“At this point,” says a New York Times editorial column, “even many Republicans acknowledge that the era of small government is over.”
We have no doubt they do. But how can an era end… if it never began?
No Republican in current practice has lived one day in an era of small government.
To visit one he must first climb into a time contraption…
He must then dial the knobs past the Great Recession, past the Patriot Act and the war on terrorism, past the ballooning deficits of the 1980s, past the guns and butter of the 1960s, past the New Deal, past WWI… to perhaps 1900.
A True Era of Small Government
In 1900 total government spending came in under 3% of the gross domestic product.
Government’s reach was so short… it scarcely brushed the individual citizen.
This state of near-nirvana existed for the following 17 years. Then Mr. Wilson ordered the doughboys across the ocean… and into the trenches.
In 1917 government spending — again, as a percentage of GDP — vaulted near 20%.
But the boys were home before long. The cannons were spiked, the fleets mothballed, the swords beaten into plowshares.
America could return to its central business — business. The pendulum never swung completely back to pre-war levels. But in fairness, it did swing back. By 1929 the percentage of government spending to GDP was back under 4%.
Even in the spending-delirious Depression that followed, it never exceeded 11%.
No Turning Back
By the end of the Second World War that figure scaled 45% — the arsenal of democracy was not cheap.
The hot war ended, mercifully. But a Cold War began. And the New Deal was now riveted onto American life. There was no prying it away.
Small government was well and truly dead.
The Great Society swung by later to shovel additional soil upon its grave.
No recent era of small government therefore exists. As well talk of the recent era of Model Ts, of telegraphs — or of honest money.
Government spending as a percentage of GDP has averaged roughly 20% since 1980. That is, it has averaged WWI levels.
The figure has run higher at times. It has run lower at times. But 20% is about par.
Now mix in state and local government spending. You will find that total government spending presently nears 40% of GDP.
But even these figures may soon appear quaint…
A $4.2 Trillion Deficit This Year
GDP is currently contracting at a savage clip — as government spending is expanding at an equally savage clip.
The natural consequence is a vastly higher percentage of spending to GDP.
The Congressional Budget Office projects this year’s federal deficit will come in at $3.7 trillion… vastly eclipsing its pre-pandemic $1 trillion projection.
But Manhattan Institute senior fellow Brian Riedl estimates the true figure at $4.2 trillion:
My models estimate that the 2020 federal budget deficit — just the deficit — will top $4.2 trillion…
CBO projects that the first four coronavirus response bills will add $2.2 trillion to this year’s deficit. The remaining portion of the deficit consists of the economic and technical effects of the economic shutdown — the nonlegislative costs such as fewer workers paying taxes and more people signing up for unemployment and Medicaid benefits. This analysis assumes approximately $1 trillion in these costs (bringing the total deficit to approximately $4.2 trillion)…
A $4.2 trillion deficit would represent nearly 20% of the United States economy — a genuine enormity:
The $4.2 trillion budget deficit would represent 19% of the economy — the largest share in American history, outside the peak of World War II, and double the 2009 level during the Great Recession.
The way ahead promises little salvation, argues Mr. Riedl:
Even if the economy recovers quickly after reopening, the projected budget deficit will still approach $2.2 trillion next year and never again fall below $1.3 trillion. Combined with the mounting costs of Social Security and Medicare, the deficit will rise to $2.6 trillion by 2030 and continue growing thereafter.
Over the full decade, the coronavirus recession is projected to add nearly $8 trillion to the national debt, pushing the debt held by the public to $41 trillion within a decade, or 128% of the economy. This would exceed the national debt at the height of World War II. Although that war ended before the debt could rise further, the expanding Social Security and Medicare shortfalls will keep the current debt increasing.
The Purpose of Republicans
The old Republicans existed for one purpose: to trim both taxes and spending.
They guarded the Treasury reasonably well. And you could trust them with the nation’s purse.
But these Republicans are no more.
They stranded their posts years ago, opened the purse… and got elected.
They no longer worked to limit spending but to channel it their way, to butter their own constituencies.
They sat at the feet of Mr. Arthur Laffer, with his famous curve. Thus they discovered they could spend like Democrats — while taxing like Republicans.
They labeled the dour old fiscal religion “root-canal economics.”
Deficits do not matter was the new catechism.
Only a handful of old-style Republicans hold out today. But their own party regards them as nuisances.
They are akin to policemen raiding a brothel — and resented for much the same reason.
Yet our sympathies are somewhat with the brothel, with the sinners…
“Small Government” Is Boring
The term “small government” is as hollow as a jug. How does one even define it in the 21st century?
Perhaps small government can be likened to Supreme Court Justice Potter Stewart’s definition of pornography — you know it when you see it.
We do not see it. Do you?
Besides, it is a dreadful marketing slogan. You would not want to sell “small government” for a living.
It is duller than the dullest dishwater… and less inspiring than an Alan Greenspan lecture.
Moreover, “small government” is a defensive doctrine. It hunkers in. But no static defense can forever hold against the relentless assaults of “progress.”
Who Marches to “Small Government?”
There were two great orators of antiquity. The Roman Cicero was one, the Greek Demosthenes the other.
“What a great speech,” said the people when Cicero talked. But what did the people say when Demosthenes spoke?
“Let us march.”
Very few march for small government. They may applaud it, politely. They may nod their heads dutifully.
But few will march.
Many will — however — march for “Health Care for All!” or “Save the Planet!” or “Equality Now!”
These are cries that awaken the blood. They pluck up the adrenaline. They rally us to the colors… and inspire us to enlist.
They inspire us to march.
We may march ultimately off a cliff if present trends do not reverse. We are not confident they will.
We are hopeful — but not confident. Yet of this we are confident:
“Small government” is nowhere in America’s future…
Managing editor, The Daily Reckoning
The economy remains under lockdown, although some states are beginning to relax restrictions. As with so many other aspects of American life, there’s been a red state/blue state divide.
Red states are generally more willing to reopen their economies, while harder-hit coastal blue states are generally more reluctant to open theirs.
Regardless, the economic consequences of the lockdown have been devastating, and we’ll be feeling their effects for a very long time. We’ll also be feeling the effects of the massive monetary and fiscal responses to the crisis for a long time.
There are so many government “stimulus” programs underway to deal with the New Depression it’s hard to keep track.
The Federal Reserve has at least 10 asset purchase programs going including purchases of corporate debt, Treasury debt, municipal bonds, commercial paper, mortgages and more.
Many of these are being done in a “special-purpose vehicle” using $425 billion given to the Fed by the Treasury as a kind of Fed bailout. (Of course, the Treasury money comes from the taxpayers, so you’re paying for all of this.)
Regardless of the legal structure, the Fed is on its way to printing $5 trillion of new money on top of the $5 trillion it has already printed to keep the lights turned on at the banks.
On the fiscal side, Congress has authorized $2.2 trillion of new spending on top of the baseline $1 trillion deficit for fiscal year 2020, and just authorized another $600 billion last week.
A new bill for $1.5 trillion of added spending is now being debated. Added together, that’s $5 trillion of deficit spending for this year, and possibly more next year.
Meanwhile, stimulus supporters hope that the checks Americans are getting from the government will give the economy a boost by way of increased consumer spending.
But a recent survey showed that 38% of recipients saved the money and 26% paid off debt. So the stimulus really isn’t stimulating. It’s main effect is to increase the deficit and the national debt.
But don’t worry, say the supporters of Modern Monetary Theory (MMT). We know how to stimulate the economy and who cares about the debt? It hasn’t been a problem yet and we can expand it a lot more.
Until a few months ago, MMT was a quirky idea known to very few and understood by even fewer.
It actually wasn’t modern (the idea has been around for over 100 years) and it wasn’t much of a theory because there was no way to test it in a controlled environment.
The basic idea is that the U.S. government could merge the balance sheets of the Treasury and the Federal Reserve and treat them as if they were a consolidated entity. (That’s not legally true, but never mind.)
The Treasury could spend as much money as it wanted on anything it wanted. MMT asks, if the Treasury doesn’t spend money, how are people supposed to earn any?
Ideas like hard work, innovation and entrepreneurship don’t enter the discussion. In MMT, all wealth comes from the government and the more they spend, the richer we get.
The Treasury finances this spending by issuing bonds. That’s where the Fed comes in.
If the private sector won’t buy the bonds or wants too high an interest rate, the Fed can just crank up the printing press, buy the bonds with money created from thin air, stick the bonds on its balance sheet and wait.
So the Fed can just give the Treasury an unlimited line of credit to spend as much as it wants.
When the bonds come due in 10 or 30 years, the Treasury can repeat the process and use new printed money to pay off the old printed money.
It all sounds nice in theory, but it’s an invitation to disaster.
If inflation breaks out, it will be too late to get it under control. You can’t just flip a switch. Inflation is like a tiger. Once it gets out of its cage, it’s very difficult to get it back in.
If confidence in the dollar is lost (something the Fed and Treasury can’t control), hyperinflation could wreck the economy. That could lead to social unrest, riots and looting, especially if the wealth disparities created by the Fed’s support of the stock market continue to grow.
Would there be any winners if MMT ran off the rails? There would be one big winner – gold.
for The Daily Reckoning
Under half of all working-age Americans will collect a wage next month.
This we learn from Mr. James Knightley, ING chief international economist.
A portion of them have received — or will receive — $1,200 from the United States Treasury.
But $1,200 does not extend very far. And our men inform us that only 15% of federal assistance is emptying into pockets of “everyday” Americans.
The remaining 85% charts a course for Wall Street… and large business.
Perhaps the percentages should run the other way.
The Value of Bankruptcy
A string of corporate bankruptcies would teach a lesson. A severe lesson it would teach — but a crucial lesson.
That assuming excessive debt is reckless, for example. That it pays to take the long view.
That is, stock buybacks to lift the short-term stock price may not represent the most prudent use of capital.
And that keeping a “rainy day” fund is sound business. It represents the purchase of an umbrella against the inevitable squall.
A rescue — the second in under 12 years — informs them they do not require the umbrella.
The Federal Reserve will simply hand them one when the water starts down.
Thus it powerfully discourages thrift, prudence… and forbearance.
But comes the objection:
“The present crisis is unlike 2008 when banks brought trouble upon themselves. Wall Street did not cause the pandemic. A string of bankruptcies would only punish the innocent.”
Just so. But the future is always full of rainstorms.
The Rain Will Come Eventually
The sky overhead may be bright and cloudless today. But a responsible business always keeps a weather eye upon the horizon. It knows the clouds will come across one day. It does not know if they will blow in from east, west, south or north.
But it knows it must ready for eventual rain — from whichever direction — and however distant.
Wall Street instead basked in perpetual sun for one entire decade, believing the Federal Reserve would push away the clouds forever.
Or — if the rains did come — that it would bring everyone in under cover.
Their assumptions have proven correct. And what conclusions can they draw?
That the Federal Reserve — and the United States government — will have the same umbrellas ready for the next downpour.
Why then should they purchase their own? And so the evil cycle perpetrates.
A Steep Price to Pay
The rescues may keep the stock market and the corporations going. But they come at a mighty price…
The financial system will sag and groan under even heavier loads of debt.
They nearly ensure that no meaningful recovery is in prospect. That is because the claims of the past and the present will prove too great.
Corporations must funnel future earnings off into the service of existing debt. They cannot invest in the future… because they will be paying too dearly for the past.
As a vessel overloaded with cargo cannot make much headway… neither can an economy overloaded with unproductive debt.
Might it be best to heave much of the deadweight over the side?
A rash of bankruptcies would clear out a pile of unproductive debt. It would restructure remaining debts.
The economy would then sit higher in the water. And maybe it could begin to rebuild its steam. It could go somewhere.
But that is not the option the monetary and fiscal authorities selected. And so they tossed aside a spectacular opportunity.
“Governments and Central Banks Have Missed a Great Opportunity for a Reset”
Mr. Guy Haselmann formerly directed global macro strategy at Scotiabank. Says he:
“Governments and central banks have missed a great opportunity for a reset.” More:
Financial markets play an important role in the economic growth of a country. They act as intermediary between lenders and borrowers providing for the efficient deployment of capital — a critical role for businesses, employment and economic expansion. It’s supposed to be a place where supply and demand factors combine to determine equilibrium prices. Unfortunately, trouble arises when government institutions like the Federal Reserve manipulate and distort this process…
The recent bailout(s) has turned this… on its head. Those who were willing to accept higher market risk have already been rewarded for many years through higher returns. The bailout rewards the risk-seekers a second time and socializes their losses… Losses should be borne by the risk-taker and not be distributed or financed by the taxpayer. After all, it was the risk-taker’s decision to assume the risk in the first place…
And what about our preferred option of Chapter 11 bankruptcy?
Would it be better to allow bankruptcy that wipes out equity and debtholders? After all, companies often continue to function with employees keeping their jobs, and with new management operating from a stronger position. Allowing bankruptcies would help refocus investors on the true meaning of risk and encourage stronger corporate management in the future.
What is more, when the laggards go under the water, resources are then channeled into more productive lines:
New beneficial technologies would come along improving productivity that eventually wipes out the profits of the “old.” Necessity is a great motivation for innovation, so bad and insolvent companies should go under. When they do, labor and capital are redirected to more productive sources and away from “zombie companies.” Entrepreneurial innovation then operates at its fullest, making higher standards of living possible.
Alas, the authorities have chosen more of the same — only more so. No previous bailout comes within miles and miles of the rescue presently unfolding.
Thus there will be no reset. Nor can you expect a reset come the next calamity… whenever it may be.
We have already traveled too far in this direction.
Mr. Bernanke could have allowed the system to reset nearly 12 years ago. He congratulates himself for finding the courage to act.
But he would have required far greater courage not to act. It was not in him.
Interest rates would have gone soaring. Marginal businesses dependent on low interest rates and cheap credit would have gone to the bottom.
The agony of bankruptcy would have been acute. But the agony of bankruptcy would have likely been brief.
A new, sturdier economy could have risen upon stronger anchorings. And business could have clawed its way back up.
Soaked by the recent crisis, it would have been sure to purchase the umbrella. After all, hard experience would have taught it that the Federal Reserve would not offer one.
And corporations may have stored in adequate cash reserves to see them through the present rainfall.
Instead the taxpayer must keep them dry.
Meantime, the stock market may not have boomed the past 11 years. But it likely would not have bubbled either. It could have found its own way… at its own pace.
In brief, a far saner system could have emerged from the previous crisis. But Mr. Bernanke lacked the courage to sit upon his hands.
And it is not in Mr. Powell…
Managing editor, The Daily Reckoning
I’m not a medical expert. But having watched scores of experts’ YouTube videos and blog posts on the COVID-19 crisis, I feel ready to draw some important conclusions.
I believe the truth on the coronavirus will become obvious fairly soon. That is, the crisis of the epidemic will be over, and it will become merely our chronic political crisis. It will become a crisis of narrative rather than a crisis of knowledge.
The Experts Weigh in
The two experts I have found most knowledgeable and convincing are William “Matt” Briggs, who earned a PhD in statistics from Cornell and taught there, and Rockefeller University and German epidemiologist Knut Wittkowski.
These are two voices in the wilderness shouting against the prevailing wisdom.
I drew ten conclusions. Since I am neither statistician nor epidemiologist nor professor nor politician, I can oversimplify their arguments without violating any academic or professional norms. Here they are:
- COVID–19 is basically another respiratory virus like many others. Yes, it can be fatal to the elderly and those with serious health risks. No doubt. But fearsome death rates are largely a function of testing biased toward acute cases. The tests are flawed by false positives and false negatives. Asymptomatic spread is speculative in the absence of antibody surveys that measure immunity.
- All respiratory viruses end through herd immunity, whether through direct exposure or artificial vaccination.
- Social distancing, closed schools, and obsessive masking prolong the epidemic and ensure a second peak comparable to the first. By flattening the curve, they widen it and thus render it more menacing to more people.
- The more that young people get exposed, the better. They are the vessel of herd immunity. Closing schools delays the immunity and tends to expose vulnerably old and frail grandparents in the home.
- By delaying herd immunity and assuring secondary peaks in the fall, school closings and other lockdowns will increase the number of deaths among the population of vulnerable and old people.
- As Briggs writes: “The H1N1 virus responsible for many deaths is still with us. The 2020 data from the Center for Disease Control (CDC) affirms, “Nationally, influenza A(H1N1) pdm09 viruses are now the most commonly reported influenza viruses this season.”
- Given the ease with which coronavirus spreads, it’s reasonable to suppose variants of COVID–19, like common colds and other respiratory distresses, including deadly pneumonia, will be with us for years to come.
- Briggs and Wittkowski agree that most testing is unreliable because of false positives, especially in initial testing. Fewer are misclassifications of deaths due to the bug but there is a tendency to suppose that deaths with the virus are caused by it.
- The conclusion, says Briggs, “is that it’s nuts to implement large–scale testing on a population. It will lead to huge numbers of false positives — which will be everywhere painted as true positives — and more panic.”
- Although closing down the private economy may seem plausible to physicians and politicians, it is an extreme overreaction to viruses that we will always have with us and provides a dreadful precedent for future crises.
The worst projections turned out to be woefully wrong. We were told hundreds of thousands would die even with lockdowns and radical social distancing measures.
The Italians scared everybody with their haphazard health system and one of the oldest populations on the planet.
The crammed-together New Yorkers in subways and tenements registered a brief blip of extreme cases. Intubations and ventilators turned out not to help (80% died), sowing fear and frustration among medical personnel.
But the latest figures on overall death rates from all causes show no increase at all. Deaths are lower than in 2019, 2018, 2017, and 2015, slightly higher than in 2016.
I won’t make light of anyone’s death from this or any other disease, but deaths have been far below initial projections.
It was these wild projections that prompted the panicked lockdown. But it would have been an outrage even if the assumptions were not wildly wrong.
People Need to Get Outside
Flattening the curve was always a fool’s errand that only widened the damage.
In fact, by impeding herd immunity, particularly among students and other young people, the lockdown has prolonged and exacerbated the medical problem. As Briggs concludes, “People need to get out into virus–killing sunshine and germicidal air.”
This flu like all previous viral flus will give way only to herd immunity, whether through natural propagation of an extremely infectious pathogen, or through the success of one of the hundreds of vaccine projects.
Meanwhile, we all heard from politicians about a so–called “ventilator crisis.”
Governor Andrew Cuomo got $80 million worth of the contraptions and suggested he needed $800 million worth.
“More Money Is Always the Answer”
But that’s how governments think. More money is always the answer. More of the same. But what we need is entrepreneurial thinking.
Economist Gale Pooley of BYU in Honolulu and The Discovery Institute alerts me to the development in India of a new $200 smartphone–based ventilator system that fits in the palm of your hand.
Bypassing healthcare professionals, it uses machine learning to adapt to the rhythms of breathing and to adjust air flow to the lung conditions of patients.
It replaces the $2 million manually managed machines that have been widely deployed (ineffectively) to fight acute cases of lung failure from the coronavirus. According to urgent testimony from the front, these costly ventilators may have actually been killing patients as much as saving them.
Besides, the increasing recognition of herd immunity as the key to overcoming viral epidemics represents a huge advance over closing down businesses, schools, and economies.
We can’t leave the big decisions to government. The real solutions will come from the private sector.
The Private Sector Is the Answer
Wealth is knowledge and growth is learning. Learning accelerates in crises. Creativity always comes as a surprise to us. It is the result of free enterprise, which responds more quickly in the face of urgent needs than government.
Government guarantees tend to thwart the surprises of learning and growth. For example, if the government guarantees $2 million ventilators, there is no push to develop $200 devices like the one I mentioned.
The ventilator makers get rich, but no one else really benefits. It only deters innovation rather than spurs it.
On the optimistic side, the coronavirus crisis can well emerge as a time of new learning and economic growth rather than depression and paralysis.
Nassim Taleb’s theme of “anti–fragility” means crisis does not break free economies. It strengthens them, spurring invention and inspiring entrepreneurs.
The key is to leave open as many paths of learning and entrepreneurship as possible. Shutdowns and closures only inhibit the surprises of creativity and experiment that have saved humanity over the centuries of the capitalist miracle.
It’s possible that the economy, and your investments, will ultimately be enhanced by this crisis if we let the private sector work its magic.
for The 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.
for The Daily Reckoning