Monetary and Fiscal Policy Won’t Help

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Monetary and fiscal policy won’t lift us out of the new depression. Let’s first take a look at monetary policy.

Fed money printing is an exhibition of monetarism, an economic theory most closely associated with Milton Friedman, winner of the Nobel Memorial Prize in economics in 1976. Its basic idea is that changes in money supply are the most important cause of changes in GDP.

A monetarist attempting to fine-tune monetary policy says that if real growth is capped at 4%, the ideal policy is one in which money supply grows at 4%, velocity is constant and the price level is constant. This produces maximum real growth and zero inflation. It’s all fairly simple as long as the velocity of money is constant.

It turns out that money velocity is not constant, contrary to Friedman’s thesis. Velocity is like a joker in the deck. It’s the factor the Fed cannot control.

Velocity is psychological: It depends on how an individual feels about her economic prospects. It cannot be controlled by the Fed’s printing press. It measures how much money gets spent from people to businesses.

Think of when you tip a waiter. That waiter might use that tip to pay for an Uber. And that Uber driver might pay for fuel with that money. This velocity of money stimulates the economy.

Well, velocity has been crashing for the past 20 years. From its peak of 2.2 in 1997 (each dollar supported $2.20 of nominal GDP), it fell to 2.0 in 2006 just before the global financial crisis and then crashed to 1.7 in mid-2009 as the crisis hit bottom.

The velocity crash did not stop with the market crash. It continued to fall to 1.43 by late 2017 despite the Fed’s money printing and zero rate policy (2008–15).

Even before the new pandemic-related crash, it fell to 1.37 in early 2020. It can be expected to fall even further as the new depression drags on.

As velocity approaches zero, the economy approaches zero. Money printing is impotent. $7 trillion times zero = zero. There is no economy without velocity.

The factors the Fed can control, such as base money, are not growing fast enough to revive the economy and decrease unemployment.

Spending is driven by the psychology of lenders and consumers, essentially a behavioral phenomenon. The Fed has forgotten (if it ever knew) the art of changing expectations about inflation, which is the key to changing consumer behavior and driving growth. It has nothing to do with money supply.

The bottom line is, monetary policy can do very little to stimulate the economy unless the velocity of money increases. And the prospects of that happening aren’t great right now.

But what about fiscal policy? Can that help get the economy out of depression?

Let’s take a look…

Congress is far along in authorizing more deficit spending in 2020 than the last eight years combined. The government will add more to the national debt this year than all presidents combined from George Washington to Bill Clinton.

This spending explosion includes $26 billion for virus testing, $126 billion for administrative costs of programs, $217 billion direct aid to state and local governments, $312 billion for public health, $513 billion in tax breaks for business, $532 billion to bail out major corporations, $784 billion in aid to individuals as unemployment benefits, paid leave, direct cash payments and $810 billion for small businesses under the Paycheck Protection Program.

This comes on top of a baseline budget deficit of $1 trillion.

Moreover, Congress is expected to pass an additional spending bill of at least $1 trillion by late July, mostly consisting of assistance to states and cities. Combining the baseline deficit, approved spending and expected additional spending brings the total deficit for 2020 to $5.3 trillion.

That added debt will increase the U.S. debt-to-GDP ratio to 130%. That’s the highest in U.S. history and puts the U.S. in the same super-debtor’s league as Japan, Greece, Italy and Lebanon.

The idea that deficit spending can stimulate an otherwise stalled economy dates to John Maynard Keynes and his classic work The General Theory of Employment, Interest and Money (1936).

Keynes’ idea was straightforward.

He said that each dollar of government spending could produce more than $1 of growth. When the government spent money (or gave it away), the recipient would spend it on goods or services. Those providers of goods and services would in turn pay their wholesalers and suppliers.

This would increase the velocity of money. Depending on the exact economic conditions, it might be possible to generate $1.30 of nominal GDP for each $1.00 of deficit spending. This was the famous Keynesian multiplier. To some extent the deficit would pay for itself in increased output and increased tax revenues.

Here’s the problem:

There is strong evidence that the Keynesian multiplier does not exist when debt levels are already too high.

In fact, America and the world are inching closer to what economists Carmen Reinhart and Ken Rogoff describe as an indeterminate yet real point where an ever-increasing debt burden triggers creditor revulsion, forcing a debtor nation into austerity, outright default or sky-high interest rates.

Reinhart and Rogoff’s research reveals that a 90% debt-to-GDP ratio or higher is not just more of the same debt stimulus. Rather it’s what physicists call a critical threshold.

The first effect is the Keynesian multiplier falls below 1. A dollar of debt and spending produces less than a dollar of growth. Creditors grow anxious while continuing to buy more debt in a vain hope that policymakers reverse course or growth spontaneously emerges to lower the ratio. This doesn’t happen. Society is addicted to debt and the addiction consumes the addict.

The end point is a rapid collapse of confidence in U.S. debt and the U.S. dollar. This means higher interest rates to attract investor dollars to continue financing the deficits. Of course, higher interest rates mean larger deficits, which makes the debt situation worse. Or the Fed could monetize the debt, yet that’s just another path to lost confidence.

The result is another 20 years of slow growth, austerity, financial repression (where interest rates are held below the rate of inflation to gradually extinguish the real value of debt) and an expanding wealth gap.

The next two decades of U.S. growth would look like the last two decades in Japan. Not a collapse, just a slow, prolonged stagnation. This is the economic reality we are facing.

And neither monetary policy nor fiscal policy will change that.

Regards,

Jim Rickards
for The Daily Reckoning

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Depression and the Great American Exodus

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Is the worst of the economic collapse over?

Not really. The economy is off the bottom, but that’s only to be expected after the historic collapse of March–May and the stock market crash in March and April.

The question now is not whether we’re growing again. We are. The questions are how fast is that growth, and how long will it be before we return to 2019 levels of output?

And this question applies not just to the U.S. but to the entire global economy, especially the large producers such as China, Japan and the EU.

Here, the news is not good at all.

Recent data suggests that we may not reach 2019 output levels until 2023 at the earliest, and that something close to full employment may not return until 2025.

A simple example will make the point.

Just Not Enough Growth

Assume 2019 GDP has a normalized level of 100. Now assume a 10% drop (that’s about how much the U.S. economy will decline for the full-year 2020 according to many estimates).

That moves the benchmark to 90 in 2020.

Now assume 5% growth in 2021 (that would also be the highest growth rate in decades).

That will move the benchmark back up to 94.5. Next assume growth in 2022 is 4% (that would also be near record annual growth for the past three decades).

That would move the benchmark up to 98.3. Here’s the problem…

An output level of 98.3 is still less than 100. In other words, back-to-back growth of 5% in 2021 and 4% in 2022 is not enough to recover the 2019 level after a 10% decline in 2020.

But the situation is even worse than I just described.

Worse Than a Technical Recession

China PMI figures have recently been 50.9 (manufacturing) and 54.4 (services).

The Wall Street happy talk brigade is cheering these numbers because they “beat” expectations and they show growth (any number over 50 indicates growth in a PMI index series).

But growth is completely expected. The problem is that growth is so weak.

A strong bounce back from a collapse should produce PMI readings of 60 or 70 if a robust recovery were underway. It’s not.

Here’s the reality: What the U.S. economy is going through right now is far worse than a technical recession.

A recession is defined as two or more consecutive quarters of declining growth along with higher unemployment.

A recession beginning in February has already been declared by the National Bureau of Economic Research (NBER), which is the private arbiter of when recessions begin and end.

If we judge strictly by growth figures, the recession may already be over (although we won’t know for months to come, until quarterly growth figures are available and the NBER has time to evaluate them and make a call).

Most recessions don’t last that long, usually only about six–nine months. But that misses the fact that we’re really in a new depression.

The New Depression

“Wait a minute,” you say. “Growth may be weak, but it’s still growth. How can you say we’re in a depression?”

Well, as I’ve explained before, the starting place for understanding depression is to get the definition right.

Economists don’t like the word “depression” because it does not have an exact mathematical definition. For economists, anything that cannot be quantified does not exist. This view is one of the many failings of modern economics.

Many think of a depression as a continuous decline in GDP. The standard definition of a recession is two or more consecutive quarters of declining GDP and rising unemployment, as I just explained.

Since a depression is understood to be something worse then a recession, investors think it must mean an extra-long period of decline.

But that’s not the definition of depression.

Defining Depression

The best definition ever offered came from John Maynard Keynes in his 1936 classic The General Theory of Employment, Interest and Money.

Keynes said a depression is “a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.”

Keynes did not refer to declining GDP; he talked about “subnormal” activity.

In other words, it’s entirely possible to have growth in a depression. The problem is that the growth is below trend. It is weak growth that does not do the job of providing enough jobs or staying ahead of the national debt.

That is exactly what the U.S. is experiencing today.

The key is a depression is not measured by declining growth but is measured by a combination of actual declines and a below-trend recovery. This happened during the Great Depression.

Depressions Leave Lasting Impressions

There was declining growth and a technical recession from 1929–1932. Then a recovery (from a low level) from 1933–36. Then a second technical recession in 1937–38 and then another recovery from 1939–1940.

The entire period 1929–1940 is known as the Great Depression in part because the stock market and commercial real estate never recovered their 1929 levels even by 1940 (they finally recovered in 1954).

Depressions are also categorized by large behavioral changes including higher savings rates, smaller family size and internal migration. These effects are intergenerational.

Many behavioral changes from the 1930s were still prevalent in the 1950s and early 1960s and lasted until the baby boomers came of age in the late 1960s.

This kind of profound change with lasting impact is happening again.

The Great American Exodus

Due to a combination of COVID-19 spreading in densely populated areas, business failures, urban riots and failing mayors and police departments, Americans are migrating from the big cities to suburban and country areas by the millions.

American families are leaving dysfunctional cities such as New York City, Seattle and San Francisco and heading for Montana, Colorado, Maine and upstate New York in the Catskill Mountains among other safe havens.

Big cities have always offered a trade-off between higher taxes and urban stress in exchange for entertainment, great restaurants, museums and intellectual buzz.

Today the venues and buzz are gone, the crime rates are soaring and all that is left is the stress and taxes. So people are getting out.

Changes like this are not temporary. Once people move out, they don’t return ever. Their children may return someday but that could be 15 or 20 years away.

And those who leave tend to have the most capital and the most talent. This leaves the cities as empty shells populated by oligarchs with personal bodyguards and the poor, who have to deal with the street-level violence.

This shift can be helpful for individuals who move, but it’s devastating for the economics of major cities. And that’s devastating for the U.S. economy as a whole.

It’s one more reason we will be in depression for years even if the technical recession is over soon.

Investors Will Learn the Hard Way

The best case is that it will take years to get back to 2019 levels of output. The worst case is that output will drop even lower as the recovery fails.

We’re not really in a recession right now. We’re in a depression and will remain there for years.

No one under the age of 90 has ever experienced a depression until now. Most investors have no working knowledge of what a depression is or how it affects asset values.

But they’re going to find out, and probably the hard way.

Regards,

Jim Rickards
for The Daily Reckoning

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Rickards: This Time IS Different

This post Rickards: This Time IS Different appeared first on Daily Reckoning.

Stocks stumbled out of the gate today, at least partially on fears about a resurgence in coronavirus cases.

South Korea, which did an excellent job containing the virus, has reported a new batch of cases. Japan and Singapore also reported new cases. Infections are increasing in Germany as well, where lockdown restrictions are being lifted.

We can also expect a rise in U.S. cases as several states lift their own restrictions.

From both epidemiological and market perspectives, the pandemic has a long way to go. Its economic effects are already without precedent…

In the midst of this economic collapse, many investors and analysts return reflexively to the 2008 financial panic.

That crisis was severe, and of course trillions of dollars of wealth were lost in the stock market. That comparison is understandable, but it does not begin to scratch the surface.

This collapse is worse than 2008, worse than the 2000 dot-com meltdown, worse than the 1998 Russia-LTCM panic, worse than the 1994 Mexican crisis and many more panics.

You have to go back to 1929 and the start of the Great Depression for the right frame of reference.

But even that does not explain how bad things are today. After October 1929, the stock market fell 90% and unemployment hit 24%. But that took three years to fully play out, until 1932.

In this collapse the stock market fell 30% in a few weeks and unemployment is over 20%, also in a matter of a few weeks.

Since the stock market has further to fall and unemployment will rise further, we will get to Great Depression levels of collapse in months, not years. How much worse can the economy get?

Well, “Dr. Doom,” Nouriel Roubini, can give you some idea.

Roubini earned the nickname Dr. Doom by predicting the 2008 collapse. He wasn’t the only one. I had been warning of a crash since 2004, but he deserves a lot of credit for sounding the alarm.

The factors he lists that show the depression will get much worse include excessive debt, defaults, declining demographics, deflation, currency debasement and de-globalization.

These are all important factors, and all of them go well beyond the usual stock market and unemployment indicators most analysts are using. Those economists expecting a “V-shaped” recovery should take heed. That’s highly unlikely in the face of all these headwinds.

I’ve always taken the view that getting a Ph.D. in economics is a major handicap when it comes to understanding the economy.

They teach you a lot of nonsense like the Phillips curve, the “wealth effect,” efficient markets, comparative advantage, etc. None of these really works in the real world outside of the classroom.

They then require you to learn complex equations with advanced calculus that bear no relationship to the real world.

If economists want to understand the economy, they should talk to their neighbors and get out of their bubble.

The economy is nothing more than the sum total of all of the complex interactions of the people who make up the economy. Common sense, anecdotal information and direct observation are better than phony models every time.

So what are everyday Americans actually saying?

According to one survey, 89% of Americans worry the pandemic could cause a collapse of the U.S. economy. This view is shared by Republicans and Democrats alike.

Ph.D. economists dislike anecdotal information because it’s hard to quantify and does not fit into their neat and tidy (but wrong) equations. But anecdotal information can be extremely important.

With so many Americans fearing a collapse, it could create a self-fulfilling prophesy.

If enough people believe something it becomes true (even if it was not true to begin with) because people behave according to the expectation and cause it to happen.

The technical name for this is a recursive function, also known as a “feedback loop.” Whatever you call it, it’s happening now.

Based on that view and a lot of other evidence, we can forecast that the depression will get much worse from here despite the initial severity.

But as usual, the Ph.D. crowd will be the last to know.

Below, I show you why you shouldn’t believe the happy talk. We’re in a deflationary and debt death spiral that has only just begun. Read on for details.

Regards,

Jim Rickards
for The Daily Reckoning

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Get Ready for World Money

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Since Federal Reserve resources were barely able to prevent complete collapse in 2008, it should be expected that an even larger collapse will overwhelm the Fed’s balance sheet.

That’s exactly the situation we’re facing right now.

The specter of a global debt crisis suggests the urgency for new liquidity sources, bigger than those that central banks can provide. The logic leads quickly to one currency for the planet.

The task of re-liquefying the world will fall to the IMF because the IMF will have the only clean balance sheet left among official institutions. The IMF will rise to the occasion with a towering issuance of special drawing rights (SDRs), and this monetary operation will effectively end the dollar’s role as the leading reserve currency.

The Federal Reserve has a printing press, they can print dollars. The IMF also has a printing press and can print SDRs. It’s just world money that could be handed out.

The IMF could function like a central bank through more frequent issuance of SDRs and by encouraging the use of “private SDRs” by banks and borrowers.

What exactly is an SDR?

The SDR is a form of world money printed by the IMF. It was created in 1969 as the realization of an earlier idea for world money called the “bancor,” proposed by John Maynard Keynes at the Bretton Woods conference in 1944.

The bancor was never adopted, but the SDR has been going strong for 50 years. I am often asked, “If I had 100 SDRs how many dollars would that be worth? How many euros would that be worth?”

There’s a formula for determining that, and as of today there are five currencies in the formula: dollars, sterling, yen, euros and yuan. Those are the five currencies that comprise in the SDR calculation.

The important thing to realize that the SDR is a source of potentially unlimited global liquidity. That’s why SDRs were invented in 1969 (when the world was seeking alternatives to the dollar), and that’s why they will be used in the imminent future.

At the previous rate of progress, it may have taken decades for the SDR to pose a serious challenge to the dollar. But as I’ve said for years, that process could be rapidly accelerated in a financial crisis where the world needed liquidity and the central banks were unable to provide it because they still have not normalized their balance sheets from the last crisis.

“In that case,” I’ve argued previously, “the replacement of the dollar could happen almost overnight.”

Well, guess what?

We’re facing a global financial crisis worse even than 2008. That’s because each crisis is larger than the previous one. The reason has to do with the system scale. In complex dynamic systems such as capital markets, risk is an exponential function of system scale. Increasing market scale correlates with exponentially larger market collapses.

This means a market panic far larger than the Panic of 2008.

SDRs have been used before. They were issued in several tranches during the monetary turmoil between 1971 and 1981 before they were put back on the shelf. In 2009 (also in a time of financial crisis). A new issue of SDRs was distributed to IMF members to provide liquidity after the panic of 2008.

The 2009 issuance was a case of the IMF “testing the plumbing” of the system to make sure it worked properly. With no issuance of SDRs for 28 years, from 1981–2009, the IMF wanted to rehearse the governance, computational and legal processes for issuing SDRs.

The purpose was partly to alleviate liquidity concerns at the time, but also partly to make sure the system works in case a large new issuance was needed on short notice. The 2009 experience showed the system worked fine.

Since 2009, the IMF has proceeded in slow steps to create a platform for massive new issuances of SDRs and the creation of a deep liquid pool of SDR-denominated assets.

On Jan. 7, 2011, the IMF issued a master plan for replacing the dollar with SDRs. This included the creation of an SDR bond market, SDR dealers, and ancillary facilities such as repos, derivatives, settlement and clearance channels, and the entire apparatus of a liquid bond market. A liquid bond market is critical.

The IMF study recommended that the SDR bond market replicate the infrastructure of the U.S. Treasury market, with hedging, financing, settlement and clearance mechanisms substantially similar to those used to support trading in Treasury securities today.

In November 2015, the Executive Committee of the IMF formally voted to admit the Chinese yuan into the basket of currencies into which an SDR is convertible.

In July 2016, the IMF issued a paper calling for the creation of a private SDR bond market. These bonds are called “M-SDRs” (for market SDRs) in contrast to “O-SDRs” (for official SDRs).

In August 2016, the World Bank announced that it would issue SDR-denominated bonds to private purchasers. Industrial and Commercial Bank of China (ICBC), the largest bank in China, will be the lead underwriter on the deal.

In September 2016, the IMF included the Chinese yuan in the SDR basket, giving China seat at the monetary table.

Over the next several years, we will see the issuance of SDRs to transnational organizations, such as the U.N. and World Bank, to be spent on climate change infrastructure and other elite pet projects outside the supervision of any democratically elected bodies. (I call this the New Blueprint for Worldwide Inflation.)

The SDR can be issued in abundance to IMF members and can also be used in the future for a select list of the most important transactions in the world, including balance-of-payments settlements, oil pricing and the financial accounts of the world’s largest corporations, such as Exxon Mobil, Toyota and Royal Dutch Shell.

So the international monetary elite has been awaiting the global liquidity crisis that we’re facing right now. In the not-too-distant future, there will be massive issuances of SDRs to return liquidity to the world. The result will be the end of the dollar as the leading global reserve currency.

SDRs will perhaps never be issued in bank note form and may never be used on an everyday basis by citizens around the world. But even such limited usage does not alter the fact that the SDR is world money controlled by elites.

But monetary resets have happened three times before, in 1914, 1939 and 1971. On average, it happens about every 30 or 40 years. We’re going on 50.

So we’re long overdue.

You’ll still have dollars, but they’ll be local currency like the Mexican peso, for example. But its global dominance will end.

Based on past practice, we can expect that the dollar will be devalued by 50–80% in the coming years.

A devaluation of this magnitude will wipe out the value of your life’s savings. You’ll still have just as many dollars, but they won’t be worth nearly as much.

Individuals will not be allowed to own SDRs, but you can still protect your wealth by buying gold — if you can find any.

Regards,

Jim Rickards
for The Daily Reckoning

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The Only Way to Avoid Depression?

This post The Only Way to Avoid Depression? appeared first on Daily Reckoning.

Hope, it is said, springs eternal.

Today the stock market was up and away on hopeful wings… for it believes “fiscal stimulus” is imminent.

Nancy Pelosi gushed there was “real optimism” about a deal today. Sen. Charles Schumer conferred with Treasury Secretary Steven Mnuchin.

Said the senator:

There are still a few little differences. Neither of us think they are in any way going to get in the way of a final agreement.

At writing, no agreement has been reached.

The Dow Jones nonetheless regained 11.26% today, a full 2,093 points — its finest day since October 2008.

Both S&P and Nasdaq turned in comparable romps.

But when you want it bad, you often get it — bad.

Getting It Bad

We have no doubt the lobbyists have been busy. Crisis is when these swamp inhabitants sniff their chance.

Any legislation will be loaded to the rails with “stimulus” having nothing to do with the economic cataclysm before us.

But it will butter their parsnips.

Most in Congress who vote for the bill will never even read it… precisely as they failed to read the Patriot Act in 2001.

“Never let a good crisis go to waste,” as a certain Obama official said after the next crisis.

Coming home…

Taxpayer money will flow to the same corporations that took on record debts this past decade to conduct stock buybacks and other financial gimmickry.

Might corporations have rebuilt their balance sheets, restocked their acorns for winter, stored in reserves for lean times?

They might have, yes. Alas they did not. The lure of stock market riches tugged too strongly.

But it is laissez-faire in bountiful times — and aidez-nous when events swing against them.

But let it go for now. Consider instead this question:.

What will a deluge of fiscal stimulus accomplish… besides plunging the entire nation deeper into debt?

A Recipe for Inflation

The gears of commerce have wound to a violent and arresting halt.

The nation faces a “supply” shortage, that is — not a “demand” shortage.

It is not possible to purchase goods that do not exist.

And so massively more money will chase fewer goods. That of course writes a recipe for inflation. Potentially even hyperinflation.

Perhaps that is why gold takes impending fiscal stimulus rather differently than the stock market…

Gold went rocketing $92 today. Yes, $92.

We can recall nothing comparable.

And Goldman Sachs hollers it is time to buy this, “the currency of last resort.”

Meantime, our men inform us that acquiring physical gold is nearly impossible.

Jim Rickards warned his readers for years to purchase gold before the crisis came. It would prove impossible to find afterward, he said.

The crisis has come.

Plunging Into Depression

Morgan Stanley and Goldman Sachs estimate second-quarter United States GDP will plummet 30%. And unemployment will run to 13%.

Morgan Stanley economists:

Economic activity has come to a near standstill in March. As social distancing measures increase in a greater number of areas and as financial conditions tighten further, the negative effects on near-term GDP growth become that much greater.

These crackerjacks project a third-quarter recovery springing from the looming stimulus.

But what if social distancing measures remain in place? What if supply chains snap entirely under the load?

What if the dose of economic medicine fails to end the cardiac arrest?

The prospects of depression are suddenly and vividly acute.

Debt Is Already Too High

But before the Great Depression, United States government debt ran to $17 billion. Yes, of course the economy was far smaller.

But the nation’s debt-to-GDP ratio was a mere 16%. Even in 1941 — after all the New Deal borrowing sprees — the ratio stood at a fair 44%.

But today the United States debt exceeds $23 trillion. And its debt-to-GDP ratio already exceeds 105%.

The nation simply lacks the capacity for a debt extravaganza.

The dollar itself might not survive the deluge, all confidence lost.

“The pen shrinks to write, the heart sickens to conceive” the enormity of the coming toothache.

Meantime, the Congressional Budget Office (CBO) had previously projected economic growth to limp along at an average 1.9% per annum through 2029.

Yet that guttering 1.9% did not account for recession — much less depression.

Whence cometh the growth… should the United States economy sink into depression’s black depths?

Is there a way out?

There may be. We have presented the option before…

The Least Bad Option?

You may have laughed it out of court at the time. But laugh no longer, such are the depths of the hells before us.

We refer to a debt jubilee.

That is, the mass forgiveness of debt.

Heave the ledger book into a roaring fire. Run a blue pen over the red ink. Wipe the tablet entirely (or largely) clean.

It may be the best available way up, argues economist Michael Hudson:

Massive social distancing, with its accompanying job losses, stock dives and huge bailouts to corporations, raises the threat of a depression. But it doesn’t have to be this way. History offers us another alternative in such situations: a debt jubilee. This slate-cleaning, balance-restoring step recognizes the fundamental truth that when debts grow too large to be paid without reducing debtors to poverty, the way to hold society together and restore balance is simply to cancel the bad debts…

The way to restore normalcy today is a debt write-down. The debts in deepest arrears and most likely to default are student debts, medical debts, general consumer debts and purely speculative debts. They block spending on goods and services, shrinking the “real” economy. A debt write-down would be pragmatic, not merely a moral sympathy with the less affluent.

This Hudson fellow has looked into debt jubilees through history.

Why Kings Wiped out Debt

The practice began some 5,000 years distant in ancient Sumer and Babylon… where a newly enthroned king would delete the people’s debts.

Was it because the new king was a swell fellow? Or because he was an ancient Marxist?

No. He cleared the books to preserve his own head. He was alert — keenly — to social stability.

Hudson:

The word Jubilee comes from the Hebrew word for trumpet — yobel. In Mosaic Law, it was blown every 50 years to signal the Year of the Lord, in which personal debts were to be canceled…

Until recently, historians doubted that such a debt jubilee would have been possible in practice or that such proclamations could have been enforced. But Assyriologists have found that from the beginning of recorded history in the Near East, it was normal for new rulers to proclaim a debt amnesty upon taking the throne. Instead of blowing a trumpet, the ruler “raised the sacred torch” to signal the amnesty.

It is now understood that these rulers were not being utopian or idealistic in forgiving debts. The alternative would have been for debtors to fall into bondage. Kingdoms would have lost their labor force, since so many would be working off debts to their creditors. Many debtors would have run away (much as Greeks emigrated en masse after their recent debt crisis) and communities would have been prone to attack from without.

A Fairly Recent Debt Jubilee

But the United States, anno Domini 2020, is not Babylon, 3,000 B.C.

Is there a more contemporary example of a debt jubilee?

Yes, says Hudson. Look to West Germany in 1948:

In fact, it could create what the Germans called an “Economic Miracle” — their own modern debt jubilee in 1948, the currency reform administered by the Allied Powers. When the Deutsche mark was introduced, replacing the Reichsmark, 90% of government and private debt was wiped out. Germany emerged as an almost debt-free economy, with low costs of production that jump-started its modern economy.

Not a Perfect Answer

Is a debt jubilee a vast swindle, a rooking of honest lenders and the absolution of the wicked?

It may well be.

“The wicked borrows and cannot pay back”… as Psalm 37:21 informs us.

Who would loan anyone money at all — knowing one day he may be left holding an empty bag?

And who would lend money to the deadbeat United States government? How would it fund its bread and circuses?

We have no answers.

In short, a debt jubilee would unquestionably produce its own migraines.

But is it worse than the alternative?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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It Could Last 18 Months — “or Longer”

This post It Could Last 18 Months — “or Longer” appeared first on Daily Reckoning.

547.5 days. 78.2 weeks. 18 months. “Or longer.”

That is how long the coronavirus scourge may endure. This we learn by way of The New York Times.

It has done us all a capital service by executing a rare feat of journalism.

For its spies have captured a government document “not for public distribution or release.”

From which:

A pandemic will last 18 months or longer and could include multiple waves of illness… Increasing COVID-19 suspected or confirmed cases in the U .S. will result in increased hospitalizations among at-risk individuals, straining the health care system… Supply chain and transportation impacts due to ongoing COVID-19 outbreak will likely result in significant shortages for government, private sector and individual U.S. consumers.

Potentially critical shortages may occur of medical supplies and staffing, due to illnesses among public health and medical workers, and potentially also due to exhaustion. SLTT governments (state, local, tribal and territorial), as well as health systems will be stressed and potentially less reliable. Health systems may run low on resources inhibiting the ability to make timely transitions between postures and maintenance of efficacy.

We are precious sick of the coronavirus after four days of home jailing.

How can any man withstand 18 months — “or longer”?

And how can the economy hold?

Consider one week of deadness upon the automobile industry. Reports auto man Eric Peters:

If people stop buying new cars for one week because dealers are forced to close shop – which has already happened in at least one state or because instantly unemployed people are no longer shopping for new cars it will cost the car industry $7.3 billion in earnings — and cost 94,400 Americans their jobs. It would also cost the government some $2 billion in taxes.

That’s one week. How about three months?

Indeed… how about 18 months?

We stagger and reel at the prospect.

Meantime, the National Restaurant Association — this organization has actual existence — projects its industry will shed “5–7 million jobs.”

We expect hotels and the tourist trade to withstand parallel holocausts.

In the immediate run…

JPMorgan’s primary U.S. economist, Michael Feroli by name, has hacksawed his second-quarter GDP forecast to a ghastly 14% drop.

The third and fourth quarters may yield a recovery. But that is far from certain if the virus remains amok.

And how about six entire quarters?

“If life doesn’t get back to normal for ‘18 months,’” argues catastrophist Michael Snyder, “we are going to witness a societal meltdown of epic proportions.”

More from whom:

If the entire world shut down for 30 days, this pandemic would quickly be brought under control. If only the U.S. shuts down, it is inevitable that the virus would keep coming back into the country as the pandemic continues raging elsewhere on the globe.

Of course we aren’t going to get the entire globe to agree to shut down simultaneously for 30 days.

So this outbreak will continue to spread and the case numbers will continue to grow.

It is a dismal mathematics.

Naturally the monetary and fiscal authorities are mobilizing on multiple fronts.

The Federal Reserve has executed the largest single market intervention in its hellish history. And the Department of Treasury is clearing for action.

The nation will plunge deeper and deeper into debt’s inky depths.

But how can it come up when chained down with so much debt?

The past 10 years offer high proof that debt does not translate to growth — not after a point, at least.

We may be articled off to prison for merely putting out this question. And the gallows after prison — and hell after the gallows…

But what if they allowed the economy and the stock market to go their own way?

Yes, the way would be down.

The going would be dreadful for a stretch. We will not pretend otherwise. Yet it would clear out much of the rot that presently infests us.

A new economy, strong and youthful and resilient, could come up from the rubble. And healthy shoots of growth could eventually grow into the towering oaks of tomorrow.

That is, what if the authorities did not do something… but merely stood there?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post It Could Last 18 Months — “or Longer” appeared first on Daily Reckoning.

A Date and Time for “Financial Armageddon?”

This post A Date and Time for “Financial Armageddon?” appeared first on Daily Reckoning.

Pete H. — a reader — gives us a good, round piece of his mind:

I have read your emails and joined some of your services over the last 10 or more years.

I have put up with your ramblings about the financial world coming to an end pretty much over that same time.

Here is a fact. Nothing has happened since and though no doubt it will one of these decades, if people had listened to you, they would have buried their money with zero return, unlike the markets, which continue to go up. Who cares how or whether it’s wrong or right? It still is going up.

After a while — I mean a long, long while — your dire warnings fall on deaf ears. So unless you can provide a date and time for financial Armageddon, I will continue to reap rewards from fools, be they the Fed, federal government or the debt-ridden world.

We can spare Mr. H. needless suspense. We never can give out the information he seeks: “a date and time for financial Armageddon.”

Nor — for the matter of that — can anybody else, the claims of false prophets notwithstanding.

“You will know neither the day nor the hour”… as the Good Book reads.

Not even the Son of God Himself knows — by His own admission.

But the reader’s tort against us contains justice — by our own admission.

Crying Wolf

Day upon day, year upon year, we moan about the (increasingly) debt-ridden world. We holler against the Federal Reserve…

We shout about an approaching stock market collapse… as the fabled boy shouted about an approaching wolf.

How many phantom wolf sightings can a fellow endure? He eventually turns a deaf ear… as our reader has turned a deaf ear to us.

“Who cares how or whether it’s wrong or right,” he razzes us. “It still is going up.”

We cannot deny it. The market is still going up — despite our impeccable reasoning, despite all the angels of hell.

We certainly credit the Federal Reserve for the market’s recent spree. It has expanded its balance sheet obscenely since September. Let us briefly reintroduce the evidence:

IMG 1

And Exhibit B:

IMG 2

Finally, Exhibit C gives the result:

IMG 3

A Just Stock Market

But let the record reflect:

We have never denied the manipulated stock market can be lucrative. Nor would we deny that bank robbing can be lucrative. Or that counterfeiting can be lucrative.

We have only questioned its authenticity… and its justice.

The stock market should be a scene of free and open combat. Bull and bear, bovine and ursine, let them meet on fair and neutral ground.

There they can settle their quarrels under honest competition.

A scrupulously impartial judge should referee the bout. His lone concern should be the equal application of martial justice.

He must hold the scales even.

And may the winner emerge fair and square, his hand raised in honest victory.

Should it be the people’s champion, the bull, so much the better.

But should the unpopular bear walk out victorious, well then…. the unpopular bear walks out victorious.

The bear would win because he was the stronger fighter. The bull would lose because he was not.

Justice, that is… would be done.

Now enter injustice…

The Fed Rigs the Fight

The Federal Reserve is not a neutral referee in this bout. It is rather an active participant, in active conspiracy with the bull.

How does it influence the outcome?

Before the bout it packs the bull’s gloves with iron. And once the action commences…

If the bull strikes beneath the belt, if he bites in the clinches, if he punches after the bell has rung…

This rogue referee instantly loses his powers of vision. He sees nothing.

And if the bear smites the bull down to the canvas, witless, leaving him to take the count?

Then this corrupto stretches the count until the sprawling bovine can regain the vertical… and his wits:

“O-o-o-o-o-o-n-e… … … … t-w-o-o-o-o-o-o… … … … t-h-h-h-r-e-e-e-e-e-e… … … … ” all the long way to 10.

Meantime, should the bear absorb but a glancing blow, the official declares him loser by technical knockout, the victim of a mighty clout.

What we have then, is not a contest of one against one. We have instead a travesty of two against one.

The badly used bear is denied all chance of victory.

“Fīat Jūstitia Ruat Cælum”

Yes, the crowd roars its approval. Even our reader, though recognizing the wrong, applauds reluctantly this holocaust of justice.

He does — after all — have a wager on the outcome.

But we confess it. Our sympathies go the other way…

There exists a force deep down, within the liver and lights, that wants it square — that demands honest justice.

And so a fellow leans naturally in an underdog’s direction… and away from the lawless overdogs.

In this instance, he leans toward the underdog bear.

“Fīat jūstitia ruat cælum” is the cry on our lips — “Let justice be done though the heavens fall.”

One day they may. But how much more injustice must the bear endure?

Give him his chance, we say. Else we will never know the rightful winner.

Meantime, we must file a scorching caveat against one of our reader’s claims…

Bury Your Money With “Zero Return?”

Had people taken aboard our advice, says our reader, “they would have buried their money with zero return, unlike the markets, which continue to go up.”

But we have never suggested anyone bury his money… or his head.

Each issue of The Daily Reckoning links to insightful financial research. It serves one purpose: to show you how to profit from today’s markets, rigged or not rigged.

A portion of it — by some miracle of God — somehow succeeds.

Yes, it is true we have recommended gold. Gold offers zero yield — and even lesser thrill.

But if you sank your money in gold instead of stocks… have you really buried it?

Daily Reckoning co-founder Bill Bonner prefers to view the stock market through a golden prism.

The stock market is denominated in dollars. But today’s dollar — relative to the pre-1971 gold-backed dollar — is a wasting asset, a sawdust asset.

Use gold as your yardstick then. You will discover the market’s nominal dollar gains pack far less wallop than commonly supposed.

“The Stock Market Is Worth Less Than Half of What It Was Worth 20 Years Ago”

Mr. Bonner:

In terms of real money — gold-linked, pre-1971 dollars— stocks have been losing ground since the start of the millennium…

The whole bull market — 2009–2019 — for example, was false… phony… a fake-out by central banks.

Yes, stock prices rose impressively in dollar terms. But in real-money terms — gold — the bull market of the last 10 years looks like an average bear market bounce.

In gold terms, the Dow merely retraced half of its losses. You could buy the Dow with 40 ounces of gold in January 2000. By January 2011, the Dow 30 stocks would cost you only 8 ounces.

In other words, stock investors had lost 80% of their money. Then in the following run-up — fueled by extravagant and nutty efforts to inflate asset prices — the Dow-to-gold ratio rose to 22. At that point, stock market investors had recovered about half of what they lost — a classic bear market bounce…

And right now, [gold is] telling us that the stock market is worth less than half of what it was worth 20 years ago.

In gold terms… the stock market is worth less than half of what it was worth 20 years ago?

Could it be?

Thus any money “buried” in gold has been up and doing, busy, putting in hard service.

Meantime, the stock market merely scrambles to recover lost ground.

Will it finally reclaim it all? Alas, no.

“Financial Armageddon” closes in on the stock market. When can you expect it?

Tomorrow we reveal the precise date, hour and second — guaranteed.

Regards,

Brian Maher
Managing editor, The Daily Reckoning

The post A Date and Time for “Financial Armageddon?” appeared first on Daily Reckoning.

The Perfect Storm

This post The Perfect Storm appeared first on Daily Reckoning.

What are the three elements of the perfect political and market storm I see coming together this fall?

The first is an effort by the Democratic House of Representatives to impeach President Trump. The second is the socialist-progressive tilt in the 2020 presidential election field. The third is the fallout from the Mueller report and the Russia collusion hoax — what I and others called “Spygate.”

These components are independent of each other but are at high risk of convergence in the coming months.  Let’s look more closely at the individual elements of impeachment, electoral chaos and Spygate that comprise this new storm with no name.

The first storm is impeachment. Impeachment of a president by the House of Representatives is just the first step in removing a president from office. The second step is a trial in the Senate requiring a two-thirds majority (67 votes) to remove the president. Two presidents have been impeached, but neither was removed. Nixon resigned before he could be impeached.

If the House impeaches Trump, the outcome will be the same. The Senate is firmly under Republican control (53 votes) and there’s no way Democrats can get 20 Republicans to defect to get the needed 67 votes needed. So House impeachment proceedings are just for show.

But it can be a very damaging show and create huge uncertainty for markets. There are powerful progressive forces in Congress and among top Democratic donors who are fanatical about impeaching Trump and will not be satisfied with anything less. One poll shows that 75% of Democratic voters favor impeachment (including almost 100% of the activist progressive base).

Speaker of the House Nancy Pelosi and House Majority Leader Steny Hoyer have both poured cold water on impeachment talk. They feel it’s a distraction from Democratic efforts to enact their legislative agenda. But some of the party’s biggest private money donors, including Tom Steyer, are also demanding impeachment.

If Steyer does not get an impeachment process, he looks to support primary challenges to sitting Democrats who don’t join the impeachment effort. This could jeopardize Pelosi’s speakership in a new Congress. So Pelosi could come under heavy pressure to go along with impeachment.

The final outcome is irrelevant; what matters is the process itself. Impeachment fever is not likely to last long into 2020, because at that point the election will not be far away. Voters will turn their backs on impeachment and insist that disputes about Donald Trump be settled at the ballot box. That’s why you can expect impeachment fever to come to a head by the fall of 2019. And that will create a lot of uncertainty for markets.

The second storm is the 2020 election.

Trump is on track to win reelection in 2020. My models estimate his chance of victory is 63% today and it will get higher as Election Day approaches. The only occurrence that will derail Trump is a recession.

The odds of a recession before the 2020 election are below 40% in my view and will get smaller with time. Meanwhile, Trump will keep up the pressure on the Fed not to raise interest rates and will ensure that the U.S.-China trade war comes in for a soft landing.

This may sound like a rosy scenario for the economy. But it’s not so rosy for the Democrats. Every piece of good economic news will cause Democrats to dial up their political hit jobs on Trump. Each one will try to outdo the next.

There are now 24 declared candidates for the 2020 Democratic presidential nomination. That’s more than the Democrats have ever had before. Currently Joe Biden and Bernie Sanders are out in front. Biden is considered the most moderate of the candidates.

But I don’t expect Joe Biden to stay in front for long, and I don’t believe he’ll win the nomination. But the only way for a Democrat to stay in the race is to stake out the most extreme progressive positions. This applies to reparations for slavery, free health care, free child care, free tuition, higher taxes, more regulation and the Green New Deal.

If Biden does fall away, then the choices are back to Sanders, Elizabeth Warren or maybe Kamala Harris. But one is more radical than the next. So, you could have a shock effect where all of a sudden it looks like the Democratic nominee is going to be a real socialist. And that would rattle markets.

This toxic combination of infighting among candidates and bitter partisanship aimed at Trump will be another source of market uncertainty and volatility until Election Day in 2020 and perhaps beyond.

But the third storm is the most dangerous and unpredictable storm of all: Spygate. It involves accountability for those involved in an attempted coup d’état aimed at President Trump.

The Mueller report lays to rest any allegations of collusion, conspiracy or obstruction of justice involving Trump and the Russians. There is simply no evidence to support the collusion and conspiracy theories and insufficient evidence to support an obstruction theory. The case against Trump is closed.

Now Trump moves from defense to offense, and the real investigation begins.

Who authorized a counterintelligence investigation of the Trump campaign to begin with? Did surveillance of the Trump campaign by the U.S. intelligence community (CIA, NSA and FBI) begin before search warrants were obtained? On what basis? Was this surveillance legal or illegal?

These are just a few of the many questions that will be investigated and answered in the coming months.

These criminal referrals will be taken seriously by Attorney General William Barr along with other criminal referrals coming from Congress. Barr will take a hard look at possible criminal acts by John Brennan (CIA director), James Comey (FBI director) and James Clapper (director of national intelligence) among many others.

At the same time Lindsey Graham, Republican senator from South Carolina, will hold hearings in the Senate Judiciary Committee about the origins of spying on the Trump campaign and lies to the FISA court. These may be the most important hearings of their kind since Watergate.

Trump will be running for reelection against this backdrop of revelations of wrongdoing by his political opponents in the last election. Actual indictments and arrests of former FBI or CIA officials will cause immense political turmoil. Such charges may be fully justified (and needed to restore credibility). They will certainly energize the Trump base.

But they are just as likely to infuriate the Democratic base. Cries of “revenge” and “witch hunt” will be coming from the Democrats this time instead of Republicans. Markets will be caught in the crossfire.

How do these three storms — impeachment, the 2020 election and Spygate — converge to create the perfect storm?

By November 2019, the impeachment process should be well underway in the form of targeted House hearings. The 2020 Democratic debates (starting in June 2019) will be red-hot. Trump’s counterattacks on the FBI and CIA should be reaching a fever pitch based on real revelations and actual indictments.

The impeachment process and Trump’s revenge represent diametrically opposing views of what happened in 2016. The Democrats will continue to call Trump “unfit for office.” Trump will continue to complain that the Obama administration and the deep state conspired to derail and delegitimize him.

The 2020 candidates will have to take a stand (even though they may prefer to discuss policy issues). There will be nowhere to hide. The bitterness, rancor and leaking will be out of control.

Any one of these storms would create enough uncertainty for investors to sell stocks, raise cash and move to the sidelines. The combination of all three will make them run for the hills. That’s my warning to investors.

The next six months will present unprecedented challenges for investors. Markets will have to wrestle with fights over impeachment, election attacks and Spygate. Trump will be trying to improve his odds with Fed appointments and an end to the trade wars. Democrats will be trying to derail Trump with investigations, accusations and leaks.

Some of this will be normal political crossfire, but some of it will be deadly serious, including arrests of former senior government officials and revelations of an attempted coup aimed at the president.

A perfect storm with no name is coming. The only safe harbors will be gold, cash and Treasury notes. And make sure you have a life preserver handy.

Regards,

Jim Rickards
for The Daily Reckoning

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