No Words for This

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6.6 million fresh unemployment claims this week. 3.3 million last week.

Combined you have a cataclysm of 9.99 million claims within two weeks.

“No words for this,” writes Pantheon Macroeconomics chief economist Ian Shepherdson — speechless, gobsmacked, floored, broken beyond endurance.

“What we are going through now dwarfs anything we’ve ever seen,” laments Heidi Shierholz, the Economic Policy Institute’s senior economist — “including the worst weeks of the Great Recession.”

Alas, the lady is correct.

This week’s unemployment figure rises 10 times higher than any week between 2007 and 2009.

In all, the United States economy shed 15 million jobs in that 18-month span. But at the present gallop… the economy will give up 15 million jobs in weeks.

Inconceivable — but there you are.

“The great financial crisis happened over a number of years,” says Wharton finance professor Susan Wachter. “This is happening in a matter of months — a matter of weeks,” she adds.

The New York Times estimates the unemployment rate is presently 13% and “rising at a speed unmatched in American history.”

You may wish to consider the reliability of the source. The true rate may be lower. But this you also must consider:

It may be higher.

And the Congressional Budget Office presently projects second-quarter GDP to plummet to an annualized -28%. That is correct.

One small example:

National box office sales ran to $204 million one year ago this week. And one year later?

$5,179 — essentially a $204 million collapse of the cinema industry.

The travel, retail and restaurant and ale house industries confront similar hells.

An economy such ours is like a long stretch of dominoes. Knock one down and the others go over…

The suddenly unemployed may lack the wherewithal to make rent. The landlord who depends on it may be unable to meet his own obligations. So with the person above him… and the next above him… all the way up the ladder.

A fellow going by the name of Mark Zandi is Moody’s Analytics chief economist. His researches indicate perhaps 30% of Americans with home loans — some 15 million of them — could fall into arrears if the economy remains shuttered through summer.

Meantime, the freshly unemployed send additional dominoes toppling…

The unemployed store manager can no longer afford the auto he planned to purchase. And so the automobile salesman goes without. His planned vacation he must cancel. He further abandons plans to renovate the kitchen or add the extension to his home.

The airline and hotel people then must suffer. As must the carpenter who would have worked the job. And the lumber men who would have sold the wood. As must the gasoline vendor who would have fueled its transportation.

And so on and so on, one domino knocking down the next in line, all the way through.

Multiply the business by 10 million, 15 million — 20 million — and you face a situation.

“No words for this.”

The Federal Reserve estimates the unemployment number may scale an unspeakable 47 million.

We find limited solace knowing the Federal Reserve nearly always botches the numbers. It is nonetheless a bleak arithmetic we confront.

The United States government is attempting to choke off the hemorrhaging with payments to businesses and the unemployed. But it will prove dreadfully unequal to its task.

What is more, multiple sources report some checks may not mail for 20 weeks — five months.

How will the unemployed with no savings rub along for five months?

Tens of thousands were driven to suicide during the Great Depression. Over 10,000 took the identical route out of the Great Recession.

Another suicidal wave — a large one — will wash on over should present conditions extend too long.

But you may be relieved to learn that the Federal Reserve is on the job…

It has expanded its balance sheet $1.6 trillion since mid-March alone. It required 15 months to attain that same figure during QE3.

And the balance sheet presently bulges to $6 trillion — a 60% increase in a mere six months.

One staff member of the Federal Reserve, meantime, believes it will swell to $9 trillion by year’s end.

We place high odds that it will expand further yet.

Well and truly… this is a time of superlatives.

But how much can the balance sheet expand… before bursting at the seams?

No one truly knows. But do we wish to find out?

Besides, its previous manias of balance sheet inflating did little for the real economy, the economy of things.

There is little reason — none, that is — to expect a different outcome now.

Here is another superlative:

The Dow Jones has endured its deepest first-quarter plunge in its entire 124 years. And heavier losses await, depend on it.

And so here we are, trapped… the devil to one side… the deep blue sea to the other.

“No words for this.”

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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The “Sugar-Rush” Economy

This post The “Sugar-Rush” Economy appeared first on Daily Reckoning.

It’s useful to think of the economy as we’ve known it as the “sugar-rush economy.” Allow me to explain.

Scientific research indicates that heavy doses of refined sugar may impact the human brain in a manner similar to addictive drugs. Stanford professor and neuroscientist Eric Stice has run experiments using MRI scans to study how our brains respond to sweetness. Consuming sugar releases dopamine, the brain’s “reward” chemical. The impact is similar to that of cocaine and other addictive drugs.

After scanning hundreds of volunteers, Stice concluded that heavy sugar consumers steadily build up a tolerance. The result: One must consume more and more sugar to release the same amount of dopamine. This process dampens the “reward center” of your brain in response to food.

The rising tolerance of the human brain to drugs (or sugar) mirrors how economies can build up a tolerance to government deficits and central bank stimulus. Balanced budgets and shrinking money supplies would bring about withdrawal symptoms that crash the economy.

So in order to maintain the status quo, the prescription is more drugs, more sugar, more spending and money printing. And if the effect starts to wane and withdrawal symptoms appear, the economists running policy predictably say, “Double the dose!”

Bubble-driven economies build up a tolerance for ever-higher doses of money and credit. The “Austrian” School of economics warns that once economies fall into addiction, the long-term consequences are tragic: either a deflationary collapse or hyperinflation. I agree with that assessment.

An alternative path might be a policy that proactively weans the system from addiction, but such a policy is politically impossible these days.

The Federal Reserve, along with every other central bank, has for the past decade been trying to prop up an unstable mountain of debt while simultaneously avoiding the collapse of confidence in their currencies.

The Fed’s rate hikes in 2017 and 2018 were partly to rebuild confidence in the dollar. Nothing builds confidence in paper money like being able to earn a positive real interest rate while holding it on deposit.

But we know how that confidence-building exercise ended at the end of 2018. The Fed retreated at the first sign of adversity and went right back to placating the financial system tantrum with sugar.

Interest rates on U.S. dollar bank deposits and Treasury bills were above zero for such a short period of time that the economic system barely had any time to get used to it. Now we face the prospect of zero interest rates for years into the future.

That might sound good if you are a borrower, but don’t forget that there’s a lender on the other side of the transaction. And in today’s economy, lenders employ many Americans and earn interest that’s passed on to pensioners. There are clear consequences to endless zero rates, as Japan’s financial system has shown everyone.

The Fed was in a difficult balancing act over the entirety of the post-2008 economic recovery. Now throw in the radical uncertainty of the economic ripple effects of the coronavirus and it’s become near-impossible for central banks to deliver an outcome that’s pleasant for investors.

Here’s a very important lesson of our debt-addicted system, one that doesn’t bode well for the future:

When an economy’s debt grows, it transfers what would have been future economic activity into the present. So it’s reasonable to assume that because the stock of global debt soared over the past decade, a large amount of production and consumption activity was pulled from the future to the present.

If the Fed’s balance sheet swells in size to $10 trillion or $20 trillion, it won’t make consumers more likely to borrow more money if they don’t want to borrow.

Even worse, from the Fed’s perspective, would be if consumers and companies go into balance sheet repair mode and pay down debt. That acts to transfer income earned today to pay for the purchases made yesterday on credit. From the Fed’s perspective, that behavior is like “anti-stimulus.”

But if consumers are offered zero interest on saving money and are still paying interest on their debt, can you blame them if they choose to pay down debts with the stimulus checks that will be mailed out in the weeks ahead?

If you think about the time-shifting nature of debt accumulation, this is the essence of how central banks supposedly stimulate economies. It simply scrambles everyone’s time preferences and robs the future, leading to bad decisions. It’s all very short-term.

The transfer of future economic activity into the present carries with it the problems we saw during the U.S. housing bubble: The borrowed-against future eventually arrives and brings with it a collapse in demand for the already-bought items.

Consider the spike and crash in U.S. new home construction. When single-family housing starts peaked at a 1.6 million annual rate in early 2006, several years’ worth of future demand was pulled into the present.

Low mortgage rates and lapsed underwriting standards caused years’ worth of demand to be constructed and delivered in a single year. The bust ruined millions of homebuyers’ credit scores, keeping them out of the market for years to come.

It took until 2012 to see a renewed uptrend in housing construction, and even now, despite favorable U.S. homeowner demographics, the level of starts is still 33% below the 2006 peak.

Such are the consequences of promoting bubbles. Wouldn’t it be better to not have bubbles in the first place?

You would think, but central bankers always seem to think they can keep everything in check.

Their goal of targeting a precise level of inflation expectations for future inflation, as though the economy were a thermostat, is not realistic.

Pursuing this goal creates more problems than it supposedly solves. Pushing consumers and businesses to buy today with the expectation of higher prices in the future is hardly different from promoting the wild growth in debt-driven housing activity in 2004–07.

The Fed’s money printing experiments infuse sugar rushes into the natural pace of economic activity, followed by hangovers.

This rush-hangover-rush-hangover cycle is a result of crony capitalism and central banking; it’s not the result of real capitalism. This system has resulted in fragile balance sheets at both the corporate and household level.

This brings me to corporate profit margins and how they are at risk in an economy fueled by the sugar rushes of federal deficits and money printing.

A private sector that once operated on a diet of healthy foods now lives from one sugar rush to the next. Deficits and money printing have degraded the health of most businesses.

Rather than live on the steady nourishment of savings and capital investment, more and more company leaders have resorted to short-term gimmicks to hold onto their executive titles and board seats.

A big gimmick was the wave of unaffordable stock buybacks and dividends we’ve seen over the past decade.

Rare is the company that produces so much excess cash so consistently that it can afford ever-rising distributions of cash to shareholders. Companies that can only afford to return cash to shareholders under favorable conditions (this describes most companies) wind up with little in reserve during lean times.

They discover that they squandered resources when some catalyst like the coronavirus comes along and they wish they still had the cash that they wasted on stock buybacks.

But they don’t have it. And they want to be bailed out for their errors. Again, that’s not capitalism. It’s crony capitalism.

And we’ll all be paying for it.

Regards,

Dan Amoss
for The Daily Reckoning

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Urgent Questions

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“Failure to comply with this order will result in a $5,000 fine and up to one year in prison…”

We woke this morning to this menacing threat. It came issuing from the loudspeaker of a prowling police cruiser.

It mandated residents to remain indoors (unless necessary)… else take the consequences described.

“We are all in this together,” the recorded message concluded — exhorting a spirit of solidarity among the homebound, a sense of shared wartime sacrifice.

Together… yet separate, isolated, desolate.

And so it has come to pass…

The land of the free has become the land of the locked down. And the home of the brave is the home of the fearful.

Viewing the slaughter in New York City, the hysteria appears warranted…

Horror in New York

The city has endured some 1,100 fatalities… and underprepared hospitals overflow with COVID-19 cases.

Nurses and doctors are falling in the line of duty, condemned by the very patients they mean to save.

Refrigerator trucks have been repurposed as makeshift morgues.

We are warned additional cities can expect parallel miseries.

The latest figures have United States infections at 206,207. They may run into the many millions eventually.

National fatalities presently exceed 4,000.

The medical men project 100,000–200,000 ultimate fatalities nationwide. And these grim figures assume a very severe and effective “social distancing.”

Deaths could run to the millions without it — again, so we are told.

Yet the questions are so many… and the answers so few.

Questions, Questions, Questions

Will the slightest exposure to the virus afflict you with a life and death battle? Or will only a heavier infestation breach your defenses?

Is the mass production of ventilators the solution? Or is it largely a waste of dear resources?

One New Orleans physician reports that 70–90% of the ventilated succumb to the illness regardless.

How can we even trust the numbers? In the absence of mass testing, how do we know the number of Americans with the virus? And how accurate are the tests?

Our agents report the possibility of substantial false readings in both directions.

But if many more Americans harbor the virus who never displayed symptoms… or only minor symptoms… it implies a drastically lower mortality rate.

Is it wise to switch off the economy for a virus that may murder under 1% of victims?

Off by a Factor of Three… or 300

Dr. John P. A. Ioannidis — professor of medicine and epidemiology at Stanford University — harbors severe doubts about the figures:

The data collected so far on how many people are infected and how the epidemic is evolving are utterly unreliable. Given the limited testing to date, some deaths and probably the vast majority of infections due to SARS-CoV-2 (COVID-19) are being missed. We don’t know if we are failing to capture infections by a factor of three or 300. Three months after the outbreak emerged, most countries, including the U.S., lack the ability to test a large number of people and no countries have reliable data on the prevalence of the virus in a representative random sample of the general population…

An error factor between three and 300 is a handsome range. All then is guesswork:

This evidence fiasco creates tremendous uncertainty about the risk of dying from COVID-19. Reported case fatality rates, like the official 3.4% rate from the World Health Organization, cause horror — and are meaningless. Patients who have been tested for SARS-CoV-2 are disproportionately those with severe symptoms and bad outcomes.

The Case of the Diamond Princess

Dr. Ioannidis cites the case of the cruise ship Diamond Princess:

Projecting the Diamond Princess mortality rate onto the age structure of the U.S. population, the death rate among people infected with COVID-19 would be 0.125%. But since this estimate is based on extremely thin data — there were just seven deaths among the 700 infected passengers and crew — the real death rate could stretch from five times lower (0.025%) to five times higher (0.625%). It is also possible that some of the passengers who were infected might die later, and that tourists may have different frequencies of chronic diseases — a risk factor for worse outcomes with SARS-CoV-2 infection — than the general population. Adding these extra sources of uncertainty, reasonable estimates for the case fatality ratio in the general U.S. population vary from 0.05–1%.

That huge range markedly affects how severe the pandemic is and what should be done. A populationwide case fatality rate of 0.05% is lower than seasonal influenza. If that is the true rate, locking down the world with potentially tremendous social and financial consequences may be totally irrational. It’s like an elephant being attacked by a house cat. Frustrated and trying to avoid the cat, the elephant accidentally jumps off a cliff and dies…

If we assume that case fatality rate among individuals infected by SARS-CoV-2 is 0.3% in the general population — a mid-range guess from my Diamond Princess analysis — and that 1% of the U.S. population gets infected (about 3.3 million people), this would translate to about 10,000 deaths. This sounds like a huge number, but it is buried within the noise of the estimate of deaths from “influenza-like illness.” If we had not known about a new virus out there and had not checked individuals with PCR tests, the number of total deaths due to “influenza-like illness” would not seem unusual this year.

Cruel Statistics

But the doctor is a man of science, and humble. He concedes we simply lack the data to draw full conclusions at this time.

Once again, official United States fatalities presently exceed 4,000. If the foregoing analysis has accuracy, perhaps “only” another 5,500 will succumb.

Each death is a tragedy in miniature, a private holocaust. A human image of almighty God is deleted forever from Earth.

But we necessarily write of abstractions in the case before us — the human forest rather than the individual maple, oak, spruce and birch trees within.

And statistics forces a cruel calculus upon us.

10,000 deaths is not 200,000 deaths. Nor is it 100,000 deaths.

If 200,000 — and then only under harsh and extended lockdown — the closing up of the American economy may well prove warranted.

But if 10,000?

We do not know which it will be. Although at this point 10,000 appears excessively optimistic.

Is the Cure Worse Than the Disease?

Again, we do not turn away from the human misery. But a truly collapsed economy may lead to as many deaths — or possibly more — than the virus itself.

The Federal Reserve projects 47 million Americans may take to the unemployment line by June’s end.

Fortunately, the Federal Reserve is rarely accurate. But what if it is in this instance?

Many industries may never recover from the present cataclysm. And those who labored within them may be permanently turned out.

Millions would be unable to take up employment in new lines.

The nation could be swamped by deaths of despair — by suicides… by the bottle… by drug and opioid abuse.

The coronavirus death count would not include these unseen legions. Yet they would be indirect casualties of the pestilence. And equally dead.

How Much More Can the Economy Take?

Here is a question, raised in the authentic spirit of curiosity:

Might we isolate the most vulnerable among us while the young and strong return to the factory floors, to the eating and drinking houses, to the theaters, to the stores?

Many would doubtless contract the malady. But their symptoms would most likely be mild to moderate. And they would acquire immunity.

The economy could then gutter along at a depressed but functioning level.

But if the present bans run through June — or longer — can it get back up?

Again, we do not pretend to know the solutions. We merely hazard a crude cost-benefit analysis.

Either “Appropriate” or the “Worst Man-made Catastrophe” in History”

We hope today’s extreme privations are warranted. For if not warranted, a mass hysteria is wrecking the economy and the futures of millions.

As a colleague of our co-founder Addison Wiggin writes, perhaps overegging the pudding slightly:

“This is either an appropriate-level response or it’s the worst man-made catastrophe in the history of man.”

Which is it?

Please, give us your take: feedback@dailyreckoning.com

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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A Warning From the Great Depression

This post A Warning From the Great Depression appeared first on Daily Reckoning.

3.28 million.

That is the total number of unemployment claims Americans filed last week — nearly five times the prior record of 695,000, from October 1982.

“We’ve known this number was coming for a week and a half,” laments Tom Gimbel, who captains a Chicago employment agency, adding:

It doesn’t surprise me at all. When you see a city like Las Vegas get shut down, I don’t know what other options there were than seeing a number like this.

A fellow must take his comforts where he can find them these days. And precious few are on offer.

But if it is consolation you seek, here you have it: Some economists had forecast as many as 7 million claims.

Here is additional cheer, however transient: The stock market had itself another day at the races today.

Stimulus, at Last!

The Dow Jones recaptured another 1,351 points. The S&P gained 154, the Nasdaq 413.

Today’s stock market surge follows last evening’s Senate passage of a $2 trillion relief package. It is the largest ever in United States history. The vote was unanimous.

The bill includes, per CNBC:

One-time direct payments to individuals, stronger unemployment insurance, loans and grants to businesses and more health care resources for hospitals, states and municipalities. It includes requirements that insurance providers cover preventive services for COVID-19.

Qualified individuals will receive cash payments of $1,200. Couples will receive $2,400… with an additional $500 for each child.

A Lobbyist’s Dream

883 pages in length, we can only imagine the skullduggery and chicanery within, the sweet venoms the lobbyists put in.

But who has time to read all 883 pages while American life dangles by a strand? And who can say no?

The legislation next goes to the House of Representatives for the rubber stamp — which it will assuredly receive tomorrow morning when the vote is scheduled.

Then it jumps to the White House for the presidential signature. Mr. Trump has pledged to sign it “immediately.”

Treasury Secretary Mnuchin said today the checks will mail within three weeks.

But as we have questioned previously… what will they accomplish?

Say’s Law

The issue at hand is not one of demand. It is one of supply. And a shuttered-in economy produces little.

Filling an idle man’s pocket with fabricated money does not increase supply. It merely increases the bid for existing supplies.

Let us not forget Say’s law — that supply creates its own demand. “Products are paid for with products,” argued Jean-Batiste Say over two centuries ago.

One man produces bread. Another produces shoes.

The cobbler who requires bread for his dinner appears before the baker. And the baker who must clad his feet appears before the baker.

They may transact in money… but money merely throws an illusory veil across their transactions.

Ultimately the baker purchases his shoes with the bread he has baked. And the cobbler purchases his bread with the shoes he has cobbled.

Concludes Monsieur Say:

Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found that one kind of commodity has been exchanged for another.

The Government Attempts to Outlaw Say’s Law

Assume now a free economy in which supply and demand are allowed their unfettered reign. Assume an economy — that is — that does not presently exist.

You can expect supply and demand to come to terms, to come into rough equilibrium.

If there is less demand, prices will fall to meet it.

But when the government prints money with no production to match it… it attempts to outlaw Say’s law.

Consider the thought experiment of another 18th-century thinker David Hume…

Imagine a benevolent fairy slips money into all the nation’s pockets overnight. And so the money supply doubles at a stroke.

Is this nation doubly rich?

Alas, it is not. The money supply has been doubled, yes. But no additional goods have entered existence.

The new money will simply chase existing goods. We can therefore expect prices to approximately double.

The Real Source of Wealth

Explains the late economist Murray Rothbard:

What makes us rich is an abundance of goods, and what limits that abundance is a scarcity of resources: namely land, labor and capital. Multiplying coin will not whisk these resources into being. We may feel twice as rich for the moment, but clearly all we are doing is diluting the money supply. As the public rushes out to spend its newfound wealth, prices will, very roughly, double — or at least rise until the demand is satisfied, and money no longer bids against itself for the existing goods.

There you have the wisdom of classical economics. But then came the Great Depression, and out it went…

Out from under every rock slithered the cranks, chiselers, dreamers, something-for-nothing and wine-from-water men…

All promising salvation, all offering their quack medicines.

And they all found their way to Washington…

Destroying Food While People Starved

The farmers were in a bad way, they argued. These sad sacks could not fetch enough money for their produce or their livestock. And so they needed a hand up.

A program was therefore required to raise prices. The brain trust then in operation hatched a beautiful scheme. What was it?

To set fire to the crops and murder the livestock.

To be clear, they did not butcher the animals to bring to market — but precisely the opposite — to keep them off the market.

Ponder for one moment the reality of it:

While millions starved, entire crops were set ablaze. And millions of animals went into the ground… rather than growling bellies… all to raise the price of farm products.

What of the impoverished nonfarmers required to pay more for their basic sustenance? How would higher food prices benefit them? Or the overall economy? Might the money people saved on food allow them additional purchases from other industries?

The men with the grand pensees did not say… or did not care for the answers.

The same lunacy was brought to bear on other industries…

A Reign of Terror

Production above mandated levels was not permitted. Nor were prices permitted to fall beneath predetermined levels.

If a man flouted the rules… woe to him.

One man, a New Jersey tailor, was convicted and clapped into prison. What was this hellcat’s “crime”?

He pressed a suit for 35 cents. Law required the job be done for 40 cents.

Meantime, New York’s garment industry endured a mighty terror, explains 1930s journalist John Flynn:

The code-enforcement police roamed through the garment district like storm-troopers. They could enter a man’s factory, send him out, line up his employees, subject them to minute interrogation, take over his books on the instant. Night work was forbidden. Flying squadrons of these private coat-and-suit police went through the district at night, battering down doors with axes looking for men who were committing the crime of sewing a pair of pants at night.

(We acknowledge economist Thomas DiLorenzo for the source material.)

Examples abound. Here is the central lesson:

At a time when lower prices and greater production were most needed… lower prices and greater production were violently suppressed.

This was the economic wisdom of the day. And now in this, our own time of economic crisis…

A fresh roster of cranks, chiselers, dreamers, something-for-nothing and wine-from-water men will afflict us anew.

1930s Redux

They would treat us to another New Deal — green in color — to haul us up.

Modern Monetary Theory is our salvation, they will croon.

Medicare for All will be the promised cure for the next pandemic.

All war with the ancient and iron laws of economics that time has proven valid.

Yet as in the 1930s… a fearful and desperate America may yet embrace them.

Regards

Brian Maher
Managing editor, The Daily Reckoning

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Get Ready for World Money

This post Get Ready for World Money appeared first on Daily Reckoning.

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

The post Get Ready for World Money appeared first on Daily Reckoning.

The Great Dollar Shortage

This post The Great Dollar Shortage appeared first on Daily Reckoning.

The coronavirus pandemic is a human tragedy. It’s also an economic tragedy, as the global economy is collapsing around us.

Second-quarter U.S. GDP may drop as much as 30%, which is a staggering figure. Many economists predict a third-quarter recovery, but there are still so many unknowns that it’s impossible to say.

It’s still too soon to say when America will reopen for business. And you can’t just flip a switch and return things to normal. That’s not how economies function.

Many industries may never recover and millions may be out of work for extended periods.

At the very least, we’re heading into a severe recession. And we could well be heading for a full-scale depression.

That’s not being alarmist.

The crisis will also accelerate the collapse of the dollar as the world’s leading reserve currency. So you need to prepare now. What do I mean?

The U.S. dollar is at the center of global trade.

The dollar represents about 60% of global reserve assets, 80% of global payments and almost 100% of global oil sales. About 40% of the world’s debt is issued in dollars.

The Bank for International Settlements (BIS) estimates that foreign banks hold over $13 trillion in dollar-denominated assets.

All this, despite the fact that the U.S. economy only accounts for about 15% of global GDP.

The reason the dollar is the world’s leading reserve currency is because there’s a very large liquid dollar-denominated bond market. Investors can go buy 30-day 10-year, 30-year Treasury notes, etc. The point is there’s a deep, liquid dollar-denominated bond market.

But the coronavirus crisis is creating a massive problem for foreign nations dependent on the dollar.

That’s because the world is facing a critical dollar shortage.

Many observers are surprised to hear about a dollar shortage. After all, didn’t the Fed print almost $4 trillion to bail out the system after 2008?

Yes, but while the Fed was printing $4 trillion, the world was creating $100 trillion in new debt.

This huge debt pyramid was fine as long as global growth was solid and dollars were flowing out of the U.S. and into emerging markets.

But that’s no longer the case, and that’s an understatement. Global growth was anemic before the crisis hit. Now it’s contracting rapidly.

If dollars are in short supply, China can’t control its currency and emerging markets can’t roll over their debts.

But again, you might say, isn’t the Fed engaged in its most massive liquidity injections ever and extending swap lines to foreign central banks to ensure they can access dollars?

Yes, but it’s not nearly enough to meet global funding needs.

Foreign nations are scrambling to acquire dollars right now. And that surging demand for dollars only drives up the value of the dollar, which puts additional strain on their ability to service debt.

When those debt holders want their money back, $4 trillion is not enough to finance $100 trillion, unless new debt replaces the old. That’s what causes a global liquidity crisis.

We’re facing a global liquidity crisis far worse than the one that occurred in 2008. In fact, the world is heading for a debt crisis not seen since the 1930s.

The trend away from the dollar was already underway before the latest crisis, led by China and Russia. Now that trend will greatly accelerate as the world seeks to eliminate, or greatly reduce, its dependence on the dollar.

That’s not just my opinion, by the way. Here’s what Eswar Prasad, former head of the IMF’s China team, says:

“The dollar’s surge will renew calls for a shift from a dollar-centric global financial system.”

It can happen much faster than you think. And the dollar’s days are more numbered now than ever.

But what will replace it? And why can you expect the dollar to lose up to 80% of its value in the years ahead? Read on.

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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Rickards: It’ll Get Worse it Before It Gets Better

This post Rickards: It’ll Get Worse it Before It Gets Better appeared first on Daily Reckoning.

We’re well into the coronavirus pandemic at this point. As of this writing, there are 360,765 reported infections and 15,491 deaths worldwide.

Over the next few days, you may be certain that those numbers will be significantly higher.

That’s how pandemics work. The cases and fatalities don’t grow in a linear fashion; they grow exponentially.

It’s widely acknowledged that this pandemic will get much worse before it gets better. There’s no doubt about that.

It didn’t take long for the coronavirus crisis to turn into an economic and financial crisis.

The Worst Collapse Since the Great Depression

The U.S. is falling into the worst economic collapse since the Great Depression in 1929. This will be worse than the dot-com collapse of 2000–01 and worse than the Great Recession and global financial crisis of 2008–09.

Don’t be surprised to see second-quarter GDP drop by 10% or more and for the unemployment rate to race past 10% on its way to 15% or higher.

The questions for economists are whether the lost output will be permanent or temporary and whether U.S. growth will return to trend or settle on a new path that is below the pre-virus trend.

Some lost expenditure may just be a timing difference. If I plan to buy a new car this month and decide not to buy it until August, that’s just a timing difference; the sale is not permanently lost.

But if I don’t go out for dinner tonight and then do go out a month from now, I’m not going to order two dinners. The skipped dinner is a permanent loss.

Unfortunately, 70% of the U.S. economy is based on consumption and the majority of that consists of services rather than goods. This suggests that much of the coronavirus impact will consist of permanent losses, not timing differences.

More important is the question of whether growth returns to trend by next year or follows a new lower trend. (Bear in mind that “trend” for the past 11 years has been 2.2% growth compared with average growth in all recoveries since 1980 of 3.2%; any decline in trend growth would be from an already low base.)

This is unknown, but the result will be as much psychological as policy driven.

The Fed’s Bazooka Is Empty

In situations like this, the standard policy response is for the Fed to cut rates, which it has certainly done.

The Fed has also launched massive amounts of quantitative easing.

In addition, they have guaranteed or offered credit facilities to banks, primary dealers, money market funds, the municipal bond market and commercial paper issuers so far.

Now the central bank has taken the unprecedented step of committing to buy as many U.S. government bonds and mortgage-backed securities as needed to keep the market functioning.

The problem is that the Fed’s programs won’t work as a form of stimulus. We’re seeing a supply shock as the economy grinds to a standstill. What’s everyone going to buy with all the money?

Still, they may have done things exactly backward.

Mohamed El-Erian, chief economic adviser at Allianz, says that the Fed should have focused on payment system problems and liquidity first but should not have cut rates.

Interest rates were already quite low. Once the Fed goes to zero as they did, they are incapable of cutting rates further (leaving aside negative rates, which also don’t provide stimulus).

El-Erian argues the Fed should have saved their rate cuts in case they are needed more acutely in the weeks ahead. Too late now. The interest rate bullets were fired. Now the Fed’s bazooka is empty at the worst possible time.

No Stimulus Bill

Meanwhile, Congress is working to pass a “stimulus” bill to fight the economic effects of the coronavirus pandemic.

Negotiations stalled this morning as Democrats want to insert provisions that would give tax credits to the solar and wind industry, give more power to unions and introduce new emissions standards for the airline industry.

“Democrats won’t let us fund hospitals or save small businesses unless they get to dust off the Green New Deal,” said Senate Majority Leader Mitch McConnell.

Once again, I need to emphasize the point: The economic impact of coronavirus could be devastating.

If consumers get used to not spending and decide that increased savings and debt reduction are the best ways to prepare for another virus or natural disaster, then velocity will fall and growth will be weak no matter how much money the Fed prints or the Congress spends.

The bottom line is that these spending bills provide spending but they do not provide stimulus. That’s up to consumers. And right now consumers are hunkered down.

It may be that the last of the big spenders just left town.

Gold Roars $75

Markets were down again today, what a surprise. The Dow lost another 600 points, finishing the day at 18,591.

Meanwhile, gold was up about $75 today. Physical supply is drying up and dealers are running out.

That’s why I’ve been warning my readers for years to get their gold before the crisis hits. Once it does (and it has), you won’t be able to get any.

What about silver?

You Should Get a “Monster Box”

Silver’s dynamics are a little bit different than gold because there are some industrial applications, but there’s no question that it’s a monetary metal.

And I always recommend that people have a “monster box.” A monster box is 500 American Silver Eagles, fine pure silver that comes directly from the Mint. It comes in a green case and is sealed.

The 500 coins at retailer commission will run you about $12,000 right now, but everybody should have one.

You ought to have a monster box of silver because if the power grid goes down, which could happen for a lot of reasons, the ATMs won’t work and neither will credit cards.

But if you walk into a store with five or six silver coins, you’ll be able to get groceries for your family.

Believe me, that’ll be legal tender when the time comes, so I definitely recommend silver.

Regards,

Jim Rickards
for The Daily Reckoning

The post Rickards: It’ll Get Worse it Before It Gets Better appeared first on Daily Reckoning.

Go Big or Go Home

This post Go Big or Go Home appeared first on Daily Reckoning.

To understand why the financial dominoes toppled by the Covid-19 pandemic lead to global insolvency, let’s start with a household example. The point of this exercise is to distinguish between the market value of assets and net worth, which is what’s left after debts are subtracted from the market value of assets.

Let’s say the household has done very well for itself and owns assets worth $1 million: a home, a family business, 401K retirement accounts and a portfolio of stocks and other investments.

The household also has $500,000 in debts: home mortgage, auto loans, student loans and credit card balances.

The household net worth is thus $1,00‌0,00‌0 minus $500,000 = $500,000.

Let’s say a typical financial crisis and recession occur, and the household’s assets fall 30%. 30% of $1 million is $300,000, so the market value of the household’s assets falls to $700,000.

Deduct the $500,000 in debts and the household’s net worth has fallen to $200,000. The point here is debts remain regardless of what happens to the market value of assets owned by the household.

Then the speculative asset bubbles re-inflate, and the household takes on more debt in the euphoric expansion of confidence to buy a larger house, expand the family business and enjoy life more.

Now the household assets are worth $2 million, but debt has risen to $1.5 million. Net worth remains at $500,000, since debt has risen along with asset values.

Alas, all bubbles pop, and the market value of the household assets decline by 30%, or $600,000. Now the household assets are worth $2,00‌0,00‌0 minus $600,000 or $1,400,000. The household net worth is now $1,40‌0,00‌0 minus $1,50‌0,00‌0 or negative $100,000. The household is insolvent.

On top of that, the net income of the family business plummets to near-zero in the recession, leaving insufficient income to pay all the debts the household has taken on.

This is an exact analog for the entire global economy, which pre-pandemic had assets with a market value of $350 trillion and debts of $255 trillion and thus a net worth of around $100 trillion.

The $11 trillion that has evaporated in the market value of U.S. stocks is only a taste of the losses in market value. Global stock markets has lost $30 trillion, and once yields rise despite central bank manipulations (oops, I mean intervention), $30 trillion in the market value of bonds will vanish into thin air.

The market value of junk bonds has already plummeted by trillions, and that’s not even counting the trillions lost in small business equity, shadow banking and a host of other non-tradable assets.

Then there’s the most massive asset bubble of all, real estate. Millions of properties delusional owners still think are worth $1.4 million will soon revert to a more reality-based valuation around $400,000, or perhaps even less, meaning $1 million per property will melt into air.

Once the market value of global assets falls by $100 trillion, the world is insolvent.

Everyone expecting the financial markets to magically return to January 2020 levels once the pandemic dies down is delusional. All the dominoes of crashing market valuations, crashing incomes, crashing profits and soaring defaults will take down all the fantasy-based valuations of bubblicious assets:

Stocks, bonds, real estate, bat guano, you name it.

The global financial system has already lost $100 trillion in market value, and therefore it’s already insolvent. The only question remaining is how insolvent?

Here’s a hint: companies whose shares were recently worth $500 or $300 will be worth $10 or $20 when this is over. Bonds that were supposedly “safe” will lose 50% of their market value. Real estate will be lucky to retain 40% of its current value. And so on.

As net worth crashes below zero, debts remain. The loans must still be serviced or paid off, and if the borrowers default, then the losses must be absorbed by the lenders or taxpayers, if we get a repeat of 2008 and the insolvent taxpayers are forced to bail out the insolvent financial elites.

Here’s the S&P 500. Where is the bottom?

There is no bottom, but nobody dares say this. Companies with negative profits have no value other than the cash on hand and the near-zero auction value of other assets. Subtract their immense debts and they have negative net worth, and therefore the market value of their stock is zero.

But don’t worry, the government is on the case…

That governments around the world will be forced to distribute “helicopter money” to keep their people fed and housed and their economies from imploding is already a given. Closing all non-essential businesses and gatherings will crimp the livelihood of millions of households and small businesses that lack the financial resources to survive weeks without any revenues.

The only question is whether governments which can borrow or print fresh currency will get ahead of the implosion or fall behind, creating a binary choice: go big now or go home.

Half-measures in helicopter money work about as well as half-measures in quarantine, i.e. they fail to achieve the intended objectives. Dribbling out modest low-interest loans is a half-measure, as is cutting payroll taxes.

Neither measure will help employees or small businesses whose income has fallen below the minimum needed to pay essential bills: rent, food, utilities, etc.

Meanwhile, the ruling elites will be under increasing pressure to bail out greedy financial elites and gamblers. Those are the scoundrels and parasites they bailed out in 2008-09. But this is not just another speculative bubble-pop, this is a matter of life and death and solvency for the masses of at-risk households and small businesses.

It is a different zeitgeist and a different crisis, and bailing out greedy parasites (banks, indebted corporations, speculators, financiers, etc.) will not go over big while households and small businesses are going bankrupt.

The Federal Reserve has been handed a lesson in the ineffectiveness of the usual monetary “bazooka” in bailing out the predatory-parasitic class of overleveraged gamblers. Nearly free money for financiers isn’t going to save the economy or non-elites sliding toward insolvency.

Instead of leaving the bottom 99.5% to twist in the wind while enriching the predatory-parasitic class, the ruling elites will have to let the top 0.5% twist in the wind and save the bottom 99.5%. This will require going against all the thousands of lobbyists, all the chums at the club, and all the millions in campaign contributions, but it’s a binary choice.

Either save your citizenry or sacrifice your legitimacy by bailing out the predatory-parasitic class. If the ruling elites save their parasitic pals, the public will demand the scalps of the predatory-parasitic class, and as the crisis deepens, they will eject every craven, greedy elected toady who caved in to the predatory-parasitic class.

So listen up ruling elites: either go big or go home. Either accept that it’s going to take several trillion dollars in helicopter money to insure the most vulnerable households and real-world enterprises remain solvent, or quit and go home.

The pandemic crisis isn’t going to end in April or May, though the urge to indulge in such magical thinking is powerful. It might still be expanding in August and September.

This is why it’s imperative to go big now, and make plans to sustain the most vulnerable households and small employers not for two weeks but for six months, or however long proves necessary.

Regards,

Charles Hugh Smith
for The Daily Reckoning

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It’s Over

This post It’s Over appeared first on Daily Reckoning.

The financial elites are pushing a narrative that asset prices, sales and profits will all return to January 2020 levels as soon as the Covid-19 pandemic fades.

Get real, baby.

Nothing is going back to January 2020 levels. Rather than the “V-shaped recovery” expected by Goldman Sachs et al., the crash in asset prices will eventually gather momentum.

Why? It’s simple: for 20 years we’ve over-invested in speculative bubbles and squandered borrowed money on consumption and under-invested in productivity-increasing assets.

To understand why the market value of assets will relentlessly reprice lower, a process sure to be interrupted with manic rallies and false dawns of hope that a return to speculative good times is just around the corner, let’s start with the basics:

The only sustainable way to increase broad-based wealth is to boost productivity across the entire economy.

That means producing more goods and services with less capital, less labor and fewer inputs such as energy.

Rather than boost productivity, we’ve lowered productivity via mal-investment and by propping up unproductive sectors with immense sums of borrowed money.

The poster child for this dynamic is higher education: rather than being pushed to innovate as costs skyrocketed, the higher education cartel passed its inefficiencies and bloated cost structure onto students, who have paid for the bloat with $1. 6 trillion in student loans few can afford.

As for Corporate America squandering $4.5 trillion on stock buybacks, the effective gains on productivity from this stupendous sum is not just zero. It’s negative, as the resulting speculative bubble suckered in institutions and individuals who’d been stripped of safe returns by the Federal Reserve’s low-interest-rates-forever policy.

What could that $4.5 trillion have purchased in terms of increasing the productivity of the entire economy?

Considerably more than the zero productivity generated by stock buybacks. The net result of uneven gains in productivity and the asymmetric distribution of whatever gains have been made is stagnant wages for the bottom 90% and rising costs for everyone.

Those of us who are self-employed or owners of small businesses know that healthcare insurance costs have been ratcheting higher by 10% or more annually for years.

Whatever gains in health that have been purchased with the additional trillions of dollars poured into the healthcare cartels have been offset with declining life spans, soaring addictions to opioids and numerous broad-based declines in overall health.

The widespread addiction to smartphones and social media have deranged and distracted millions, crushing productivity while greatly increasing loneliness, insecurity and a host of social ills.

Two dynamics define the economy in the 21st century:

1. We have substituted debt-driven speculation for productive investment

2. We have substituted debt for earnings

This is why the repricing of speculative-bubble assets can’t be stopped: debt-driven speculation is not a sustainable substitute for investing in increasing productivity, and debt-fueled consumption masquerading as “investment” is not a sustainable substitute for limiting consumption to what we earn and save.

All bubbles pop, period. Once Corporate America’s credit lines are pulled and its revenues and profits plummet, the financial manipulation of stock buybacks will end. That spells the end of the 12-year bull market in stocks.

As the tide of speculative mania ebbs and confidence wanes, the world’s housing bubbles will all pop, and the $1.4 million bungalows will drift back down to their Bubble #1 highs around $400,000, and perhaps even drop from there.

As for collectibles and other play-things of the super-wealthy: the bids will soon vanish and yachts will be set adrift to avoid paying the dock fees.

Regards,

Charles Hugh Smith
for The Daily Reckoning

The post It’s Over appeared first on Daily Reckoning.