Exposing the Myth of MMT

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Yesterday I discussed modern monetary theory (MMT) and how it’s become very popular in Democratic circles.

That’s because it allows for much greater government spending without having to raise everyone’s taxes. And everyday citizens could get behind it because it promises to fund lots of programs without seeing their taxes raised.

What’s not to like?

If MMT were just a fringe idea with a few fringe followers, I wouldn’t waste my time or your time on it. But it’s coming your way, so it is important to understand it.

If you missed yesterday’s reckoning, go here for a refresher.

The people who are thinking about MMT, who understand it at least in some superficial way, are the people who are driving the policy debate or running for president.

Many mainstream economists and money managers have attacked MMT, including Fed Chairman Jay Powell, Larry Summers, Paul Krugman, Kenneth Rogoff, Larry Fink, Jeff Gundlach, Jamie Dimon and Ray Dalio.

But much of their criticism is unjustified (see below for more). I’m an opponent of MMT — but for different reasons. As far as I know, I’m the only analyst who’s raised the objections I list below.

Today, I’m going to show you what I believe to be the real problem with MMT.

Again, it’s easy to see why so many politicians on the Democratic side would be such big supporters of MMT.

Some or all of them have come out in support of the following programs:

Free college tuition, student loan forgiveness, Medicare for all, free child care, universal basic income (UBI) and a Green New Deal. Some support them all.

Needless to say, that’s going to cost a lot of money. Just consider the Green New Deal alone.

I’m not going to go through every detail of it. But in essence it would spend trillions of dollars, for example, building high-speed rail. The idea is to cut down dramatically on air travel. It would also convert nearly every single structure in the country to solar power.

I wrote this article from a house that’s running on solar power. But it’s very expensive to put the system in. I have a big system, but it barely covers my house. And every time I look at it, I say, “Oh, we’re going to do this for every house in the country? Good luck with that.”

Some analysts have estimated that the Green New Deal would cost around $97 trillion. That’s trillion, not billion — or nearly five times annual U.S. GDP.

When critics hear that a Green New Deal could potentially cost something like $97 trillion, or proposals for Medicare for all, free tuition, free child care or guaranteed basic income, they say, “That all sounds nice, but we just can’t afford it.”

That’s their main argument — that no matter how desirable these programs might be in theory, we just can’t afford them. Most criticism of MMT falls along those lines.

Even the Keynesians like those I mentioned earlier, who generally favor large amounts of government spending to stimulate the economy, have come out against MMT.

Besides that claim that we can’t afford it, even the Keynesians say MMT would be highly inflationary. If you printed that much money and start handing it out to people, demand would outstrip the output capacity of the economy and you’d get high inflation.

But the MMT advocates have an answer to these objections. They’re not the least bit intimidated by critics who say we can’t afford it.

They say, “Yes, we can, and Modern Monetary Theory proves it. Just print the money and monetize the debt. Japanese debt is 2.5 times the United States’ debt, and China’s is higher than ours.”

They haven’t collapsed, so we can take on far more debt than we have today. Furthermore, QE did not create much inflation. In fact, the Fed would like to see more inflation than it has. It still can’t produce a sustained 2% inflation rate after all these years.

You might think the argument is ridiculous. After all, do we really want to become Japan?

But in important ways, the MMT crowd has the upper hand in the debate.


Jim Rickards
for The Daily Reckoning

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The Real Problem With Modern Monetary Theory

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MMT supporters will point to 2008 and say, “Just look at QE. In 2008, the Federal Reserve Balance sheet was $800 billion. But as a result of QE1, QE2, and QE3, that number went to $4.5 trillion. And the world didn’t end. To the contrary, the stock market went on a huge bull run.We did not have an economic crash. And again, inflation was muted.”

Fed chairman Jay Powell has criticized MMT, for example. But its advocates say Powell and other Fed officials hoist themselves on their own petard. That’s because they are the ones who actually proved that MMT works. They point to the fact that the Fed printed close to $4 trillion and nothing bad happened. So it should go ahead and print another $4 trillion.

This is one of the great ironies of the debate. The Fed criticizes MMT, but it was its very own money creation after 2008 that MMT advocates point to as proof that it works.

Their only quibble is that the benefit of all that money creation went to rich investors, the major banks and corporations. The rich simply got richer. MMT advocates say it will simply redirect the money towards the poor, students, everyday Americans, people who need healthcare and childcare. It would basically be QE for the people, instead of the rich.

And it will go into the real economy, where it will boost productivity and finally give us significant growth.

When I first encountered these arguments, I knew they weren’t right. Both my gut feeling and my more rigorous approach to my own theory of money told me MMT was wrong. But I must admit, their arguments were more difficult to answer than I expected. I had a tough time uncovering the logical flaws.

Their points are internally consistent, and they did have a point. After all, the Fed did create all that money and it didn’t produce a calamity. Who’s to say they couldn’t do a lot more of it?

In other words, the Keynesian argument does not hold water when you look at the facts or certainly recent economic history.

Without doing any more serious thinking about it, I probably would have lost a debate with any leading MMT proponent who’s done a lot of work on it, despite “knowing” they were wrong. I couldn’t easily refute their basic arguments.

You can never win a debate if you don’t understand your opponent’s position. Over the past several years I got dragged into endless gold versus bitcoin debates, and I always thought they were silly because gold is gold, and bitcoin is bitcoin. Contrasting them never made sense to me, but that’s what everybody wanted to hear, so I participated in a lot of gold versus bitcoin debates.

I won every debate according to the judges or the audience, but the point being I had to understand bitcoin in order to see its shortcomings. I wasn’t about to debate somebody about bitcoin and get blindsided or embarrassed because I didn’t understand their arguments. I had to become a complete expert on bitcoin to win these debates.

The same applies to MMT. If you’re going to debate somebody on MMT, you’d better know it better than they do or you’re going to lose that debate. It just so happens that I’ll be debating a leading MMT proponent on April 3, in just a few weeks. So I had to immerse myself in it to learn it inside and out.

I knew I had to go beyond the standard arguments that we can’t afford it, that it would explode the deficit, etc. I’m happy to say that I worked out an answer refuting MMT, but it wasn’t easy. It took a lot of hard thinking. Today I’m giving you a preview of what I’ll argue at the upcoming debate.

Here’s what it comes down to…

The real problem with MMT can be traced to its very definition of money. The MMT advocates say they know what money is. Money derives its value from the fact that you need it to pay your taxes. In the U.S. case, money is dollars.

But their definition of money is flawed. In other words, the whole theory is built on quicksand. And this is the point that everyone is missing, including the usual critics. No one else has raised it.

The basis of money, the definition of money, has nothing to do with paying taxes. I can think of a hundred ways to hold money and store wealth where you don’t owe any taxes. Here’s one example…

If you buy a share of stock and stick it in your portfolio for 10 years without selling it, how much do you owe in taxes? Zero. You don’t owe any taxes until you sell it. This is one of the reasons why Warren Buffet is so rich, by the way. He pays very little taxes.

But it’s not just stocks. What if you bought some land instead? You sit on it for 10 years, 20 years, 30 years, and ultimately give it to your kids. They keep it as a family homestead. How much do you owe in income tax? Zero. You don’t owe a nickel until you sell it.

The same applies to gold. You buy it and stick it in a safe for years. If you don’t sell it, you don’t owe taxes on it. That’s my point. In other words, there are innumerable ways to convert money into assets that preserve wealth where you don’t owe any taxes. You don’t have to pay taxes if you have stores of wealth and don’t sell them.

The bottom line is, people have lots of alternatives. They are infinitely resourceful when it comes to getting out of the tax system and preserving wealth without having to pay taxes. So the whole idea that money derives its value from taxation fails. Money is not based on paying taxes at the end of the barrel of a gun.

What is money based on then?

Ultimately, it’s based on trust. We all need to trust in the money we use or else it wouldn’t be of much value. I could offer you seashells as a form of payment, but it’s highly unlikely you’ll accept it. When it comes your turn to buy goods and services, you need to know that someone else will accept your money.

It’s that trust in the system that creates value. That system is very fragile and can be lost. And once lost, it’s almost impossible to regain. That’s why fiat currencies always fail in the long run.

MMT advocates say trust has nothing to do with it, that you need to pay your taxes with money, or else. But look at a place like Venezuela today. It’s one of the worst cases of hyperinflation in the history of the world. I don’t think anybody in Venezuela is worried about paying their taxes. They’re worried about finding food and water so their family doesn’t starve today.

And if they happen to have some local money they’re getting out of it as fast as they can. If they can find gold or dollars or euros, they’re buying it. They’re dumping their currency faster than the government can print it. When confidence is lost, when trust is lost, people get out of rapidly depreciating money as fast as they can.

That’s where the whole modern monetary theory breaks down, at its foundation. It fails because they substitute the threat of violence and jail for what really drives money, which is trust. They don’t understand that. And this trust can be lost very quickly.

MMT advocates also seem to think inflation can be dialed back or tweaked at will. Maybe they’ll say we’ll only spend $90 million on a Green New Deal instead of $97 trillion. They think they can dial it down. But they can’t. Once inflationary expectations set in, they take on a life of their own. It’s a non-linear system.

It’s like moving the control rod in a nuclear reactor. If you get it wrong by just a little you can melt the reactor down and kill a million people. It’s a non-linear system.

So, my point is that MMT advocates misunderstand what money is. Money is not about coercion, it’s about trust. They don’t understand that there are plenty of non-taxable alternatives people can resort to. They misunderstand what inflation is. Inflation is not a linear phenomenon, but a non-linear phenomenon that can spiral out of control before you can do anything about it.

And I use Venezuela as my case study, not QE. So, the point being they don’t understand money. This is what I’ll argue at my upcoming debate.

I expect to win.


Jim Rickards
for The Daily Reckoning

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A Recipe for Massive Government Spending

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I try to avoid partisan politics in my analysis. And I never try to tell people how to vote or what they should think. I trust my readers to make their own judgments. But sometimes I can’t avoid partisan politics because they can have a major impact on markets and the economy.

Leading Democratic presidential hopefuls Elizabeth Warren, Kamala Harris and Bernie Sanders have expressed desires to increase income taxes to 70% or even 90% on the rich, impose “wealth taxes” on their net worth and impose estate taxes that are equally onerous when they die.

The result would be that working people would pay state and local income tax on their wages, super-high income taxes on interest and dividends and annual wealth taxes and whatever was left over would be confiscated when they die.

In case you think these proposals are too extreme to become law, you might want to check out the polls. Recent polls show 74% of registered voters support a 2% annual wealth tax on those with $50 million of assets and 3% on those with $1 billion of assets.

Don’t assume you’re exempt just because your annual income is lower. Those tax thresholds are on wealth, not income, and could include stocks, bonds, business equity and intangible business equity for doctors, dentists and lawyers.

Another poll shows 59% of voters support the 70% income tax rate proposed by Rep. Alexandria Ocasio-Cortez (D-New York). Politicians go where the votes are. Right now, the votes are in favor of much higher taxes on you.

The history of these taxes is that the rates start low and the thresholds start high, but it’s just a matter of time before rates rise, thresholds drop and everyone is handing over their wealth.

But taxes become very unpopular when too many people get clipped. And politicians are very sensitive to that. Now some Democrats are calling for a system that would allow them to spend much, much more money on social programs without appreciably raising taxes. For politicians, it’s a dream come true — if it could work.

The leading Democratic candidates for president and numerous members of Congress have come out in favor of Medicare for All, free child care, fee tuition, a guaranteed basic income even for those unwilling to work and a Green New Deal that will require all Americans to give up their cars, stop flying in planes and rebuild most commercial buildings and residences from the ground up to use renewable energy sources only.

The costs of these programs are estimated at $75–95 trillion over the next 10 years. To put those costs in perspective, $20 trillion represents the entire U.S. GDP and $22 trillion is the national debt.

It used to be easy to knock these ideas down with a simple rebuttal that the U.S. couldn’t afford it. If we raised taxes, it would kill the economy. If we printed the money, it would cause inflation. Those types of objections are still heard from mainstream economists and policymakers, including Fed Chair Jay Powell.

But now the big spenders have a simple answer to the complaint that we can’t afford it. Their answer is, “Yes, we can!” That’s because of a new school of thought called Modern Monetary Theory, or MMT.

Daily Reckoning managing editor Brian Maher previously discussed MMT here and here.

This theory says that the U.S. can spend as much as it wants and run the deficit as high as we want because the Fed can monetize any Treasury debt by printing money and holding the debt on its balance sheet until maturity, at which time it can be rolled over with new debt.

What’s the problem?

Bernanke printed $4 trillion from 2008–2014 to bail out the banks and help Wall Street keep their big bonuses. There was no inflation. So why not print $10 trillion or more to try out these new programs?

There are serious problems with MMT (not the ones Jay Powell and mainstream voices point to). But very few analysts can really see the flaws. I’ll be in an MMT debate with a leading proponent in a few weeks, where I will point out what I believe to be the biggest flaws with MMT. To my knowledge, no one else has raised them.

For now, get used to the rise of MMT. It will be a central feature of the 2020 election campaign. The disastrous consequences are a little further down the road.

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The Government’s Greatest Con Job

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Yesterday we documented our personal frustrations with contemporary technology.

Today we file a protest against contemporary money.

We begin with the “evolution” of United States currency…

We refer you to this $10 bank note, dated 1928:

10 Dollar Bill

In those antique days, a fellow could march into a bank, hand the clerk a slip of paper as illustrated above and demand the denominated amount in gold coin.

The system imposed a hard discipline upon banks… and held inflation in checkmate.

Federal Reserve banks were required to keep a 35% reserve of “gold or lawful money” on hand, lest they make a liar of the United States Treasury secretary — in this case the Hon. Andrew William Mellon.

In effect, the private citizen bound the banking system in golden handcuffs.

But one Great Depression, one New Deal and one world war later… we come now to a 1950 $10 bank note:

10 Dollar Bill

In appearance it is nearly a perfect twin to the 1928 model — with one infinitely telling exception.

Can you sniff it out?

The 1928 note bears this inscription:

“Redeemable in gold on demand at the United States Treasury or in gold or lawful money at any Federal Reserve Bank.”

But reads the 1950 version:

“This note is legal tender for all debts, public and private, and is redeemable in lawful money at the United States Treasury, or at any Federal Reserve Bank.”

The fine print disguises a vast swindle: The gold provision was stricken from the record.

The bankers had broken free of their golden handcuffs… and no longer could a private citizen bring them to honest account.

But what about “lawful money”? What is it?

In 1947, a certain gentleman — A.F. Davis by name — dispatched the following note to the United States Treasury, accompanied by a $10 note:

I am sending you herewith via registered mail one $10 Federal Reserve note. On this note is inscribed the following:

“This note is legal tender for all debts, public and private, and is redeemable in lawful money at the United States Treasury, or at any Federal Reserve bank.”

In accordance with this statement, will you send me $10.00 in lawful money?

The acting treasurer, M.E. Slindee, responded after this fashion:

Dear Mr. Davis,

Receipt is acknowledged of your letter of Dec. 9 with enclosure of one ten-dollar ($10.) Federal Reserve note.

In compliance with your request, two five-dollar United States notes are transmitted herewith.

And so Mr. Slindee began chasing his tail — what the logicians call circular reasoning.

In exchange for his $10 note, Mr. Davis was mailed two $5 bills bearing the same pledge to redeem in lawful money.

But this Davis fellow would not be so easily shooed away.

He returned one of the $5 bills, once again demanding lawful money in exchange:

Finally Mr. Slindee threw up the sponge:

Dear Mr. Davis:

… You are advised that the term “lawful money” has not been defined in federal legislation. It first came to use prior to 1933 when some United States currency was not legal tender but could be held by national banking associations as lawful money reserves.  

Since the act of May 12, 1933, as amended by the Joint Resolution of June 5, 1933, makes all coins and currency of the United States legal tender and the Joint Resolution of Aug. 27, 1935, provides for the exchange of United States coin or currency for other types of such coin or currency, the term “lawful money” no longer has such special significance.

The $5 United States note received with your letter of Dec. 23 is returned herewith.

Beginning in 1963, all promises to redeem in lawful money were stricken from United States currency.

Here, in graphic detail, the devolution of American money:


Say what you will of paper money. But in one sense it is redeemable — if you’ll forgive the expression in the present context.

It in tangible. You can hold it in your hand, in your wallet, in your mattress.

It cannot be erased at the stroke of a key.

It is also anonymous. Once out of your hands, it leaves no trace.

None of these happy virtues apply to digital money…

Digital money has no tangible existence. It can disappear at a keystroke. The bank can freeze you out of it. And every transaction goes on your permanent record.

What is more, digital money removes all natural checks.

Even paper money files a claim on Earth’s resources — it is constituted of cotton and linen.


Digital money is the type of money bound to get itself into trouble.

Wispy as fog, slippery as oil, it is conjured into existence… as if by the magician’s wand.

And it can get around the world at electronic speeds.

It is also the ideal money for a government swollen to ghastly dimensions — its issue being unlimited in theory.

If paper money invites abuse… what about digital money?

Thus we speak our piece for lawful money — even paper money.


Brian Maher
Managing editor, The Daily Reckoning

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Can Technology Save Us?

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The economy has been trapped in a one-step-forward, two-steps-back cycle nearly a decade running.

One door opens, two slam shut.

A ray of sun cracks through, the overcast patches the hole.

Rapidly advancing technology offers a way out, its drummers claim.

They insist automation, robotics and artificial intelligence (AI) will soon catapult the economic system into vastly more productive realms.

By 2030 alone, they believe it could yield an additional $16 trillion to global GDP.

They further claim 40–50% of human occupations will be subject to automation over the next 15–20 years.

These are not limited to trucking, taxi driving or manufacturing and construction.

To these we must add white-collared jobs in law, finance, medicine, accounting, etc.

What will become of the attorney at law, we wonder — and the human conductor of the ambulance he chases?

We are unconvinced automation will proceed at the projected gallop.

But let us suspend all assumption for the moment… and drive on to the inevitable question:

What happens when robots acquire the brains to perform nearly all human labor?

Economist Joseph Schumpeter (1883–1950) put the term “creative destruction” into general circulation.

For Schumpeter, capitalism was the “perennial gale” of creative destruction.

Capitalism blows away the old and inefficient. In comes the new and improved.

Because of capitalism’s perennial gale, today’s serf lives more royally than yesteryear’s king.

Explains economist Richard Rahn of the Cato Institute:

The average low-income American, who makes $25,000 per year, lives in a home that has air conditioning, a color TV and a dishwasher, owns an automobile and eats more calories than he should from an immense variety of food…

Louis XIV lived in constant fear of dying from smallpox and many other diseases that are now cured quickly by antibiotics. His palace at Versailles had 700 rooms but no bathrooms (hence he rarely bathed), and no central heating or air conditioning.

Here is progress itself. All because capitalism’s creative gales flattened everything in sight.

The obvious benefits of capitalism are why most focus on the “creative” side of the ledger.

But what about the equally critical “destruction” side?

Innovation and technology have always allowed humans to mine fresh sources of productive employment.

The 19th-century farmer became the 20th-century factory worker… became the 21st-century computer programmer.

But an omnipotent robot would likely spell the end of the human laborer.

A robotic brute that can drive home a rivet is one thing.

But a genius robot that could do anything a human can do — only better — is yet another.

This robot would tower above the human as the human towers above the beasts of the field.

An Aristotle, a da Vinci, an Einstein would be a dunce next to it.

What human ability would lie beyond this unnatural beast?

Artistic expression?

A 900-IQ robot might run its circles around the human antique, you say.

But it could not appreciate beauty — much less express it.

The robot has a brain… but no soul.

No, the kingdom of the arts belongs to man alone.

Well, please introduce yourself to Aiva…

Aiva is a computerized composer.

Programmers had it soak in the music of Bach, Beethoven, Mozart and other colossi of the classical canon.

Based on the inputs, it taught itself to compose original music.

Its music is indistinguishable from a carbon-based professional’s.

Its tunes have been featured in cinematic soundtracks, advertisements and computer games.

Will the next Mozart be a computer?

Not even the oldest profession is safe from robotic competition — but let it pass for now.

Moreover, Schumpeter’s creatively destructive gales tear apart the social fabric …

Capitalism puts out its tongue at tradition.

It uproots communities. It swings the human being around hairpin turns of social and technological change… like a dizzied fly upon a wheel.

Within a generation, the centuries-old farming community is given over to the assembly line and the punch clock.

A generation later the factory goes dark as creative destruction blows the jobs clear to China… or Vietnam… or wherever labor is cheapest.

And Americans must constantly upend their families to follow the jobs — which pries apart the bonds of community.

And advancing technology makes today’s job obsolete tomorrow.

Not everyone can take up new lines.

Many are simply left behind, broken… and can never catch up.

The river of progress carries forward, as it must.

And yes — it must.

Do you reject progress?

Then the inventor of the wheel you must set down as a colossal villain.

If justice held, Ford should have been flattened by an auto, Franklin fried in an electric chair.

We disagree, with the highest respect.

But let us at least recognize…

The advancing river of progress sometimes takes the human note with it.

And not all change is progress…


Brian Maher
Managing editor, The Daily Reckoning

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REVEALED: The True Inflation Rate

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The Federal Reserve has pursued its 2% inflation target with a monomaniacal determination… like a mad dog worrying a bone.

But it has largely been a juiceless pursuit… “as elusive as sheet lightning playing among June clouds.”

Inflation has bubbled a bit here, gurgled a bit there. But to limited general effect.

Headline inflation (including food and energy) sank from 2.9% last June… to 1.6% in January.

It is true that core inflation — excluding food and energy — runs somewhat warmer at 2.2%, annualized.

But the oven is nonetheless set to low temperature.

Experts dispute the causes — depressed worker wages obtaining from globalization, “secular stagnation,” a global “savings glut,” the astrological misalignment of stars and planets, etc.

Some accounts carry a greater plausibility than others.

We presently incline toward the astrological theory — but we are far from convinced.

Meantime, the February inflation numbers are due out tomorrow.

We expect no sharp departure from existing trends.

And they will likely offer the Federal Reserve additional justification to hold rates steady.

Here we speak of official inflation measures.

But is actual inflation vastly higher?

Yes, the Federal Reserve’s 2% sustained inflation hopelessly eludes it.

Yet assets such as stocks, bonds and real estate have been the scenes of dramatic inflation over the past decade.

The S&P — to take one example — has increased over 300% alone.

And therein hangs an epic tale…

Household net worth in these United States has increased some 73% since the Great Recession.

And Americans’ financial assets totaled over $85 trillion at the end of 2018.

Traditional inflation models exclude these asset prices.

But what if they were included?

The Federal Reserve’s New York headquarters hatched a model for that express purpose:

The “underlying inflation gauge,” or UIG.

This UIG incorporates not only consumer prices — but producer prices, commodity prices and financial asset prices.

Thus it promises a true inflation reading.

Claims the New York Fed:

The UIG proved especially useful in detecting turning points in trend inflation and has shown higher forecast accuracy compared with core inflation measures.

If we gauge inflation by this comprehensive model… the true rate of inflation substantially exceeds the Federal Reserve’s 2% target.

What is the true inflation rate as indicated by the UIG?

Roughly 3%.

From 3.06% in December, it slipped to 2.99% in January.

The true inflation rate nonetheless exceeds the core rate by nearly one full percentage point.

The lesson, plain as eggs:

Inflation lives and thrives. But largely in assets.

And the Federal Reserve could have begun raising interest rates as far back as Bernanke.

Danielle DiMartino Booth, former aide to ex-Dallas Fed President Richard Fisher:

Had the Fed been using a 2% target based on the UIG, [former chairs] Janet Yellen and Ben Bernanke would have been compelled to raise interest rates much earlier than they did. 

Sharpening the point is Joseph G. Carson, former global director of economic research at AllianceBernstein:

The UIG carries [an important message] to policymakers: The obsessive fears of economywide inflation being too low is misguided; monetary stimulus in recent years was not needed.

Obsessive fears of low inflation are misguided? Monetary stimulus in recent years was not needed?

This Carson heaves up strange and dangerous heresies.

The Paul Krugmans of this world will set him down as an agent of the Old Boy himself… and an enemy of civilization.

As well claim that Noah’s Ark did not house all the world’s species in duplicate… that George Washington did not fell the cherry tree…

Or worse — that gold is money.

But what if the UGI is correct?

Were decades of loose monetary policy an epic blunder?

Analyst John Rubino of DollarCollapse.com:

The really frustrating part of this story is that had central banks viewed stocks, bonds and real estate as part of the “cost of living” all along, the past three decades’ booms and busts might have been avoided because monetary policy would have tightened several years earlier, moderating each cycle’s volatility.

But if the actual inflation rate runs to 3%… what does it portend for the economy?

When this underlying inflation gauge crossed 3%, Zero Hedge reminds us, recession and bear markets often follow.

At 2.99%, it is currently hard against the 3% threshold.

So here we welcome our old colleague Catch-22 to the proceedings…

If the Federal Reserve resumes rate hikes at this late point, it would likely trigger a major stock market sell-off.

But if it does not raise rates, the true inflation rate will once again exceed the critical 3% mark, inviting recession… and a market sell-off.

Thus the Fed appears damned if it raises rates — and damned if it doesn’t.

But either way… damned.


Brian Maher
Managing editor, The Daily Reckoning

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The Worst Jobs Report Since 2017

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The big story today is the February jobs report.

In the parlance of the trade, it was a “miss.” And not by a jot, not by a tittle, not by a whisker.

Economists as a whole divined the economy would add 175,000 jobs last month.

What was the actual number?

A mere 20,000 — miles and miles beneath expectations — and the worst monthly showing since September 2017.

Consider: The United States economy has averaged over 200,000 new jobs 12 months running.

Among the report’s “highlights”:

Manufacturing jobs fell 8,000 below estimate. Retail jobs disappointed to the sour tune of 6,100. Construction jobs fell a full 31,000 short of the glory.

Today’s report sent stocks into red numbers for the fifth straight day — despite a late uprising.

The Dow Jones closed the day down 23 points. The S&P lost 6, the Nasdaq 13.

But markets should take heart…

Bad News Is Good News for Stocks

Today’s unemployment report means Jerome Powell will not be raising interest rates soon.

In fact, we suspect Mr. Powell is inwardly pleased today.

The report gives him every excuse to hold — or even cut rates.

And the president will stop battering him about interest rates.

Affirms Mark Hamrick, senior economic analyst for Bankrate.com:

“All of this shows the Federal Reserve can continue to wait before raising interest rates, if at all this year.”

Today fed funds futures are in fact giving a 25% chance of a rate cut by next January — up 5% from yesterday.

What precisely does this morning’s grim report portend for the American economy?

“The sharp slowdown in payroll employment growth in February provides further evidence that economic growth has slowed in the first quarter,” says Michael Pearce, senior U.S. economist at Capital Economics.

“This is a disappointing report,” moans Carl Tannenbaum, chief economist of Northern Trust, adding:

“I don’t think there’s any way to sugarcoat it.”

But that does not mean the rah-rah men did not try…

Mother Nature and Uncle Sam Are to Blame

It was the month’s lousy weather, they bellow. Of course construction jobs are down. And do not forget about the government shutdown.

On hand with his sack of sugar was professional optimist Larry Kudlow, the president’s economic point man.

“Fluky,” is how he describes this morning’s report:

I think you have timing issues with respect to the government shutdown, winter seasonal issues. I think it’s very fluky. I wouldn’t pay any attention to it to be honest with you.

“I think the federal shutdown and the weather are playing games with the numbers,” adds Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.

Just so.

We are in no position to question a director of the United States National Economic Council… or a chief investment officer at Independent Advisor Alliance.


The professional men had forecast 175,000 jobs.

Were they not aware of the lousy weather… the government shutdown… and all the temporary hobgoblins tormenting February’s employment market?

What is the point of having experts?

Mr. Jonathan Doe or Mrs. Jane Doe could scarcely botch things so badly.

And if the number did come ringing in at 175,000 — depend on it — the same experts would seize upon it as proof of a raging economy.

We wonder when they will be exhausted of excuses.

Nearly 10 years running, disappointing economic data have resulted from the weather. Or this temporary malady. Or that brief detour.

It has been a permanent chasing of rainbows.

Yet there has been no pot of gold at rainbow’s end.

Perhaps today’s woeful unemployment says what it means and means what it says…

The “New Normal”

The economy is staggering to a crawl.

GDP growth peaked at 4.2% in last year’s second quarter.

The quarters following turned in 3.4%… and 2.6%.

After today’s botchwork you must dose any expert prognostication with heaping amounts of table salt.

But Goldman now projects 0.9% Q1 GDP growth.

The Federal Reserve’s New York garrison has it at 0.88%.

Its Atlanta branch now estimates Q1 growth of merely 0.5%.

Meantime, the New York Fed’s No. 1 man says he expects 2019 GDP to print just 2%.

But the same John Williams is neither concerned… nor surprised.

Diminished growth is merely the “new normal”:

I know this talk of slowing growth is causing uncertainty, some hand-wringing and even fear of recession. But slower growth shouldn’t necessarily come as a surprise. Instead, it’s the “new normal” we should expect.

But with the highest respect to Mr. Williams… why shouldn’t we expect more?

Plenty of Bang, Not Much Buck

The United States government has borrowed in excess of $10 trillion over the prior decade.

$10 trillion is plenty handsome.

Yet that $10 trillion of debt yielded only $3 trillion of real GDP.

To hone in closer, the nation’s debt increases roughly $100 billion per month.

But GDP only increases some $40 billion per month.

We are getting plenty of buck, that is. But not much bang.

The nation’s debt-to-GDP ratio already exceeds 100% — its highest since WWII.

But where are the Nazis? Where are the Japanese?

What Manhattan Project is the United States government financing?

The standard formula says deficits should decline during economic expansions. Come the inevitable recession, the government then has a full war chest to throw at it.

But a decade into the current expansion… the Treasury is depleted.

And the debt-to-GDP ratio is projected at 115% within three years.

Meantime, the Federal Reserve expects long-term GDP growth of 1.9%.

It is a grim calculus.

So Far, So Good

Yet the president of the New York branch of the Federal Reserve is unconcerned.

We are reminded of the blind fellow who falls off the 100-story building.

“So far, so good,” he assures himself 80 floors down.

We suspect the United States is 80 floors down. Or perhaps 73. Or 68.

Either way, the pavement is coming up fast…


Brian Maher
Managing editor, The Daily Reckoning

The post The Worst Jobs Report Since 2017 appeared first on Daily Reckoning.

Bull Market — or Bear Market Rally?

This post Bull Market — or Bear Market Rally? appeared first on Daily Reckoning.

After “the sharpest rally since the global financial crisis recovery” — Goldman’s phrase — has the stock market peaked for the year?

Today we weigh the evidence… and hazard a conclusion.

The major averages jumped over 20% from their Christmas Eve bottoms.

The Dow Jones catapulted over 4,000 points valley to peak.

The S&P, 450. And the Nasdaq, some 1,250 points.

VIX — Wall Street’s “fear gauge” — plunged from a menacing 36 to a kittenish 13 by March 1.

“The bull is back,” gloated the financial press. “The bears are back in hibernation,” they exulted, putting out their tongues at skeptics.

But as the sage Lao Tzu warned:

The light that burns twice as bright burns half as long.

This light is flickering… and fading.

Today the major averages posted losses for the fourth consecutive session — their worst span since December.

The Dow Jones gave back another 200 points today.

The S&P surrendered 22; the Nasdaq, 84.

So we ask:

Was the historic bounce a mere spasm of a dying beast — a “bear market rally”?

Financial journalist and analyst Mark Hulbert:

Rallies in excess of 20% during bear markets are hardly unprecedented. In each of the 2000–2002 and 2007–09 bear markets, for example, both the S&P 500 and the Nasdaq Composite rallied by more than they have recently — only to eventually succumb to the bear market that remained in force.


During the bear market that lasted from March 2000–October 2002, for example, the S&P 500 experienced a rally in which it rose 21%; in its biggest rally during the October 2007–March 2009 bear market it gained 24%. Both rallies were larger than the one this benchmark has experienced since its Christmas Eve low.

Morgan Stanley subscribes to the bear rally theory. It has been “selling the rally” — not buying.

Returning to Goldman, its analysts believe the market’s recent highs could well be the year’s highs.

It appears there is justice here.

Before its recent slippage, the S&P was already up some 15% on the year.

A 15% annual gain for the S&P is pretty handsome.

Its average annualized return stretching 90 years is a workmanlike but unspectacular 9.8%.

And over the past 20 years?

You may wobble at the answer:


Yes, it is true — 2017 turned in a 19.7% gain.

And 2013 yielded a wondrous 29.6% return.

But these years we find at the margin, far beyond the general.

Also in recent years:

2018’s 4.4% loss. 2015’s 1.4% gain. 2011’s 2.1% gain.

If the S&P can scratch out a 15% gain this year, it would be a job jolly well done.

Especially, that is, in context of unfurling economic conditions.

As we have documented to the verge of exhaustion, growth is winding to a halt.

GDP trends in the wrong direction. The consumer sags and groans under record debt. Retail stores close at alarming rates. Construction wallows.

Et cetera, et cetera.

Yesterday’s reckoning, in summary:

Debt delinquencies are at unprecedented levels, bankruptcies are soaring, retail stores are closing at a record pace; this is the worst economy for farmers since the early 1980s, exports are plummeting and a brand-new real estate crisis has now begun.

Meantime, unemployment is beginning to slink higher… like a choking vine.

The Federal Reserve evidently agrees.

Why else would it suddenly transition to “patience”?

Before December’s near-bear market Jerome Powell was implacably and resolutely determined to raise interest rates and hack the balance sheet.

But the market read him a severe lesson… and Mr. Powell saw the light.

Unfortunately it could be the headlight of a locomotive barreling toward him…

Monetary policy runs to a lagging 12–18-month schedule.

The combined effects of previous rate hikes and balance sheet gougings may finally be working their mischief.

Powell could cut rates once again — fed funds futures suggest a nearly 20% chance of a rate cut by next January.

But recall the 12–18-month policy lag.

Like Custer at Little Bighorn, reinforcements would not arrive in time.

And as we have explained previously, recession almost always follows the first rate cut after a hiking cycle.

By then… it is too late.

We cannot be certain recession will come calling this year.

But we hazard the stock market will not end 2019 much above its recent highs — if it ends 2019 higher at all.


Brian Maher
Managing editor, The Daily Reckoning

The post Bull Market — or Bear Market Rally? appeared first on Daily Reckoning.

The Worst Economy Ever?

This post The Worst Economy Ever? appeared first on Daily Reckoning.

Like an army that has outdistanced its supply lines, the stock market runs far ahead of logistical support.

Total market capitalization of U.S. stocks presently ranges to $40 trillion — or twice GDP.

This 2-1 ratio is the highest in history… we might mention.

Analyst John Hussman reminds us the ratio previously topped at 1.9 in 2000.

That is, never before has Wall Street run so far ahead of Main Street.

But like Napoleon racing for Moscow after Borodino, an overextended army is a vulnerable army.

The Grande Armée went into Russia some 450,000-strong in June 1812.

Perhaps 22,000 sad caricatures of humanity staggered out later that year.

We believe the stock market is marching toward its own Moscow… and a similar retreat.

Soon or late it will come limping back — broken, bandaged… beaten.

Main Street cannot maintain the pace of advance.

The Economy Is Advancing in the Wrong Direction

Reuters informs us that government bean counters will likely downgrade their initial 2.6% Q4 2018 GDP estimate.

Falling construction spending is the central explanation on offer.

The unhappy trend will likely continue into Q1 2019.

Goldman now projects 0.9% Q1 GDP growth.

The Federal Reserve’s New York headquarters has it at 0.88%.

And its Atlanta branch now estimates Q1 growth of merely 0.3%.

The Atlanta outfit is known, incidentally, for its blue-sky, cockeyed optimism.

Meantime the American consumer has reached his maximum endurance, and is falling out of rank… exhausted.

In December U.S. credit card debt scaled $870 billion — its highest ever amount.

Similarly, auto loan interest rates teeter at eight-year heights. And a record number of Americans are at least 90 days in arrears of payment.

In all, aggregate household interest payments have spiked to a 15% year-over-year rate.

As Zero Hedge reminds us, recession is on tap nearly every occasion when interest payments rise with such extravagance.

All the while, retail stores are shuttering their doors at a record clip.

We haven’t the heart to continue.

Michael Snyder of The Economic Collapse blog does:

Debt delinquencies are at unprecedented levels, bankruptcies are soaring, retail stores are closing at a record pace; this is the worst economy for farmers since the early 1980s, exports are plummeting and a brand-new real estate crisis has now begun.

Then Why Are Stocks Still So Expensive?

Yet stocks remain in what our old colleague David Stockman labels the “nosebleed section of history.”

The Shiller P/E ratio is a widely recognized barometer of stock market prices.

Stretching through history, its mean score is 16.9.

Even after last year’s near-bear market, today it rises to 30.7 — 81% above the mean.

It is also within an ace of October 1929’s 32.6.

Only 1999’s infinitely obscene 44 outpaces it.

But do today’s economic conditions justify an altitude-induced nosebleed?

The evidence here assembled shouts no.

Yet there they are.

And so a rose blooms from a turnip seed.

But let us take the longer view…

The stock market has been on the march since 2009, with only occasional reversals.

Have underlying economic conditions warranted the ground gained?

“The Current Economy Has Underperformed the Worst Economy”

Jeffrey Snider of Alhambra Investments has compared and contrasted this past decade to decades past.

He notes first that real GDP expanded at an 18.85% cumulative rate, 2007–2018.

Nothing, perhaps, to pound a kettle drum about — but growth it is.

Maybe you are of an age to recall the ghastly stagflation of the 1970s.

At least this past decade has turned in real growth, you say — unlike the inflation-hobbled decade of bell-bottomed trousers and gasoline lines.

You are forgiven for thinking it. But you are far off the facts…

Real GDP expanded 38% between 1969 and 1980 — over double the past 11 years’ 18.85%.

Again, we refer to real GDP. Unlike nominal GDP, it accounts for inflation’s false fireworks.

Just so, you argue.

But the past decade is still miles better, for example, than the locust years of the Great Depression.

Unemployment scaled a hellish 25%. Unemployment never exceeded 10% during the Great Recession.

All comparisons fall short, you continue.

Ah, but once again, have another guess…

Snider reminds us that real GDP 1929–1940 expanded at a cumulative 19.89% rate — outstripping the most recent 11 years’ 18.85%.

Impossible! You howl.

But the facts are the facts.

The Great Depression’s valleys may have been steeper, the winds icier, the hunger more acute.

But it had its years of 12.9% growth… 10.8%… 8.8%… and 8.0%.

Though excluded from our sample, 1941 GDP expanded a sky-shooting 17.7%.

Meantime, not a single one of these past 11 years can crack 3%.

The United States economy appears to be down with a wasting disease.

This, despite maximum efforts of the Federal Reserve and its trillions of dollars of assistance.


What is now established, though, is a mathematical fact. The last 11 years have been worse than the Great Depression. According to the updated estimates, using 2012 dollars as a reference, the current economy has underperformed the worst economy.

Mr. Stockman phrases it in terms harsher yet:

After one decade of the most massive combined monetary and fiscal stimulus in U.S. history, the real growth rate at 1.5% per annum is lower than it’s ever been, even during the 1930s!

Something is not right.

Today’s Stock Market vs. Previous Stock Markets

Economically, we have stacked the past 11 years alongside the 11 years 1969–1980 and 1929–1940.

And we have found them wanting sorely in comparison.

Meantime, the S&P has gained over 300% since bottoming 10 years ago this very day — March 6, 2009.

Shall we compare today’s stock market performance with the Great Depression and 1970s?

The stock market was a seesaw affair for much of the 1930s.

But in nominal terms, it required 25 years of hard labor to recover from the shock of ’29.

Not until 1954 did it recapture its 1929 heights.

Meantime, the present stock market required only six years to reclaim its 2007 highs.

But we cannot asribe this pleasant fact to the economy.

GDP growth averaged 1.14% between 2009 and 2013.

What about the “lost” decade of the 1970s?

Recall that real GDP gains 1969–1980 more than doubled real GDP 2007–2018.

The Dow Jones opened 1969 at roughly 6,500. It opened 1980 near 2,850.

The S&P plunged from 740 to 360 across the same space.

For the stock market, the decade was well and truly lost.

So lost was it that Business Week ran a 1979 cover story pronouncing “The Death of Equities.”

In a peanut shell:

Real GDP 1969–1980 more than doubled real GDP 2007–2018.

But the stock market 2007–2018 at least tripled the stock market 1969–1980.

Should not the opposite be true?

Perhaps this curious fact owes to the multiple rounds of quantitative easing that vastly inflated the stock market post-2008?

Those same multiple rounds of quantitative easing yielded bits… scraps… leavings for the Main Street economy.

Time, the Great Equalizer

But time equalizes as nothing else.

Scales balance, what goes up comes down, what goes down comes up…

The mighty fall, mountains crumble, the meek inherit the earth.

We suspect stock market and economy will meet again on fair ground.

Stock market will likely fall to the level of economy before economy rises to the level of stock market.

But if the gods are kind, no time soon…


Brian Maher
Managing editor, The Daily Reckoning

The post The Worst Economy Ever? appeared first on Daily Reckoning.

Another Government Debt Crisis?

This post Another Government Debt Crisis? appeared first on Daily Reckoning.

The president has redrawn his March 1 line in the sand.

“Substantial progress” in trade talks with China is the reason he cited.

But another March 1 deadline menaces the United States… like a creeping shadow, dark, broad and doomy.

And Mr. Trump cannot push it back.

Details shortly.

First to the shadows hanging over the world…

Nuclear rivals India and Pakistan are playing with matches in perhaps the world’s largest powder keg — Kashmir.

A terrorist bomb killed 42 Indian paramilitary personnel in Kashmir earlier this month.

Yesterday, India airstruck what it claims to be a training facility of the group responsible.

At least one Indian warbird was downed… and one pilot captured.

Early today, Pakistan unleashed a retaliatory airstrike against Indian targets in Kashmir.

And so the Hatfields and McCoys are once again at each other’s throats — only these feuding clans wield nuclear muskets.

Skittish markets sold off this morning before making good some of their losses.

The Dow Jones closed 72 points lower. The S&P lost a mere point, while the Nasdaq clawed a five-point gain.

But to return to our looming March 1 deadline…

Last February’s “bipartisan” spending bill suspended the debt ceiling — then at $20.5 trillion — until March 1, 2019.

March 1, 2019, falls this Friday.

Friday’s deadline would pass harmlessly if the debt had remained at $20.5 trillion.

But it has not.

Today’s federal debt exceeds $22 trillion.

And after Friday, the United States government cannot legally borrow additional funds — unless Congress raises the debt ceiling to present levels.

Of course… the government runs under perpetual deficit.

And it cannot meet existing commitments without ongoing resort to the credit markets.

The Treasury can take to accounting gimmicks or “extraordinary measures” to keep the government in funds.

But only for a time.

The Congressional Budget Office (CBO) estimates the cupboards would be empty by September — unless the debt ceiling is raised beforehand.

If it is not, the United States government will default on its obligations… and its creditors will go scratching.

Before the U.S. Senate Finance Committee yesterday, Jerome Powell attested “it would be a very big deal,” adding:

It’s beyond even consideration. The idea that the U.S. would not honor all of its obligations and pay them when due is something that can’t even be considered.

But we would advise Mr. Powell to sleep well.

Of course Congress will raise the debt ceiling.

We will eat these words if wrong — without salt, without butter, without chaser.

Would an addict cut himself off from his dealer?

Would a hopeless drunkard willingly throw himself upon the wagon?

Would a crook lock himself up… and toss the key?

The prior two debt ceiling “crises” fell in 2011 and 2013.

Republicans sobbed their crocodile tears about Obama and the spendthrift Democrats.

The debt ceiling must not be raised without spending cuts to match, they raged.

But now one of their own occupies the White House — or at least a fellow with an “R” after his name.

And they themselves have spent like ship-bound sailors turned loose ashore.

The federal government has assumed over $2 trillion alone since Mr. Trump swore the oath.

How could they possibly take their stand now?

What about the Democrats?

Might they try to use the debt ceiling for political advantage, to dig a thumb in Trump’s eye?

Not without being laughed off the floor.

Have you seen some of their spending proposals?

And House Democrats have recently introduced legislation to abolish the debt ceiling entirely.

The new credit card would come without a limit.

And so today we suffer an acute pang of what the Germans call fremdschämen — embarrassment for those incapable of feeling embarrassment.

Each raising of the debt ceiling represents another sad congressional admission:

We cannot control ourselves. We are incapable of living within our means. We are wastrels.

But rather than lower their heads… they extend their hands.


But perhaps we should be kinder.

The entire system rests upon greater and greater infusions of debt.

It would seem somehow inappropriate to stop now. What else can they do?

As our co-founder Bill Bonner has said:

People think what they must think when they must think it.

Meantime, debt is expanding 6% per year — far greater than growth.

As it stands today, the nation’s debt-to-GDP ratio rises above a perilous 106%.

Evidence — though inconclusive — suggests the red zone begins at 90%.

And growth is trending in the wrong direction.

Our crystal ball turns up no reason why it will return to historical levels anytime soon.

But slow-motion disasters are rarely halted before they reach their ultimate conclusion.

Meantime, the can will go kicking down the road… until the day it stops.


Brian Maher
Managing editor, The Daily Reckoning

The post Another Government Debt Crisis? appeared first on Daily Reckoning.