and hygiene products raised the prices of these goods. Moreover, the supply-side disruptions can reduce the availability of many goods, contributing to their increasing prices.
On the other hand, the current crisis results not only from a negative supply shock, but also from a negative demand shock. As a result of uncertainty, people cling to cash and forego unnecessary expenses. In addition, social distancing means reduced household spending on many goods and services, which exerts deflationary pressure. The most prominent example is crude oil, whose price has temporarily dropped to just $20 a barrel (although this was partly due to the lack of agreement between OPEC and Russia). Lower fuel prices will translate into lower CPI inflation rate. Entrepreneurs, especially those with large stocks of goods, will probably lower prices to encourage shopping. Moreover, the appreciation of the US dollar means lower prices of imported goods.
A Hyperinflationary Depression has always been the inevitable end to the biggest financial bubble in history. And this time it will be global. Hyperinflation will spread from country to country like Coronavirus. It could start anywhere but the most likely first countries are the US and the EU or ED (European Disunion) They will quickly be followed by many more like Japan and most developing countries. Like CV it will quickly jump from country to country with very few being spared.
Ever since the last interest cycle peaked in 1981, there has been a 39 year downtrend in US and global rates from almost 20% to 0%. Since in a free market interest rates are a function of the demand for credit, this long downtrend points to a severe recession in the US and the rest of the world. The simple rules of supply and demand tell us that when the price of money is zero, nobody wants it. But instead debt has grown exponentially without putting any upside pressure on rates. The reason is simple. Central and commercial banks have created limitless amounts of credit out of thin air. In a fractional banking system banks can lend the same money 10 to 50 times. And central banks can just print infinite amounts.
The soup lines hadn’t formed yet. Jobs had not even noticeably started to dry up, but they weren’t as easy to find anymore. You had to be angry to quit without having a better job firmly in hand. Stocks were climbing furiously above an economy that had been slowly ebbing away since summer. Sales were down for months, so revenues were down for months, and profits were down. Funding in the world’s easiest credit market — interbank repos — was extremely tight — so tight the Fed had to come to the rescue every single day for months, and the problem was only getting worse.
Such were the times before COVID-19 struck the world in 2020 like an asteroid from some far reach of the solar system crumbling the walls that already sat on cracked foundations, burying in ash a partying world that hadn’t yet figured out it was already slowly dying from its own internal decay.
Our base scenario for 2020 is that it might be a worse year for gold than 2019 was. However, there are three major upside (and one downside) risks for the gold market, which could materialize in 2020. Today’s article will introduce you to these potential catalysts that could send gold prices higher (or significantly lower) in 2020.
We stated earlier that unless something bad happens, 2020 may be worse for the yellow metal than 2019, as gold fundamentals seem to have deteriorated since the last year. Of course, bad things are happening all the time, but do not result in any possible negative developments. Rather, we have in mind three downside risks to our macroeconomic outlook, or three upside risks for gold. What are they?
In the red corner, unpayable debt threatens to crush the US economy, stock and bond markets, and main street Americans.
In the green corner, the levitating power of the Fed might save the economy, stock and bond markets, and Wall Street Banks.
Red or green? Who wins?
Breaking news: Apple stock closed over $315. The S&P 500 Index closed over 3,300 in January. Liquidity rules, for now…
By Clint Siegner – Re-Blogged From Money Metals Exchange
The presidential race will mesmerize Americans over the next 11 months. The country hasn’t been this polarized since the Civil War.
Voters on the left desperately want a story which undermines support for President Trump. They are also searching for a candidate who can actually win.
Many Republicans are outraged about the Deep State and corporate media campaign obsession with unseating a duly elected president – and they worry an avowed socialist could win the Democratic primary and, just possibly, the general election.
Plenty about the year ahead is unpredictable. Massive federal budget deficits and unrestrained borrowing, however, are a certainty.
Have we learned the lessons of 2008? Konstantin Kisin and Francis Foster interview James Rickards.
I’m sure most of you are inundated with “Black November,” “70% off” and “clearance” email promotions from the usual cast of brick/mortar/online chain retailers. It started with my inbox in October. This is because retailers are terrified of what could be one of the worst holiday spending seasons in years.
The mainstream financial media, planted with sound-bytes from Wall Street snake-oil salesmen, have already created this year’s “the dog ate my homework” excuse for poor holiday spending with the absurd notion that the period between Thanksgiving and Christmas is shorter this year. Quite frankly, I would not be surprise if many households used Amazon’s Prime day and easy Amazon credit lines offered to buy holiday gifts early this year.
Speaking of AMZN, it warned that its expected holiday sales would be lower than previous guidance. And Home Depot lowered its Q4 revenue estimates for the second time in three months.
Not too long ago, we wrote about the so called Modern Monetary so called Theory (MMT). It is not modern, and it is not a theory. We called it a cargo cult. You’d think that everyone would know that donning fake headphones made of coconut shells, and waving tiki torches will not summon airplanes loaded with cargo. At least the people who believe in this have the excuse of being illiterate.
You’d think that everyone would know that printing fake money and waving bogus theories around will not create new wealth. The excuse is that so called the wealth effect is so pleasant. Like drugs provide a happiness effect.
There is an old joke about a guy who talks to a psychologist about his crazy brother.
The guys says, “Doc, my brother thinks he’s a chicken.”
The psychologist says, “You should make sure he gets therapy for this delusion.”
“I would, but the eggs are good!”
◆ In the first quarter of 2019, global debt hit $246.5 trillion
◆ Encouraged by lower interest rates, governments went on a borrowing binge as they ramped up spending, adding $3 trillion to world debt in Q1 alone
◆ It reverses a trend that started in the beginning of 2018, of reducing debt burdens, when global debt reached its highest on record, $248 trillion
Something is rotten in the state of Denmark the world (from Shakespeare’s Hamlet).
In a world that cannot survive without incessant deficit spending, money printing and negative interest rates, there is clearly something very rotten. It is not only rotten but it stinks! Yes it stinks of lies, deceit and moral decadence.
So why doesn’t anyone stand up to tell the world where we are heading. Well, for the simple reason that no politician can tell the truth. Because if they did, they wouldn’t be elected. The principal purpose of any politician is to buy votes and to get votes you can never speak the truth.
The music died many times in the past. To name a few:
This article posits that there is an unpleasant conjunction of events beginning to undermine government finances in advanced nations. They combine the arrival of a long-term trend of rising welfare commitments with an increasing certainty of a global-scale credit crisis, in turn the outcome of a combination of the peak of the credit cycle and increasing trade protectionism. We see the latter already undermining the global economy, catching both governments and investors unexpectedly.
Few observers seem aware that an economic and systemic crisis will occur at a time when government finances are already precarious. However, the consequences are unthinkable for the authorities, and for this reason it is certain such a downturn will lead to a substantial increase in monetary inflation. The scale of the problem needs to be grasped in order to assess how destructive it will be for government finances and ultimately state-issued currencies.
What Silence?
Have you heard loud warnings from Mainstream Media or from official government sources about the following huge problems? No! Official sources and the media are largely silent. They can’t/won’t discuss our serious problems and prefer the hopium strategy.
Gold and Debt: Asia has accumulated thousands of tons of gold. The U.S. has created over $22 trillion in federal government debt and $72 trillion in total debt per the St. Louis Federal Reserve. What happens when they devalue the dollar further, and gold prices go sky high?
Answer: Consumer prices for Americans will climb much higher. Gold will protect purchasing power, but few will own it. Asian economies will flourish, and the west will drown in debt.
In our view, gold investors should settle back with some popcorn and enjoy the coming fireworks, which will include the best gold bull market ever, with all the volatility that implies. We see new all-time highs just around the corner. The challenge is to take a position and stay the course. Central banks are about to pay for decades of bad policy and gold will reap the dividends.
Let’s be clear about one thing: the global economy is falling into a deep recession but it is NOT due to the U.S.-China trade war, and a resolution of that war, no matter what it is, will not avoid the inevitable. Inverted yield curves and an historic collapse in bond yields are the clearest message that markets can send on the economic outlook. The trade war does not explain why Europe and Japan have been on the brink of recession for more than a year. Nor will central bank easing prevent a recession when monetary conditions are already the loosest in 25 years. Central bank monetary policy is part of the problem, not the solution. In our view, the economy and the stock market are not going to be saved by trade deals and monetary policy.
Greg Hunter interview with Egon von Greyerz on USAWatchdog:
In this Interview with Greg Hunter, Egon von Greyerz says the signs abound that we are nearing the end of this global fiat money experiment.
Asked about the health of the global financial system EvG replied: “The central banks are panicking. They don’t know what to do anymore. Europe is starting QE again with $20 billion a month, but that’s nothing compared to what is coming… This is simply a ‘practice round’”.
People have been talking about a “debt bubble” for some years now. They’ve been right, of course, based on the combination of surging borrowing and plunging rates. But the bubble hasn’t stopped inflating, and recently it entered what certainsly looks like a terminal blow-off stage. Some highlights:
Though July, China’s total debt rose by $2 trillion, a year-over-year increase of 26%. And this month the Chinese government cut bank reserve requirements in an attempt to further rev up lending.
In Japan, the junk bond market is being constrained by banks so desperate for yield that they’re lending directly to companies previously considered too risky. See Japan Junk Bond Market Hopes Crushed by Banks Hungry to Lend.
By Gary Christenson. – Re-Blogged From Deviant Investor
WHAT BIG CON? There are so many in the worlds of central banking, economics, government, and money that we list only a few.
In this interview with Silverdoctors, Egon discusses $666 silver and $10’000 gold. Some viewers commented the 666 price target.
Egon stated in response to these comments:
All the commentaries related to 666 and Luciferians have got the wrong Bible quote. Here is the correct one: 2 Chronicles 9.13 “The weight of gold that came to Solomon in one year was six hundred sixty-six talents of gold.” 666 talents of gold is today worth over $1 billion. So the wise King Salomon collected $1 billion of gold every year which has nothing to do with Lucifer.
Also:
For the discussion of those topics and a whole lot more, tune in to the interview in its entirety:
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Last week we wrote about how global central banks have created an economic time machine by forcing $17 trillion worth of bond yields below zero percent, which is now 30% of the entire developed world’s supply. Now it’s time to explain how the time machine they have built has broken down.
In parts of the developed world, individuals are now being incentivized to consume their savings today rather than being rewarded for deferring consumption tomorrow. In effect, time has been flipped upside down. These same central bankers then broke that time machine by guaranteeing investors they will never cease printing money until inflation has been firmly and permanently inculcated into the economy.
They have printed $22 trillion worth of new credit in search of this goal since 2008. This figure is still growing by the day. But by doing so, they have destroyed Capitalism. Freedom is dying; not by some Red Army but by central banks.
We are now witnessing the death throes of the free market. The massive and record-breaking global debt overhang, which is now $250 trillion (330% of GDP), demands a deflationary deleveraging depression to occur; as a wave of defaults eliminates much of that untenable debt overhang. The vestiges of the free market are trying to accomplish this task, which is both healthy and necessary in the long term—no matter how destructive it may seem during the process. Just like a forest fire is sometimes necessary to clear away the dead brush in order to promote viable new growth. However, the “firemen” of today (central banks) are no longer in the business of containing wildfires, but instead proactively flooding the forest with a deluge of water to the point of destroying all life.
In point of fact, the free market is no longer being allowed to function. Communism has destroyed capitalism, as the vital savings and investment dynamic has been obliterated. Central banks have decided that savers deserve no return on their so-called risk-free investments and have hence forced into existence humongous bubbles in junk bonds and equity markets worldwide. They have destroyed the savings and investment dynamic and turned time backward.
By Alasdair Macleod – Re-Blogged From Gold Eagle
We tend to think of a nation’s accounts as being split between government and the private sector. It is for this reason that key tests of a nation’s economic sustainability and prospects for the currency are measures such as a government’s share of a nation’s economic output, and the level of government debt relative to gross domestic product.
While there is value in statistics of this sort, it is principally to give a quick overview in comparisons with other nations. For a more valuable analysis it is always worthwhile following different analytical approaches in assessing the prospective evolution of a currency’s future purchasing power.
It appears that the two steps forward, one step backwards approach of mainland China isn’t working as Hong Kong citizens are protesting again. The increasingly violent protests have plunged Chinese-ruled Hong Kong into its most serious crisis in decades, and the situation appears to be getting worse every week. What does it imply for the gold market?
On Monday, Hong Kong’s Airport Authority canceled flights as demonstrators poured into its main terminal. What is going on in Hong Kong? The protests began over plans that would have allowed extradition from Hong Kong to mainland China. Although the bill was suspended, the protests continue, as people demand democratic reforms. The problem is that although Hong Kong – as a former British colony – still enjoys freedoms not seen in mainland China, they are on the decline. The protesters say that mainland China is meddling in Hong Kong, citing examples such as legal rulings that have disqualified pro-democracy legislators.
Breaking News: COMEX paper gold contracts closed on Wednesday, August 7, at $1,513, up from $1,274 on May 22. Gold bottomed at $1,045 in December 2015. The S&P 500 Index closed at a new all-time high on July 26.
Gold closed at its highest price since 2013.
Read: Silver Prices – The Next 5 Years
This phrase was first used by U.S. Supreme Court Justice Potter Stewart, in a case of obscenity. Instead of defining it—we would think that this would be a requirement for a law, which is of course backed by threat of imprisonment—he resorted to what might be called Begging Common Sense. It’s just common sense, it’s easy-peasy, there’s no need to define the term…
This is not a satisfactory approach. Leaving aside concerns with undefined terms as the basis of sending someone to jail, it is an admission that one cannot define the term. As Richard Feynman once said:
“I couldn’t reduce it to the freshman level. That means we really don’t understand it.”
Obscenity has an analog in monetary economics: usury. Most people think usury is a bad thing, like obscenity. But they can’t define it.
We have spilled many electrons on the topic of capital consumption. Still, this is a very abstract topic and we think many people still struggle to picture what it means. Thus, the inspiration for this week’s essay.
Suppose a young man, Early Enterprise, inherits a car from his grandfather. Early decides to drive for Uber to earn a living. Being enterprising, he is up at dawn and drives all day. He finds that he makes a comfortable living. He grosses $250 a day, minus $50 in gas, or $200 net. He works the standard 220 days a year, so he takes home $44,000. Not a bad living.
One day, the transmission breaks. It costs $1,000 to repair. Early has no choice but to pay. He arranges with the shop to get his car back and work it off that week. He does not eat for that week, but he pays and is back to normal.
Individuals dream about winning the lottery, stock market profits, reducing debt, earning more income, attractive sex partners, and tasty food. But our dreams can turn into nightmares filled with inflation ghosts and monsters.
The derivative monster is a destroyer. Deutsche Bank stock closed at $6.76 on June 7, 2019, down from over $100 in 2007. A repeat of 2007 is possible. Price on July 25 is $7.89 – still sick.
Presidential candidates Bernie Sanders and Elizabeth Warren are promising as much as $1.6 trillion in student debt forgiveness for millions of borrowers. Critics smell a cynical campaign ploy to try to buy the youth vote.
How is it either realistic or fair to declare an entire category of debt to be assumed by taxpayers?
Regardless, pie-in-the-sky proposals to cancel student debt shed light on a very down-to-earth problem for not only college students and recent graduates – but also for the economy and financial markets.
Last week, we discussed the fundamental flaw in GDP. GDP is a perfect tool for central planning tools. But for measuring the economy, not so much. This is because it looks only at cash revenues. It does not look at the balance sheet. It does not take into account capital consumption or debt accumulation. Any Keynesian fool can add to GDP by borrowing to spend. But that is not economic growth.
Today, let’s look at another problem with GDP. To understand it, let’s walk through a plausible scenario. It begins with Johnny Fastlane. Johnny borrows $10,000 on his credit card to (yes, our favorite example) go on a gambling vacation in Las Vegas. An airline carries away some of his cash. A hotel lodges some. A few restaurants eat it. And of course, the casinos roll in his dough.
Trump’s trade advisor, Peter Navarro, was on CNBC today asserting that the economy was expanding at an unprecedented rate. Either Navarro is tragically ignorant or an egregious liar. Either way he looks like an idiot to those us who study the real numbers and understand the truth.
The Global Manufacturing PMI (Purchasing Managers Index) dropped to 50.4 – the lowest since July 2016. It’s been falling almost nonstop since mid-2017. The current period of decline is the longest in the 20-year history of the index. The index includes the purchase of inputs for the manufacturing of consumer goods, investment goods (capex material) and intermediate goods (semi-finished goods used as inputs for final goods).
