Don’t Believe the Happy Talk

This post Don’t Believe the Happy Talk appeared first on Daily Reckoning.

Nothing like what we’re witnessing has ever happened before. Even the savviest analysts cannot yet internalize what happened.

As I explained earlier, comparisons to the 2008 crisis or even the 1929 stock market crash that started the Great Depression fail to capture the magnitude of the economic damage of the virus. You may have to go back to the Black Plague of the mid-14th century for the right comparison.

Unfortunately the economy will not return to normal for years. Some businesses will never return to normal because they’ll be bankrupt before they are even allowed to reopen.

Businesses like restaurants, bars, pizza parlors, dry cleaners, hair salons and many similar businesses make up 44% of total U.S. GDP and 47% of all jobs. This is where many of the job losses, shutdowns and lost revenues occurred.

The U.S. government response to the economic collapse has been unprecedented in size and scope. The U.S. has a baseline budget deficit of about $1 trillion for fiscal year 2020. Congress added $2.2 trillion to that in its first economic bailout bill. A second bailout bill added an additional $500 billion. Another bill may add another $2 trillion to the deficit.

Combining the baseline deficit, enacted legislation and anticipated legislation brings the fiscal 2020 deficit to $5.7 trillion. That’s equal to more than 25% of GDP and will push the U.S. debt-to-GDP ratio to as high as 130% once the lost output ($6 trillion annualized) is taken into account. The previous record debt for the U.S. was about 120% of GDP at the end of World War II.

This puts the U.S. in the same category as Greece, Lebanon and Japan when it comes to the most heavily indebted countries in the world.

The Federal Reserve is also printing money at an unprecedented rate. The Fed’s balance sheet is already above $6.7 trillion, up from about $4.5 trillion at the end of QE3 in 2015. The first rescue bill for $2.2 trillion included $454 billion of new capital for a special purpose vehicle (SPV) managed by the U.S. Treasury Department and the Fed.

Since the Fed is a bank, it can leverage the SPV’s $454 billion in equity provided by the Treasury into $4.54 trillion on its balance sheet. The Fed could use that capacity to buy corporate debt, junk bonds, mortgages, Treasury notes and municipal bonds and to make direct corporate loans.

Once the Fed is done, its balance sheet will reach $10 trillion.

That much is known. What is not known is how quickly the economy will recover. The best evidence indicates that the economy will not recover quickly, and an age of low output, high unemployment and deflation is upon us.

Here’s why the economic recovery will not exhibit the “pent-up demand” and other happy-talk traits you hear about on TV…

The first reason the economic downturn will persist is the lost income for individuals. Unemployment compensation and PPP loans will only scratch the surface of total lost income from layoffs, pay cuts, reduced hours, business failures and individuals who are not only unemployed but drop out of the workforce entirely.

In addition to lost wages through layoffs and pay cuts, many other workers are losing pay in the form of tips, bonuses and commissions. Even a fully employed waitress or salesperson cannot collect tips or sales commissions if there are no customers. This illustrates how the economy is tightly linked so that problems in one sector quickly spread to other sectors.

In addition to lost individual income, there is a massive loss of business income. Earnings per share of publicly traded companies are not only declining in the second quarter (and likely the third quarter) but many are negative.

Lost business income will be another source of lower stock valuations and a source of dividend cuts. Reduced dividends are also a source of lost income for individual stockholders who rely on dividends to pay for their retirements or medical expenses.

Programs such as PPP and other direct government-to-business loans will not come close to compensating for the losses described above. The loans (which can turn into grants) will help for a month or two but are not a permanent solution to lost customers.

For still other firms, the loans won’t help at all because the firms are short of working capital and will simply close their doors for good and file for bankruptcy. This means the jobs in those enterprises will be permanently lost.

From these straightforward events (lost individual income, lost business income, dividend cuts and bankruptcies) come a host of ripple effects.

Once the government aid is distributed, many recipients will not spend it (as hoped) but will save it. Such savings are called “precautionary.” Even if you are not laid off, you may worry that your job is still in jeopardy. Any income you receive will either go to pay bills or into savings “just in case.”

In either case, the money will not be used for new spending. At a time when the economy needs consumption, we will not get it. The economy will fall into a “liquidity trap” where saving leads to deflation, which increases the value of cash, which leads to more saving. This pattern was last seen in the Great Depression (1929–40) and will soon be prevalent again.

Even if individuals were inclined to spend, there would be reduced spending in any case because there are fewer things to spend money on. Shows and sporting events are called off. Restaurants and movie theaters are closed. Travel is almost nonexistent, and no one wants to hop on a cruise ship or visit a resort until they can be assured that the risk of COVID-19 is greatly reduced.

This will guarantee a continued slow recovery and persistent deflation, which makes the slow recovery worse.

In addition to these constraints on demand, there are serious constraints on supply. Global supply chains have been seriously disrupted due to shutdowns and transportation bottlenecks. Social distancing will slow production even at those facilities that are open and can get needed inputs.

One case of COVID-19 in a factory can cause the entire factory to be shut down for a two-week quarantine period. Companies that depend on the output of that factory to manufacture their own products will also be shut down.

Beyond these direct effects of lost income and lost output, there are significant indirect effects on the willingness of entrepreneurs to invest and of individuals to spend.

First among these is the “wealth effect.” When stock values drop 20–30% as they have recently, investors feel poorer even if they have substantial net worth after the drop. The psychological effect is to cause people to reduce spending even if they can afford not to.

This means that spending cutbacks come not only from the middle class and unemployed but also from wealthier individuals who feel threatened by lost wealth even if they have continued income.

Finally, real estate values will collapse as tenants refuse to pay rent and landlords default on their mortgages, putting properties into foreclosure.

None of these negative economic consequences of the New Depression are amenable to easy fixes by the Congress or the Fed.

Deficit spending will not “stimulate” the economy as the recipients of the spending will pay bills or save money. The Fed can provide liquidity and keep the lights on in the financial system, but it cannot cure insolvency or prevent bankruptcies.

The process will feed on itself expressed as deflation, which will encourage even more savings and discourage consumption. We’re in a deflationary and debt death spiral that has only just begun.

Based on this analysis, investors should expect the recovery from the New Depression to be slow and weak. The Fed will be out of bullets. Deficit spending will slow growth rather than stimulate it because the unprecedented level of debt will cause Americans to expect higher taxes, inflation or both.

The U.S. economy will not recover 2019 levels of GDP until 2022. Unemployment will not return even to 5% until 2026 or later.

This means stocks are far from a bottom. The S&P 500 Index could easily hit 1,870 (it’s 2,943 as of this writing) and the Dow Jones Index could fall to 15,000 (it’s 24,360 as of this writing).

Those are levels at which investors might want to consider investing in stocks.

Any effort to “buy the dips” in the meantime will just lead to further losses when the full impact of what’s described above begins to sink in.

Got gold?


Jim Rickards
for The Daily Reckoning

The post Don’t Believe the Happy Talk appeared first on Daily Reckoning.

A Better World Is Emerging

This post A Better World Is Emerging appeared first on Daily Reckoning.

The era of waste, fraud and living on borrowed money is dying, and those who’ve known no other way of living are mourning its passing.

Its passing was inevitable, for any society that squanders its resources is unsustainable. Any society that rewards fraud above all else is unsustainable. Any society which lives on money borrowed from the future and other forms of phantom capital is unsustainable.

We know this in our bones, but we fear the future because we know no other arrangement other than the unsustainable present.

And so we hear the faint echo of the cries filling the streets of ancient Rome when the Bread and Circuses stopped: what do we do now?

When the free bread and entertainments disappeared, people found new arrangements. They left Rome.

The greatest private fortunes in history vanished as Rome unraveled. All the land, the palaces, the gold and all the other treasures were no protection against the collapse of the system that institutionalized corruption as the ultimate protector of concentrated wealth.

The most jealously guarded power of government is the creation of money, for without money the government cannot pay the soldiers, police, courts and administrators needed to enforce its rule.

Western Rome created money by controlling silver mines; in the current era, governments create money (currency) out of thin air.

Once the government’s money loses purchasing power, the system collapses.

Our “money” is nothing but phantom entries on digital ledgers, and so its complete loss of purchasing power is inevitable.

Without “money,” the government can no longer enforce the will of its self-serving elites.

Once the government’s ability to sustain its enforcement with money created out of thin air vanishes, the entire order vanishes along with it.

The destruction of the value of central bank-created “money” is already ordained, for there is no limit on the elites’ desire to maintain control, and so governments will create their “money” in ever-increasing amounts until the value has been completely eliminated.

But here’s the good news:

The outlines of a better world are emerging, an arrangement that prioritizes something more than maximizing and institutionalizing the corruption needed to protect today’s phony gains.

We will relearn to live within our means, and relearn how to institutionalize opportunity rather than corruption designed to protect elites.

We will come to a new understanding of the nature of centralized power, that centralized power only knows how to extend its power and so the only possible outcome is collapse.

We will come to understand technology need not serve only monopolies, cartels and the state, that it could serve a sustainable, decentralized economy that does more with less, i.e. a “DeGrowth” economy.

The Federal Reserve will fail, just as the Roman gods failed to sustain the corrupt and bankrupt Roman elites.

A host of decentralized, transparently priced non-state currencies will compete on the open market, just like goods, services and commodities.

The Fed’s essential role — serving parasitic elites at the expense of the many, under the cover of creating currency out of thin air — will be repudiated by the implosion of the economy as all the Fed’s phantom “wealth” evaporates.

Yes, the outlines of a better world are emerging. The old system is unsustainable and cannot last.

Below, I show you why assets will crash — it’s inevitable. Read on to see why.


Charles Hugh Smith
for The Daily Reckoning

The post A Better World Is Emerging appeared first on Daily Reckoning.

“The Only Thing to Fear Is Deficit Fear Itself”

This post “The Only Thing to Fear Is Deficit Fear Itself” appeared first on Daily Reckoning.

Dr. Paul Krugman — a man of knowledge — is talking again. The Nobel laureate informs us:

“The only fiscal thing to fear is deficit fear itself.”

Do you fear the latest cyclone of deficit spending will rip a swath through the Treasury?

This year’s budget deficit will likely near $4 trillion, after all — the largest in history.

Goldman Sachs estimates a $6 trillion combined deficit over the next two years alone.

Meantime, the Committee for a Responsible Federal Budget (do not laugh!) projects publicly held debt will eclipse its post-WWII record by 2023.

Let us assume these projections alarm you. And why should they not?

But Dr. Krugman would set you down as a sort of ox… an imbecile… some poor undersoul who is deaf to the music of the spheres.

The celestial bells are audible only to those — like him — with a nuanced and penetrating grasp of economics.

And these bells chime an ode to deficits.

So What if Debt Soars to 108% of GDP?

Reports the good professor, heaven’s tunes jingling in his ears:

It’s true that we’re headed for some eye-popping numbers. Last week the Congressional Budget Office released preliminary economic and budget projections for the next two years, which were both shocking and unsurprising…

In particular, the budget office expects the COVID-19 crisis to drive the unemployment rate to 16% in a few months, which might even be on the low side.

Soaring unemployment will cause federal revenues to plunge and also lead to a surge in spending on safety-net programs like unemployment insurance, Medicaid and food stamps. Add in the large relief packages Congress has passed and the budget office projects a deficit that will temporarily rise to levels we haven’t seen since World War II, and it expects federal debt to rise to 108% from 79% of GDP, which sounds scary.

Yes, it “sounds scary.” But of course it is not scary — to those who understand:

But the government will be able to borrow that money at incredibly low interest rates. In fact, real interest rates — rates on government bonds protected against inflation — are negative. So the burden of the additional debt as measured by the rise in federal interest payments will be negligible. And no, we don’t have to worry about paying off the debt; we never will, and that’s OK.

Borrowing costs are incredibly low, it is true. But if the price of hemlock were incredibly low… should you lay in?

“The Dose Makes the Poison”

The question is not entirely fair, of course. Debt is not lethal in itself.

“The dose makes the poison,” as argued Swiss Renaissance physician Paracelsus.

You may liken debt to alcohol…

In light doses drink lightens the heart. It flushes the cheeks. It unties the tongue… like the initial glass of bubbly at a wedding.

It is a fabulous facilitator of fun and frolick.

A second glass goes immediately down the gullet. But this second glass soon becomes the fourth glass, becomes the eighth glass, becomes the 10th glass — or 13th.

The dose makes the poison.

And so with debt. In the proper doses it is a pleasant stimulant, a spirit-lifter, a social lubricant.

But when abused… debt no longer stimulates, but inhibits. It no longer lifts, but drags. It no longer lubricates, but parches.

It poisons.

A Rascal With an Unquenchable Thirst for Rum and a Running Tab

Fifty years ago, $1 of debt may have yielded an additional dollar of economic growth, real or otherwise. Perhaps even more.

That is of course because the national debt burden was vastly lighter. The gold standard enforced a general fiscal sobriety, feeble though it was in its dying days.

Until 1971 the federal government might crave a tumbler of debt. But the barkeep could demand gold in return — payable on the nail.

But then the gold window came slamming down. And Uncle Samuel could raid the shelves without fear for his gold. The entire bar was thrown open to him — on credit.

Extend a running tab to a rascal with an unquenchable thirst for rum… and here you have the results:


More Liquor, Less Joy

By now the hopeless sot has acquired such a tolerance for drink… he requires ever increasing helpings to obtain a boost.

Each dollar borrowed since 2008 has yielded under $1 of growth. It is perhaps 40 cents, by some estimates we have encountered.

More liquor, that is. But less joy.

And now this tosspot is ordering doubles and triples, sinking them faster than the barman can pour them out…

Crisis spending may add $2 trillion to this year’s deficit alone. The nation’s debt already rises above $24.8 trillion — a $5.3 trillion ballooning in only four years.

The ladies and gentlemen who run the National Debt Clock project it will read $41.7 trillion four years from today.

It is a mere projection, of course, a gazing into crystal. But we wager high it rings in nearer to $41.7 trillion than $30 trillion.

At what point will the world abandon confidence in the dollar?

The question is more easily asked than answered. But it is a question best left unanswered… if you live and die by the dollar.

“The Wicked Borroweth, and Payeth Not Again”

Yet Dr. Krugman is ruffled neither by deficits nor the national debt. Again, he writes:

The government will be able to borrow that money at incredibly low interest rates. In fact, real interest rates — rates on government bonds protected against inflation — are negative. So the burden of the additional debt as measured by the rise in federal interest payments will be negligible. And no, we don’t have to worry about paying off the debt; we never will, and that’s OK.

Is it “OK”? Reads Psalm 37:21: “The wicked borroweth, and payeth not again.”

But we will overlook Dr. Krugman’s wicked counsel. Instead we ask:

Is borrowing at extremely low rates truly a warrant to plunge deeper into debt?

It is true, again, the government can presently borrow at these rates. But this is likewise true:

The sheer accumulation of debt can wash out the lower rates. That is, interest payments on the debt increase nonetheless.

Low Interest Rates, Ballooning Debt Payments

Writing in November 2017 is Michael Kosares, founder of USAGOLD:

As interest rates have declined over the last several years, the interest paid by the federal government has increased markedly due to the rapid growth in size of the accumulated debt…

In 2008 when the national debt stood at $10 trillion, the federal government paid $336 billion in interest. For a measuring stick, the 10-year Treasury bill drew an average interest rate at the time of around 3.66%.

In 2012 when the debt crossed the $16 trillion threshold, the interest payment was almost $456 billion. The 10-year Treasury bill drew an average interest rate of 1.80%.

In 2016 with the national debt approaching the $20 trillion mark, the interest payment was $497 billion. The 10-year Treasury bill drew an average interest rate of 1.84%. It is difficult to overlook the fact that 2016’s interest payment was an all-time record at the second-lowest rate [in 46 years].

Today the 10-year Treasury note yields a vanishing 0.61%. Total debt is nonetheless $5.3 trillion higher than in 2016. And it is piling high.

What if rates increase as the bond market recoils in horror at the prospect of a $41 trillion national debt?

Interest payments could wash over the entire budget.

A Grim Forecast

Debt service is already rising faster than any other federal shell-out.

Prior to this crisis the Congressional Budget Office already projected debt service would scale $915 billion by 2028 — nearly 25% of the entire budget.

The Lord only knows the ultimate figure. But it will likely be far higher absent a drastic reversal of economic fortune.

How will the government afford to pay for anything else?

We foresee little reason to expect a change. Yet we cling to hope, as a drowning man clings to a life ring — or as a drunkard clings to his bottle.

The nation’s debt is not a crisis because “we owe it to ourselves,” argue the spenders.

But one scalawag takes them at their word. “Note to self,” he writes:

“Pay up.”


Brian Maher
Managing editor, The Daily Reckoning

The post “The Only Thing to Fear Is Deficit Fear Itself” appeared first on Daily Reckoning.

John Rubino over at Dollar Collapse – Mon 27 Apr, 2020

Could the combo of COVID shutdown and oil collapse cause the financial system to fail?

John Rubino joins me today to outline why he thinks we could be nearing the end of the current financial system as we know it. Now yes we have all heard this argument time and time again as debt continues to build and governments continue to spend. Will this time be different? John thinks it could, I take the other side of the argument.

Click here to visit John’s site – Dollar Collapse.

Making a Bad Situation Worse

This post Making a Bad Situation Worse appeared first on Daily Reckoning.

One entire decade of employment gains washed out in one single month…

The United States economy took on 22.13 million jobs during the past 10 years. Yet it has given back 22.03 million within the past four weeks.

Rather, 22.03 million jobs were deliberately strangled out of the economy. The “lockdown” was, after all, self-imposed.

April unemployment may nonetheless scale 17% — a post-WWII record. Let us not forget:

Behind each cold statistic beats a human heart, a broken heart. Our men forward us the following information:

Each 1% increase in the unemployment rate may yield up to 30,000 fatalities from suicide, alcohol, drugs and related deaths of despair.

We are further informed that each 1% unemployment increase elevates the odds of death the following year by 6%.

We do not know if the figures have full accuracy. But we suspect there is a high degree of justice in them.

Three Months of Savings

Meantime, one recent survey revealed that 41% of working adults claimed only enough savings to see them through for three months.

If the present economic paralysis represented a mere suspended animation — if the idle returned to duty within three months — the blow would not prove fatal.

Yet many will be turned out forever and ever, orphaned and abandoned. Their positions will be permanently deleted.

Many will be unable to take up employment in new lines. How will they rub along on three months’ savings?

Government checks will only take them so far.

It is a grim calculus.

$25 Billion per Day

Meantime, the top man at the St. Louis Federal Reserve hazards this estimate:

The United States economy hemorrhages $25 billion in lost business each day of economic coma.

No economy can withstand months and months of it.

The lights must flicker back on, the machinery must begin to whine, workers must punch the clocks.

Else the cure will prove deadlier than the disease that afflicts us.

When will the economy reopen its doors for business?

The question is easier asked than answered.

North Dakota has issued “guidelines” to open up May 1. But with the highest respect… the Peace Garden State is not central to the United States economy.

New York’s economy represents a much larger chunk. And Gov. Andrew Cuomo has extended the statewide jail term through May 15.

California — an even larger chunk of the national economy — is no closer to opening.

But what the nation is losing in output… it is gaining in debt.

The Shattered Keynesian Multiplier

The entire economic and financial system was dreadfully indebted before the pandemic.

Now it is plunging deeper and deeper into debt without the economic activity to cushion the cost.

The Federal Reserve’s balance sheet is expanding to dimensions truly obscene… like a 600-pound man with a mania for donuts.

And governments are ladling out reams and reams of borrowed money. That is, money they do not in fact possess.

Who will pay for it? And what good will it work?

The miracle of water into wine — of the Keynesian multiplier — says each watery dollar yields a surplus of rich wine.

It is therefore an “investment” in future growth.

The theory may have something in it under debt-free conditions.

But today’s system is so soaked through with debt… additional debt yields not wine… but vinegar.

It subtracts rather than adds.

Well Past the Point of Diminishing Returns

Economists Kenneth Rogoff and Carmen Reinhart have arrived at this conclusion:

When a nation’s debt-to-GDP ratio exceeds 90%, median growth drops 1%. And average growth “falls considerably more.”

The United States entered the present catastrophe with a debt-to-GDP ratio of 105%.

Now debt is galloping ahead under full steam. But GDP is going backward. The ratio will only increase. And growth will lag even further.

Perhaps Rogoff and Reinhart are off — critics allege they are.

But we do not believe that plunging deeper into debt will lift up the gross domestic product.

We certainly expect no V-shaped recovery like the rah-rah men gabble about.

We expect rather a protracted guttering along, an extended economic lethargy, a long, cold drizzle.

Unproductive Debt

What is more, much of current debt is “unproductive.” That is, it holds no theoretical promise of return.

It merely fulfills existing political promises.

Some 50% of all Americans already receive at least one federal benefit.

Some 63 million receive Social Security payments. Sixty million receive Medicare. Medicaid, 64 million. Five million American households claim housing subsidies.

And 40 million Americans receive “supplemental nutritional assistance.” That is, food stamps.

Even pre-crisis, this federal transfer spending — largely spending that shovels money to those who did not earn it — was on the track for a record $3.22 trillion this year.

These payments would have likely accounted for 68% of all 2020 federal shellouts, or 14.4% of GDP.

But comes your objection:

“My taxes pay for Social Security, Medicare and Medicaid. How can you call those transfer payments when I in fact pay for them?”

Yet these programs qualify as transfer payments under United States accounting rules.

Regardless, taxes to fund benefits already fell far short.

We remind you that was before the present crisis. And now?

The Difference Between Today and the Great Depression

Take the year 1940 as your comparison. The United States government dedicated a mere 2.1% of GDP to these types of payments.

But here is the difference between the economy of the Great Depression and the economy of today:

Real GDP 1929–1940 expanded at a cumulative 19.89% rate. And for the past 11 years?

Cumulative GDP expanded at 18.85%.

That is, the economy of the Great Depression — cumulatively — outperformed today’s.

It turned in years of 12.9% growth… 10.8%… 8.8%… and 8.0%.

Meantime, not a single one of these past 11 years exceeded 3% growth. This year certainly will not. And the next several may be spent simply clawing out.

Deficits to the Moon and Beyond

Thus we arrive at this sad conclusion:

Many American households drain more money out than they pour in. And less real growth supports the operation.

These twin trends are now vastly accelerated.

The tax stream is running dry… while the demand for government relief inflates to extravagant dimensions.

Annual deficits may surge to $2 trillion — or $3 trillion.

Pre-crisis, the Congressional Budget Office (CBO) projected a $28.7 trillion national debt by 2029.

But these Pollyannas never accounted for recession — much less depression.

Now assume $2–3 trillion annual deficits. The national debt could well approach $40 trillion by 2029.

Meantime, CBO previously projected that debt service would rise to $915 billion by 2028 — nearly 25% of the entire budget.

For some slight perspective, consider:

That $915 billion roughly approximates 2018’s combined Medicare and Medicaid costs.

And do not forget: That calculation assumed a $28.7 trillion national debt. It did not assume a $40 trillion national debt.

Interest payments in this second scenario would swamp the entire federal budget.


How America is to rebuild its finances, we do not pretend to know. We are certain only that debts that cannot be paid will not be repaid.

Default of one form or other appears inevitable.

But let us stow our worries, draw a smile across our features… and take heart.

For the stock market was up again today…


Brian Maher
Managing editor, The Daily Reckoning

The post Making a Bad Situation Worse appeared first on Daily Reckoning.

Weekend Show – Sat 11 Apr, 2020

Hour 1 – Making sense of the Fed’s move this week from a macro prospective
Full First Hour

I hope everyone is having a good Easter weekend. This is not what any of us had in mind for this weekend but hopefully things will get better very soon.

This week the Fed stole the headlines by announcing a $3.2trillion loan program aimed at supporting the economy. I spend a couple extended segments making sense of what it all means for the economy and you.

I also dedicate a couple segments to the resource investor focusing on royalty companies and Great Bear Resources.

Please keep emailing me to share your thoughts on the show, companies you would like to see on the show, and any of your other thoughts –

Exclusive Interviews this week

Jesse Felder
Marc Chandler
Brien Leni
Chris Taylor – Great Bear Resources

Exclusive Comments from Marc Chandler – Fri 3 Apr, 2020

What currencies and governments could look like when COVID-19 is behind us

Marc Chandler joins me for a broad discussion on the currency markets and the massive amounts of debt being added to the system. With all the doom and gloom narratives at full force right now the fact is no one knows what how this will all play out.

Click here to visit Marc’s blog. It’s well worth your time on a daily basis.

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.


Dan Amoss
for The Daily Reckoning

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

Brian Leni – Founder of Junior Stock Review – Fri 27 Mar, 2020

What will it look like this time when governments and central banks paper over everything?

Brian Leni joins me to kick off today with a discuss about the massive amount of money governments and central banks are committing to businesses and individuals. We have no idea when this isolation will end but there is no doubt the economy will be severely hit for every week an month this lasts.

Click here to visit Brian’s site – The Junior Stock Review.

Joel Elconin – Benzinga Pre-Market Prep Show – Tue 10 Mar, 2020

When will some calm enter the markets?

Another week and another headline that drives fear into the markets. This has become the trend in 2020 and has caused a lot of money to be pulled out of markets.

Joel Elconin joins me with his thoughts on how a sense of calm is needed in the markets before an sustainable rebound could happen. We discuss the buy the dip mentality and how the oil crash is adding a whole new fear to these markets.

Click here to visit the Benzinga website and listen to the recording of Joel’s Pre-Market Prep Show.