Yesterday we likened the economy to an overswollen tick, obese with blood.
Rather than blood, the economy is obese with debt.
Like our ludicrously engorged arachnid, the economy cannot much expand. It is impossibly loaded down… and groans under the burden, horribly swaybacked.
The economy will continue to wallow — unless it can shake off the weight.
But how can it?
Today we blow the dust off an ancient solution… and polish it up for the 21st century.
It may flabbergast and stagger you. You may laugh it out of court.
But it may offer the only way out. What is it?
The answer momentarily. We first check on another preposterously inflated behemoth — the stock market.
The bears won the day on majority decision…
The Dow Jones lost 28 points on the day. The S&P slipped a single point. The Nasdaq, meantime, scratched out a four-point gain today.
In all, a quiet an uneventful December day.
But how can the economy unload the gargantuan debt load that saddles it, hagrides it and torments it?
We must first come to terms with the facts…
Not Much Bang for the Buck
The United States government has since borrowed some $13 trillion since the financial crisis.
These borrowings have hoisted the United States national debt above $23 trillion.
Yet the American economy expanded only $5.1 trillion these past 10 years.
That is, while GDP has expanded less than 40%… the national debt has increased over 120%.
Parallel the past decade to the locust years of the Great Depression…
Real GDP 1929–1940 expanded at a cumulative 19.89% rate.
But for the past 11 years, cumulative GDP expanded 18.85%.
That is, the economy of the Great Depression — cumulatively — outperformed today’s.
Average real annual economic growth since 2009 runs to 2.23%. But the larger trend since 1980 is 3.22%.
The Cost of Lossed Growth
One percentage point may seem a trifle. And one year to the next it is.
But Jim Rickards calculates the United States would be $4 trillion richer today — had the 3.22% trend held this decade.
Run it out 30, 50, 60 years… and Jim concludes the nation would be twice as rich over a lifetime.
Here you have a grim lesson in the meaning of negative compounding interest.
Meantime, the Congressional Budget Office (CBO) projects economic growth to limp along at an average 1.9% per annum 10 years out.
That 1.9% stands against the 3.22% rate common until the great gale of 2008 blew on through.
More debt… less growth.
And so the Keynesian “multiplier” has taken up division.
A “Scoundrel Economics”
Here is the deeper lesson:
Debt-based consumption steals from the future to gratify the present. It brings tomorrow’s consumption forward to today — and leaves the future empty.
We have borrowed from the future so heavily and so long… we are writing checks against a failing bank.
It is a juvenile economics, a wastrel economics, a deadbeat economics — a scoundrel economics.
“The wicked borrows, and cannot pay back”… as Psalm 37:21 informs us.
Meantime, federal debt presently rises three times the rate of revenue coming in. And trillion-dollar deficits gape to the farthest horizon.
CBO projects annual deficits 10 years out will average $1.2 trillion.
Allow for the inevitable smash-up recession. Deficits could double… or possibly triple.
As is, debt service alone could rise to $915 billion by 2028 — nearly 25% of the entire budget.
For the long-term sufferings we turn to the Brookings Institute:
Sustained federal deficits and rising federal debt, used to finance consumption or transfer payments, will crowd out future investment; reduce prospects for economic growth; make it more difficult to conduct routine policy, address major new priorities or deal with the next recession or emergencies; and impose substantial burdens on future generations.
$210 Trillion in Debt?
And we have failed to mention “unfunded liabilities.”
Future Social Security, Medicare and Medicaid obligations are not fully tallied in official number crunching.
Work them in… and America’s true debt may rise to an obscene $210 trillion.
“The pen shrinks to write, the heart sickens to conceive” the enormity of the coming migraine.
Such obscene debt obligation cannot possibly be met. And debts that cannot be paid… will not be paid.
We cannot “grow” our way out of it.
Meantime, America labors under record student loan debt, credit card debt, auto debt, mortgage debt, corporate and state and local government debt.
Again we ask: Is there a way out? Can the economy unload its impossible cargo of debt?
One way out — or partial way out — is hyperinflation on the scale of a Venezuela.
Inflation lightens debt’s burdens. But a hyperinflation hauls them away altogether.
But hyperinflation is a very rough medicine — worse than the ailment it cures. Besides, the Federal Reserve cannot even wring a sustained 2% (official) inflation from the economy.
How could it bumble into a hyperinflation?
Furthermore, no major Western industrial power has endured hyperinflation in over 50 years.
The United States will not likely be the first.
Is there another way out?
In theory — in theory — there is. But we must furl back the scrolls of time… to the sunrise of civilization.
The 5,000-year Old Solution to America’s Debt?
Here is the answer:
A debt jubilee.
That is, the mass forgiveness of debt.
Heave the ledger book into the fire. Run a blue pen across the red ink. Wipe the tablet entirely (or mostly) clean.
The practice began some 5,000 years distant in ancient Sumer and Babylon… where a new king would delete the people’s debts.
Was it because the new king was a swell fellow? Or because he was a tribune of the proletariat, an ancient Karl Marx?
No. He cleared the books to preserve his hide. He was alert — keenly — to social stability.
An impossibly indebted class was a disgruntled class. And a disgruntled class is a dangerous class.
Economist Michael Hudson is the author of …And Forgive Them Their Debts. From whom:
The idea was to restore the economy to the stability that existed before widespread debts ran up during the preceding ruler’s reign. What was “restored” was an idealized “original” or “normal” state in which nobody owed debts to the palace…
The idea of debt amnesties was to prevent debt from tearing society apart — to prevent the kind of crisis that the United States has been in since 2008, when President Obama didn’t cancel the junk-bond debts, or the debts that tore the Greek economy apart — when the IMF and Europe imposed them on Greece instead of letting it default on debts owed to French and German bondholders.
Recognizing that a backlog of debts had accrued that could not be paid out of current production, rulers gave priority to preserving an economy in which citizens could provide for their basic needs on their own land while paying taxes, performing their… labor duties and serving in the army…
Even in the normal course of economic life, social balance required writing off debt arrears to the palace, temples or other creditors so as to maintain a free population of families able to provide for their own basic needs… Societies that canceled the debts enjoyed stable growth for thousands of years.
The debt jubilee was smuggled into Judaic law… and the Bible. Every 50th year would be a jubilee year, says Leviticus:
You shall make the 50th year holy, and proclaim liberty throughout the land to all its inhabitants. It shall be a jubilee to you; and each of you shall return to his own property, and each of you shall return to his family.
Now come home…
Might these United States witness a debt jubilee? After all, the average American sags under $38,000 of debt… or some such.
Already cries arise for a debt jubilee of sorts. Democratic presidential candidates — for example — have announced intentions to forgive student debt.
Four Prerequisites for an American Debt Jubilee
Porter Stansberry of Agora’s Stansberry Research has canvassed the history. He identifies four requisite elements of an American jubilee:
- The wealth gap must be getting dramatically bigger.
- There must be cultural threats from those with different values or from outsiders (in other words, minority populations and immigrants).
- The government must be ineffective at providing solutions.
- And there must be growing anger toward the “elites.”
We append no comment.
Clearing away all the deadweight sitting on the economy is perhaps the way to renewed American prosperity.
The economy can then proceed on solid foundations of capital, unencumbered and unbridled by debt… like a stallion suddenly freed from the barn.
Of course, any such jubilee would bring consequences.
It would peel back the lid on a can of wriggling worms…
What about all the creditors a jubilee would clean out? Not all are villain Wall Street banks. Must they all go scratching?
And what of moral hazard?
Who would not load up on debt? After all, someone will one day lift it off your shoulders.
And who would loan anyone money at all — knowing one day he may be fleeced, dragooned and clubbed — and holding an empty bag.
That is, a debt jubilee would tilt the delicate balance between creditor and debtor.
In conclusion, we expect no jubilee of the sort here envisioned.
But we do expect a jubilee… of a sort. Only this jubilee will bring little jubilance.
It will arrive with the next recession. It will wipe out trillions of creaking corporate and personal debt.
It will also sink the economy. And only the avenging gods will rejoice…
Managing editor, The Daily Reckoning
Has the United States dollar conquered “Triffin’s dilemma”?
That is… is the dollar safely and securely perched atop the global monetary system?
Today we turn away from the bright, sunlit world of appearance… and seek our answer in the “shadows.”
For “the eye is always caught by light,” as author Gregory Maguire styles it — “but shadows have more to say.”
To these shadows we shall listen.
Belgian economist Robert Triffin argued decades ago that:
If a nation’s currency is to put in double duty as a global reserve currency, the issuing nation must print drowning amounts — far beyond its national needs.
Why? To keep global trade going along.
The Burden of a Global Currency
A failure of its printing press would deprive the world of required funds. And the gears of global commerce would grind down.
That is, the issuing nation must issue heroic amounts of currency to hold global trade together.
An Argentina, for example, may wish to purchase oil from a Saudi Arabia. But Saudi Arabia — understandably — may not accept Argentine pesos in exchange.
But if Argentina dangles out United States dollars instead, these Saudi Arabia can use.
Multiply this example in countless directions and you have the flavor of it.
Why then the dilemma?
Because the nation ladling out the reserve currency must run chronic current account deficits.
Triffin argued these chronic deficits would eventually bring down tremendous weights upon the currency.
That is, the currency’s vastly excessive supply would fatally undermine its value.
This currency would plunge toward nothingness. Interest rates would go skyshooting as the world emptied overboard the increasingly worthless paper.
Hence… Triffin’s dilemma.
But come pull up to the facts…
Why Hasn’t the Dollar Collapsed?
The United States has piled up record current account deficits lo these many years — twinned with a $23 trillion national debt.
And trillion-dollar annual budget deficits run out to the distant horizon.
Yet — yet — the dollar has rarely been mightier. And interest rates have rarely sunk lower.
10-year Treasury yields scrape along under 2%. And 30-year Treasury yields?
They run scarcely higher… at 2.24%.
That is, debt has never scaled such dizzied and obscene heights. Yet the dollar remains king, as deeply enthroned as ever.
And interest rates wallow near record lows.
Where then is the long-lamented death of the dollar? Where is the mass exodus from the greenback?
Shrieks about its looming demise have gone out for decades.
Yet here it stands.
It is true, this central bank or that central bank may reduce its dollar holdings. It may heave part of its Treasury holdings out the door.
But it makes no nevermind, argues Jeffrey Snider of Alhambra Partners…
Central Banks Aren’t Central
That is because central banks are no longer central — as Mr. Snider has previously argued in these pages. The dins, clamors and carrying-ons of the central banks signify nothing:
The central bank is not central… The thing people have the most trouble with is the idea that central banks are not central. It flies in the face of everything you have been taught and told your whole life. There is no money in monetary policy; it is entirely psychology…
Monetary policy contains no money; it runs entirely on expectations. Therefore, according to this view, what ultimately matters is how you perceive monetary policy…
How we perceive monetary policy?
Then you might act in anticipating all that “money printing” was going to have stimulative and even sharp inflationary effects. You might then pull forward purchasing activity, or, if a business, hiring and production, before the expected higher costs arrived.
Just so. But it has clearly failed.
If central banks are no longer central… what then is central?
As Snider has also argued in these pages, here is the answer:
The “shadow banking system.”
The Shadow Banking System Casts Its Shadow Across the World
The shadow banking system is the deeply interconnected network of banking institutions that operate outside direct control of central banks.
They include the large Wall Street banks and their offshore units.
This shadow banking system extends its shade across Europe, the Caribbean and Asia — the world over.
It first took shape in the 1950s and ’60s. That is, after Bretton Woods hoisted the dollar up to global dominance.
It expanded through the 1980s, ’90s… and beyond.
Entirely beneath notice, the shadow banking system shouldered the central banks out of the international monetary system.
“The Dollar Did Not Replace Gold in 1971. The [Shadow Banking System] Did Long Before 1971”
Snider: “The global money system moved on without central banks bothering to notice.” More:
The dollar did not replace gold in 1971. The [shadow banking system] did long before 1971…
Especially from the 1960s forward, and particularly in the 1990s forward, was that as the [shadow banking system] replaced other forms of mediation in global trade. What actually happened was it became a parallel banking system unto itself… with no backing by gold or by physical cash issued by the U.S. Treasury…
That balance clearly shifted and changed throughout the ’80s. When the pound crisis hit in 1992, central bankers were astounded by the massive offshore liquidity that easily dwarfed what they could answer with. The balance of money had shifted, dramatically, yet economists and policymakers did not shift with it…
And the shadows are so opaque, so impenetrable… they escaped regulation:
So what we’re describing here is almost an entire massive complete system… that existed offshore and wholesale, in the shadows, because there was no regulatory authority… no government authority over the conduct of this system. It was essentially a self-contained system that operated beyond the reach of everybody.
“The Real Action Transpires in the Shadows”
This shadow banking system runs on dollars — as the respiration runs on oxygen, as autos run on gasoline — as politics runs on lies.
As much as 80% of international trade is invoiced in the dollar. And this dollar participates in nearly 90% of all foreign exchange trades.
Meantime, nearly 40% of the world’s debt is issued in dollars. And offshore banks sit upon perhaps $18 trillion in dollar-denominated international liabilities.
Yes, the real action transpires in the shadows. Snider:
The world needs dollars for the purposes of a global reserve currency. It gets them from this [shadow banking] system…
You want to swap yen for U.S. Treasuries? Credit-based “dollars.” You want to swap yen for Singapore bonds? Credit-based “dollars.” A company in Brazil wants to ship China raw material? Credit-based “dollars.” A firm in Europe is trying to build capacity in Thailand? Credit-based “dollars”…
The [shadow bank’s] dollar is the world’s true reserve currency; therefore, problems in it are going to be problems shared by the whole interconnected global economy…
A Way out of Triffin’s Dilemma?
Can we conclude the shadow banking system offers the way out of Triffin’s dilemma?
After all, its thirst for dollars is seemingly infinite. And the dollar packs a wallop… despite record debts and infinitely mushroomed deficits.
So turn your focus away from the central banks, argues Snider.
Is the Russian central bank hoarding gold in conspiracy against the dollar? Is the People’s Bank of China shoveling dollars overboard? Is the Bank of Japan losing its yen for dollars?
Be not deceived.
As long as the shadow banking system runs on dollars… so does the world:
Unless and until the banking system moves away from dollars, diversifying national reserve holdings means absolutely nothing. Nothing… despite a decade’s worth of noise, fury and quite often heartache, there is simply no realistic alternative… We are stuck with this arrangement largely because the media, politicians, central bankers, etc., don’t know a thing about it.
But perhaps each American should fall upon both knees… and thank fortune for this shadow banking system.
It may be the central pillar holding the dollar up high…
Managing editor, The Daily Reckoning
Markets are eagerly awaiting the conclusion of the so-called “phase one” trade deal between the U.S. and China.
Both parties are trying to reach a mini-deal involving simple tariff reductions and a truce on new tariffs along with Chinese purchases of pork and soybeans from the U.S.
The likely success or failure of the mini-deal has been a main driver of stock market action for the past year. When the deal looks likely, markets rally. When the deal looks shaky, markets fall.
A deal is still possible. But investors should be prepared for a shocking fall in stock market valuations if it does not. Markets have fully discounted a successful phase one, so there’s not much upside if it happens.
On the other hand, if phase one falls apart stock markets will hit an air pocket and fall 5% or more in a matter of days.
But even if the phase one deal goes through, it does not end the trade wars. Unresolved issues include tariffs, subsidies, theft of intellectual property, forced transfer of technology, closed markets, unfair competition, cyber-espionage and more.
Most of the issues will not be resolved quickly, if ever.
Resolution involves intrusion into internal Chinese affairs both in the form of legal changes and enforcement mechanisms to ensure China lives up to its commitments.
These legal and enforcement mechanisms are needed because China has lied about and reneged on its trade commitments for the past 25 years. There’s no reason to believe China will be any more honest this time around without verification and enforcement. But China refuses to allow this kind of intrusion into their sovereignty.
For the Chinese, the U.S. approach recalls the Opium Wars (1839–1860) and the “Unequal Treaty” (1848–1950) whereby foreign powers (the U.K., the U.S., Japan, France, Germany and Russia) forced China into humiliating concessions of land, port access, tariffs and extraterritorial immunity.
China has now regained its lost economic and military strength and refuses to make similar concessions today.
In order to break the impasse between protections the U.S. insists on and concessions China refuses to give.
This points to the fact that the “trade war” is not just a trade war but really part of a much broader confrontation between the U.S. and China that more closely resembles a new Cold War.
This big-picture analysis has been outlined in a speech given by Vice President Mike Pence in October 2018 and a follow-up speech delivered on Oct. 24, 2019. Both speeches are available on the White House website.
Secretary of State Mike Pompeo has also added his voice to the hawks warning that China is a long-term threat to the U.S. and that business as usual will no longer protect U.S. national security.
Pictured above are Vice President Mike Pence (l.) and Secretary of State Mike Pompeo (r.). Pence and Pompeo have taken the lead in the public criticism of China by the Trump administration. In a series of speeches and interviews they have pointed out egregious human rights violations, blatant theft of intellectual property and threatening military advances that should cause the U.S. to treat China as more of a geopolitical adversary than a friendly trading partner.
The views of Pence and Pompeo, often captured under the heading of the Pence Doctrine, were neatly summarized by China expert Gordon G. Chang, author of The Coming Collapse of China, in a Wall Street Journal Op-Ed on Nov. 7, 2019, quoted below:
The Trump administration is heading for a fundamental break with the People’s Republic of China. The rupture, if it occurs, will upend almost a half century of Washington’s “engagement” policies. Twin speeches last month by Vice President Mike Pence and Secretary of State Mike Pompeo contained confrontational language rarely heard from senior American officials in public.
“America will continue to seek a fundamental restructuring of our relationship with China,” the vice president said at a Wilson Center event on Oct. 24 as he detailed Chinaʼs disturbing behavior during the past year.
Some argue the vice presidentʼs talk didnʼt differ substantively from his groundbreaking October 2018 speech, but these observers fail to see that in the face of Beijingʼs refusal to respond to American initiatives, Mr. Pence was patiently building the case for stern U.S. actions.
Moreover, the vice presidentʼs thematic repetition was itself important. It suggested that the administrationʼs approach, first broadly articulated in the December 2017 National Security Strategy, had hardened. That document ditched the long-used “friend” and “partner” labels.
Instead it called China — and its de facto ally Russia — “revisionist powers” and “rivals.”
At a Hudson Institute dinner last Wednesday, Mr. Pompeo spoke even more candidly: “It is no longer realistic to ignore the fundamental differences between our two systems and the impact… those systems have on American national security.” Chinaʼs ruling elite, he said, belong to “a Marxist-Leninist party focused on struggle and international domination.” We know of Chinese hostility to the U.S., Mr. Pompeo pointed out, by listening to “the words of their leaders.”
The U.S.-China trade war is not the anomaly globalists portray. It’s not even that unusual viewed from a historical perspective. Retaliation from trading partners is all in the game.
Free trade is a myth. It doesn’t exist outside classrooms. France subsidizes agriculture. The U.S. subsidizes electric vehicles. China subsidizes a long list of national champions with government contracts, cheap loans and currency manipulation. Every major economy subsidizes one or more sectors using fiscal and monetary tools and tariffs and nontariff barriers to trade.
Trump’s tariffs on China in January 2018 were reputedly the start of a trade war, but the war was actually begun by China 24 years earlier when China devalued its currency (1994) and continued when China joined the WTO (2001) and immediately started to break WTO rules.
The trade battle is now joined, but no critical issues have been resolved and none will be in the near future. The U.S. cannot accept Chinese assurances without verification that intrudes on Chinese sovereignty.
China cannot agree to U.S. demands without impeding its theft of U.S. intellectual property. This theft is essential to escape the middle income trap that afflicts developing economies.
The EU is caught in the crossfire. The U.S. is threatening to impose tariffs on German autos and French agricultural exports as part of an effort to force an end to German and French subsidies to favored interests.
The U.S. will win the trade wars despite costs. China will lose the trade wars while maintaining advantages in intellectual property theft. Trade wars will continue for years, even decades, until China abandons communism or the U.S. concedes the high ground in global hegemony.
Neither is likely soon.
for The Daily Reckoning
The president has spoken…
A China trade accord can jolly well wait until next year’s election is done, he announced yesterday.
While the president spoke, the United States House of Representatives legislated…
China is allegedly roughhousing its Uighur (wee-gr) Muslim minority.
The House has passed legislation that denounces the inhumanity… and sanctions certain Chinese officials for their villainous participation.
Beijing is unamused — toweringly unamused.
Swift retaliation it has promised if the Uighur Intervention and Global Humanitarian Unified Response Act of 2019 assumes force of law.
In brief, neither party presently negotiates from goodwill.
Meantime, the Dec. 15 deadline draws near.
On that date fresh tariffs enter effect — absent a resolution.
Given the mutual asperity presently prevailing… a resolution is far from certain.
Is it any wonder the stock market turned in losses three consecutive sessions?
Thus today was the ideal occasion for a lovely trade rumor… a gorgeous sprig of catnip to excite, vivify and invigorate the animal spirits.
Global Times editor Hu Xijin, late yesterday:
I predict there is a high probability that President Trump or a senior U.S. official will openly say in a few hours that China-U.S. trade talks have made a big progress in order to pump up the U.S. stock markets. They’ve been doing this a lot.
You may hand that man a Gurkha Royal Courtesan cigar. His forecast rang dead center…
Word crossed the wires at 4:06 this morning, coming by way of Bloomberg:
The U.S. and China are moving closer to agreeing on the amount of tariffs that would be rolled back in a phase-one trade deal despite tensions over Hong Kong and Xinjiang, people familiar with the talks said… Recent U.S. legislation seeking to sanction Chinese officials over human rights issues in Hong Kong and Xinjiang is unlikely to impact the talks, one person familiar with Beijing’s thinking said.
The rumor’s source requested anonymity. But the scalawags at Zero Hedge point a razzing finger at Mr. Larry Kudlow:
There were naturally questions about the Bloomberg piece: like why does an “unknown” source who “thinks” the deal is imminent take precedence, when very known people, i.e., the U.S. president and [senior trade official] Wilbur Ross, both said a deal may not happen for almost a year… or why was this “respected”
Larry Kudlowsource so terrified to give his name on the record if everything checks out?
Mr. Kudlow is of course the president’s senior economic adviser — and professional optimist.
We confess it: We trust the rumor no further than we could heave a horse by its tail.
It claims, for example, “U.S. legislation seeking to sanction Chinese officials… is unlikely to impact the talks.”
But would you shake the hand of a man preparing to stab you with the other?
And we might remind you: The Chinese are notoriously sensitive to slights.
But the computer algorithms running Wall Street are gullible dupes. They will fall for anything…
Jilted 100 times by false promises, they salivated, swooned and fell for the 101st.
It is time to buy, they concluded… and set to work.
S&P futures jumped immediately on Bloomberg’s “news.” And the Dow Jones opened the day 200 points to the good.
The president did his own part to meet Mr. Hu’s overnight prediction… and goose the stock market.
Trade talks were “going very well,” he claimed this morning — one day after suggesting a deal could go on ice until next year’s election is decided.
The computers chose to believe this morning’s comments. The market leaked some steam towards the end of the day, it is true.
But the Dow Jones still posted a 147-point gain. The S&P came out 19 points ahead; the Nasdaq, 46.
But we come now to this question:
What happens to the stock market if Dec. 15 passes without a trade deal?
Won’t the same computer algorithms that pushed stocks up today… pull them down?
We suspect strongly that they will.
But by how much?
Managing editor, The Daily Reckoning