Is Monetary Policy Too Tight?

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No negative interest rates — “for now.”

This we have on authority of the Federal Reserve chairman himself. For Mr. Powell announced yesterday that:

I know there are fans of the policy, but for now it’s not something that we’re considering. We think we have a good tool kit, and that’s the one that we will be using.

Like a fireman hosing a junior fire before it fans an inferno… Powell was out to stream freezing water upon all talk of them.

From one direction the president was pushing him…

On Tuesday Mr. Trump implored the Federal Reserve to “accept the GIFT” of negative interest rates.

From another direction the market was pulling him…

The futures markets had begun to project negative rates — by mid-2021.

What if Mr. Powell failed to swear off negative rates yesterday?

“Forward Guidance”

Silence often talks louder than talking itself. And markets may have heard a shout in his silence. It would have informed them that negative rates are truly in prospect.

The stock market would have begun to factor them. And it would have endured a severe letting-down if Powell failed to carry through. Do not forget:

“Forward guidance” is one of the implements in the fellow’s “tool kit.”

Its purpose is to telegraph rate policy — to wire a sort of advance weather report — so markets can chart a proper course.

An unexpected gust could knock them off their heading.

What, Monetary Policy Is Too Tight???!!!

Yet the stock market is not the economy. And the economy is in for dirty weather.

Only additional easing will see it across the other side… or so we are told.

We are further told monetary policy is too tight for the challenge ahead — if you can believe it.

Deutsche Bank’s credit strategist Stuart Sparks, for example, tells us:

For all the measures taken by the Fed and fiscal authorities to counter the COVID-19 shock, policy remains too tight.

Yet rates are presently set to zero. How can monetary policy remain too tight?

To locate the answer we must get… “real.” That is, we must look beyond nominal interest rates… to real interest rates.

It’s the Real Rate That Counts

Explains Jim Rickards:

The real interest rate is the nominal interest rate minus the inflation rate. You might look at today’s interest rates and think they’re already extremely low. And in nominal terms they certainly are. But when you consider real interest rates, you’ll see that they can be substantially higher than the nominal rate…

If you’re an economist or analyst trying to forecast markets based on the impact of rates on the economy, then you need to focus on real rates.

Assume the nominal rate on a bond is 4%; what you see is what you get. But the real rate is the nominal rate minus inflation. If the nominal rate is 4% and inflation is 2%, then the real rate is 2% (4 – 2 = 2).

That difference between nominal and real rates seems simple until you get into a strange situation where inflation is higher than the nominal rate. Then the real rate is negative.

For example, if the nominal rate is 4% and inflation is 5%, then the real rate of interest is negative 1% (4 – 5 = -1).

Just so. What then is today’s real rate?

A Shocking Conclusion

The 10-year Treasury note currently yields a skeletal 0.614%. Meantime, the latest core inflation runs to 1.4%.

If we subtract the core inflation rate (1.4%) from the nominal rate (0.664%)… we find the real rate equals -0.786%.

Thus the real rate is negative — but only slightly.

Let us compare today’s real rate with the real rate from 1981…

Nominal rates at the time were killingly high — 13%. But real rates? Once again, Jim Rickards:

By the early 1980s, nominal interest rates on long-term Treasury securities hit 13%. But inflation at the time was 15%, so the real rate was negative 2%. The real cost of money was cheap even as nominal rates hit all-time highs.

Thus today’s real rate — though negative — nonetheless runs higher than 1981’s -2% real rate.

This, despite the fact that 1981’s nominal rate (13%) vastly overtowered today’s vanishing 0.664%.

It may flabbergast you, it may astound you. It may dynamite the bedrock upon which you stand.

But the facts are the facts.

And so comes the question: Are today’s rates negative enough?

Not according to Harvard economist Kenneth Rogoff…

The Economy Needs -3% Rates

You may recognize the name from these pages. That is because we have often brought him into ridicule.

He is perhaps the loudest drummer for negative interest rates — and the abolition of cash. And Mr. Rogoff believes today’s slightly negative real rate is inadequate to purposes.

The following is from a Reuters article, summarizing Rogoff’s position:

While core inflation excluding volatile energy prices was a healthier 1.4%, that fall in inflation could mean “real” interest rates are not deeply negative enough to swiftly revive the virus-hit economy as the Fed hopes.

To what depth should real rates sink?

Minus 3% — “or lower.” The blessings would spread wide, far and deep:

Negative rates of -3% or lower could lift firms, states and cities from default, boost demand and jobs and be a boon to many hobbled emerging economies too.

Assume for the moment this fellow is correct. Only deeply negative rates could work the trick. Yet Mr. Powell has declared against negative rates.

Can he nonetheless engineer negative real rates to push up the economy? How?

Look to the Balance Sheet

The aforesaid Stuart Sparks — of Deutsche Bank — lights the path:

“Further easing must be provided by the size and composition of the Fed’s balance sheet.”

That is, by additional quantitative easing.

As the gentlemen of Zero Hedge remind us, the Federal Reserve has made the previous estimation:

Each $100 billion of quantitative easing roughly equals three basis points of rate cuts (a normal rate cut is 25 basis points).

Let us assume the Federal Reserve takes aboard Mr. Rogoff’s counsel… and guns for a real -3% rate.

Recall, today’s real rate is -0.786% by our calculations. The Federal Reserve would need to sink the real rate at least two percentage points. Only then would it scrape -3%.

Two percentage points equal 200 basis points.

If $100 billion of quantitative easing approximates three basis points of rate cuts… the Federal Reserve would therefore require the equivalent of 66 rate cuts.

Thus it must empty a satanic $6.66 trillion onto the balance sheet.

That balance sheet presently swells to $6.72 trillion. $6.66 trillion would double the thing to $13.38 trillion — three times its 2015 high.

And so the Federal Reserve could plunge real rates to -3% while nesting nominal rates at zero.

Will it come to pass?

Powell’s Conundrum

We hazard no prediction. And we do not believe monetary policy can bring the economy back up.

We merely sketch a blueprint.

Is Mr. Powell prepared to balloon the balance sheet to a delirious $13.38 trillion?

Balance sheet expansion has a limit. An unknown limit — but a limit.

Drive past it and the dollar could crumble, all confidence lost.

And so we find Mr. Powell hung upon the hooks of a mighty dilemma…

In his mind he could:

A) Risk a dollar collapse by inflating the balance sheet to $13 trillion, or…

B) Risk a deeper economic collapse by failing to inflate the balance sheet to $13 trillion.

Our wager is on A…


Brian Maher
Managing editor, The Daily Reckoning

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The Biggest Economic Threat Today

This post The Biggest Economic Threat Today appeared first on Daily Reckoning.

Kind heaven, no! A fresh economic scourge is upon the land. Announces CNN:

“New Threat to the Economy: Americans Are Saving Like It’s the 1980s.”

Is a higher evil possible? Thus we are informed:

Americans are slashing their spending, hoarding cash and shrinking their credit card debt as they fear their jobs could disappear during the coronavirus pandemic…

Although caution is a logical response to that uncertainty, hunkering down also poses a risk to the recovery in an economy dominated by consumer spending. A so-called V-shaped recovery can’t happen if consumers are sitting on the sidelines…

The savings rate in the United States climbed from 8% in February to 13.1% in March. That was the highest savings rate since November 1981.

The article further reminds us that consumer spending constitutes some 70% of the United States economy.

And so the old bugaboo rises from the grave yet again — the “paradox of thrift.”

The Evils of Saving

The individual saver may be the model of prudence, of frugality, of forbearance… of thrift itself.

But if the entire nation tied down its money?

A savage cycle would feed and feed upon itself… until the economy is devoured to the final crumbs.

Consumption would dwindle to near-nonexistence. GDP would collapse in a heap. Waves of bankruptcies would wash through.

All this because the selfishness of savers. They refuse to untie their purse strings… and spend for the greater good.

This paradox of thrift is perhaps the mother myth of economists in the Keynesian line.

Yet no paradox exists whatsoever.

Today we maintain — again — that saving is an unvarnished blessing, at all times, under all circumstances.

Let us first plunge a stake through the squirming heart of another myth:

The myth that consumer consumption constitutes 70% of the United States economy…

Lying Statistics

Much of what goes under the banner “consumer spending”… is not consumer spending.

It is government spending. Medicare and Medicaid, for example, are included.

Meantime, official GDP calculations do not include tremendous piles of economic doings.

These piles include business investment and spending on “intermediate” goods.

These of course are inputs required for the production of final goods — hence intermediate. They must first come in before consumer goods can go out.

The steel in the automobile, the sugar in the candy, the wood of the furniture… these are intermediate goods.

Consumer Spending Is Only 30% of GDP?

Yet their purchase does not classify as consumer spending — else they would be double-counted. Explains economist Mark Skousen:

GDP only measures the value of final output. It deliberately leaves out a big chunk of the economy — intermediate production or goods-in-process at the commodity, manufacturing and wholesale stages — to avoid double counting.

Now mix in expenditures on intermediate goods. What do we find?

We find that consumer consumption only constitutes perhaps 30% of GDP. Skousen:

I calculated total spending (sales or receipts) in the economy at all stages to be more than double GDP… By this measure — which I have dubbed gross domestic expenditures, or GDE — consumption represents only about 30% of the economy, while business investment (including intermediate output) represents over 50%.

We might add that Americans purchase heaps of foreign goods. These purchases add little to the gross domestic product.

Perhaps consumer spending accounts for less than 30% of GDP. We speculate of course. We have not interrogated the figures.

We now revisit our central claim — that saving is an unvarnished blessing, at all times, under all circumstances.

Remember Say’s Law

“From time immemorial proverbial wisdom has taught the virtues of saving,” wrote Henry Hazlitt 74 years ago, “and warned against the consequences of prodigality and waste.”

But to the anti-savers… prodigality and waste are near-virtues at times as these.

They have forgotten their Say’s law — perhaps purposefully.

Say’s law holds that supply creates its own demand. “Products are paid for with products,” argued Jean-Batiste Say over two centuries ago.

Production must precede consumption.

Here we return to an example we have previously cited…

The Baker and the Shoemaker

One man produces bread. Another produces shoes.

Let us say the baker bakes a baker’s dozen — 13 loaves of bread. He consumes two of them.

The remaining 11 loaves represent his savings. He can peddle them for other goods: shoes in our little example.

Meantime, the cobbler cobbles together 13 pairs of shoes. He requires one new pair for himself. He further sets aside two pairs for his growing children.

This fellow “consumes” three pairs of shoes, that is. The remaining ten constitute his savings. Like our baker, he can exchange his savings for goods.

To proceed…

Buying Is Actually a Form of Barter

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

They may transact in money — direct barter is primitive. But upon closer examination we see their transactions in fact constitute an indirect barter.

Money merely throws an illusory veil across the transactions.

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

That is, each has paid for his items through savings.

Concludes Monsieur Say:

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

What is more, the goods a man acquires through savings sees him through… and allows him to produce more loaves, more shoes.

We must conclude that there can be no excess of savings. Savings equal stored wealth.

To argue that savings injure society is to argue that wealth injures society.

And savings spring from production.

“Lack of Demand”

Yet the enemies of savings turn Say’s law upon its head. They sob not about a lack of production but a “lack of demand.”

That is, they place the wagon cart of consumption before the draft horse of production.

The government must race the printing press to make the shortage good, to furnish the lacking demand.

But no new production accompanies the flood of money. The additional money merely chases the existing stock of goods.

It is the pursuit of alchemy, of lead into gold, of the free lunch. It is the half-conscious belief that the print press is the spark plug of prosperity.

It neglects production.

“But what about times like these?” counter the author of the CNN article. “If everybody saved, the economy would collapse. Remember the paradox of thrift. If government doesn’t step in and spend, who will?”

But the old dead economists argue there is no paradox whatsoever…

No Paradox of Thrift

What applies to the individual applies to society at large, they insist. What is society but a collection of individuals, after all?

If saving during depressed times is such a vicious economic crime… how has any economy gotten back up?

The standard logic assumes all such economies corkscrew down and down into oblivion.

Yet as history demonstrates abundantly, they recover. As we have also explained before…

When society saves in lean times, it is not eliminating consumption — it is merely delaying it.

The demand that is supposedly lost is not lost at all. It is simply shifted toward the future.

Today’s savings are therefore tomorrow’s spending, tomorrow’s consumption. By reducing consumption today… society allows greater consumption tomorrow.

Or according to Hazlitt:

“‘Saving,’ in short, in the modern world, is only another form of spending.”

Perhaps someone can whisper those words into the ear of a certain CNN economics writer…


Brian Maher
Managing editor, The Daily Reckoning

The post The Biggest Economic Threat Today appeared first on Daily Reckoning.

Rickards: This Time IS Different

This post Rickards: This Time IS Different appeared first on Daily Reckoning.

Stocks stumbled out of the gate today, at least partially on fears about a resurgence in coronavirus cases.

South Korea, which did an excellent job containing the virus, has reported a new batch of cases. Japan and Singapore also reported new cases. Infections are increasing in Germany as well, where lockdown restrictions are being lifted.

We can also expect a rise in U.S. cases as several states lift their own restrictions.

From both epidemiological and market perspectives, the pandemic has a long way to go. Its economic effects are already without precedent…

In the midst of this economic collapse, many investors and analysts return reflexively to the 2008 financial panic.

That crisis was severe, and of course trillions of dollars of wealth were lost in the stock market. That comparison is understandable, but it does not begin to scratch the surface.

This collapse is worse than 2008, worse than the 2000 dot-com meltdown, worse than the 1998 Russia-LTCM panic, worse than the 1994 Mexican crisis and many more panics.

You have to go back to 1929 and the start of the Great Depression for the right frame of reference.

But even that does not explain how bad things are today. After October 1929, the stock market fell 90% and unemployment hit 24%. But that took three years to fully play out, until 1932.

In this collapse the stock market fell 30% in a few weeks and unemployment is over 20%, also in a matter of a few weeks.

Since the stock market has further to fall and unemployment will rise further, we will get to Great Depression levels of collapse in months, not years. How much worse can the economy get?

Well, “Dr. Doom,” Nouriel Roubini, can give you some idea.

Roubini earned the nickname Dr. Doom by predicting the 2008 collapse. He wasn’t the only one. I had been warning of a crash since 2004, but he deserves a lot of credit for sounding the alarm.

The factors he lists that show the depression will get much worse include excessive debt, defaults, declining demographics, deflation, currency debasement and de-globalization.

These are all important factors, and all of them go well beyond the usual stock market and unemployment indicators most analysts are using. Those economists expecting a “V-shaped” recovery should take heed. That’s highly unlikely in the face of all these headwinds.

I’ve always taken the view that getting a Ph.D. in economics is a major handicap when it comes to understanding the economy.

They teach you a lot of nonsense like the Phillips curve, the “wealth effect,” efficient markets, comparative advantage, etc. None of these really works in the real world outside of the classroom.

They then require you to learn complex equations with advanced calculus that bear no relationship to the real world.

If economists want to understand the economy, they should talk to their neighbors and get out of their bubble.

The economy is nothing more than the sum total of all of the complex interactions of the people who make up the economy. Common sense, anecdotal information and direct observation are better than phony models every time.

So what are everyday Americans actually saying?

According to one survey, 89% of Americans worry the pandemic could cause a collapse of the U.S. economy. This view is shared by Republicans and Democrats alike.

Ph.D. economists dislike anecdotal information because it’s hard to quantify and does not fit into their neat and tidy (but wrong) equations. But anecdotal information can be extremely important.

With so many Americans fearing a collapse, it could create a self-fulfilling prophesy.

If enough people believe something it becomes true (even if it was not true to begin with) because people behave according to the expectation and cause it to happen.

The technical name for this is a recursive function, also known as a “feedback loop.” Whatever you call it, it’s happening now.

Based on that view and a lot of other evidence, we can forecast that the depression will get much worse from here despite the initial severity.

But as usual, the Ph.D. crowd will be the last to know.

Below, I show you why you shouldn’t believe the happy talk. We’re in a deflationary and debt death spiral that has only just begun. Read on for details.


Jim Rickards
for The Daily Reckoning

The post Rickards: This Time IS Different appeared first on Daily Reckoning.

Why Assets Will Crash

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The increasing concentration of the ownership of wealth/assets in the top 10% has an under-appreciated consequence: when only the top 10% can afford to buy assets, that unleashes an almost karmic payback for the narrowing of ownership, a.k.a. soaring wealth and income inequality: assets crash.

Most of you are aware that the bottom 90% own very little other than their labor (tradeable only in full employment) and modest amounts of home equity that are highly vulnerable to a collapse of the housing bubble.

(The same can be said of China’s middle class, only more so, as 75% of China’s household wealth is in real estate, more than double the percentage of wealth held in housing in U.S. households.)

As the chart illustrates, the top 10% own 84% of all stocks, over 90% of all business equity and over 80% of all non-home real estate. The concentration of ownership of assets such as vintage autos, collectibles, art, pleasure craft and second homes in the top 10% is likely even greater.

The more expensive the asset, the greater the concentration of ownership, as the top 5% own roughly 2/3 of all wealth, the top 1% own 40% and the top 0.1% own 20%.

In other words, the more costly the asset, the narrower the ownership. Total number of U.S. households is about 128 million, so the top 5% is around 6 million households and the top 1% is 1.2 million households.

This means the pool of potential buyers is relatively small, even if we include global wealth owners.

Since price is set on the margins, and assets like houses are illiquid, then we can anticipate all the markets for assets owned solely by the wealthy to go bidless — yachts, collectibles, vacation real estate — because the pool of buyers is small, and if that pool gets cautious due to a drop in net worth/unearned income, there won’t be any buyers except at the margins, at incredible discounts.

As we know, in a neighborhood of 100 homes currently valued at $1 million each, when a desperate seller accepts $500,000, the value of the other 99 homes immediately drops to $500,000.

Since few of the current bubble-era asset valuations are supported by actual income fundamentals, then the sales price boils down to a very small number of potential buyers and what they’re willing to pay.

Houses have a value based on rent, of course, but rents will drop very quickly for the same reason: prices are set on the margins. The most desperate landlords will drop rents and re-set the rental market from the margins.

If demand plummets (which it will as people can no longer afford rents in hot urban markets once they lose their jobs), then vacancies will soar and rents will crash as a few desperate landlords will take $1200/month instead of $2500/month.

Due to the multi-year building boom of multi-family buildings in hot job markets which inevitably leads to an oversupply once the boom ends, there are now hundreds of vacancies where there were once only a few dozen, and thousands where there were previously only hundreds.

As millions of wait staff, bartenders, etc. who made good money in tips find their jobs have vanished, all the urban hotspots will see mass out-migration: Seattle, Portland, the S.F. Bay Area, L.A., NYC, Denver, etc. as demand for rentals will evaporate and rents will be set on the margins by the most desperate landlords. Everyone holding out for the previous bubble-era rent will have $0 income as their units are vacant.

Tech start-ups and Unicorns are melting like ice cubes in Death Valley, and tech-sector layoffs are already in the tens of thousands. This wave of highly paid techies losing their jobs will become a tsunami, further reducing the pool of people who can afford rents of $2,500 to $3,000 for a studio or one-bedroom apartment.

The concentration of ownership generates a self-reinforcing feedback that further depresses prices: since the top 10% own most of the assets of the nation, they are most prone to a reversal of “the wealth effect.”

As their assets soared in value, the top 10% felt wealthier and more confident in future gains, enabling them to borrow and spend freely on second homes, pleasure craft, new vehicles, collectibles, luxury travel, etc.

Once even one class of assets plummets in value–for example, the recent decline in the stock market — the wealth effect reverses and the top 10% feel poorer and less confident about future gains, and thus less enthused about borrowing and spending.

The demand for other costly assets quickly evaporates, further reducing the wealth of the “ownership class,” which further reduces their desire and ability to buy bubble-era assets.

The high-priced assets owned by the top 10% will be the assets least in demand due to their high cost and potential for enormous losses: nothing loses value faster in a recession that narrowly owned assets such as vintage cars, art, vacation homes, yachts, etc.

Once assets start sliding in value, the reverse wealth effect quickly dries up demand for all asset classes with narrow ownership. Since these assets are illiquid — that is, the market for them is thin, with buyers few and far between–the prices are set by a very shallow pool of buyers and desperate sellers.

Consider a pleasure craft that retails new for $120,000. In the boom era of rising stocks and housing, a used boat might fetch $65,000. But as the wealth of the small pool of households able to buy and maintain a costly craft evaporates, the number of qualified buyers evaporates, too.

The seller might be aghast by an offer of $35,000 and reject it angrily. Six months later, he’s praying someone will take it off his hands for $15,000, and in another six months, he’ll accept $500 just to get out from underneath the insurance, slip-rental and licencing fees.

This is how it happens that boats that were once worth tens of thousands of dollars are set adrift by owners who can no longer afford to pay slip fees, and vacation homes are abandoned and auctioned off for overdue property taxes: the market for these luxuries dries up and blows away, i.e. goes bidless — there are no buyers at any price.

Once housing and real estate valuations fall, that will trigger a decline in the value of all other costly, narrowly owned assets, which will reinforce the reverse wealth effect.

This is the systemic payback for concentrating ownership of assets in the hands of the few: when their bubble-era priced assets plummet in value, the bottom falls out of all assets with narrow ownership.

The price of superfluous assets such as boats, vintage cars, collectibles, art and vacation homes can quickly fall to a fraction of bubble-era valuations, destroying much of what was always fictional capital.

The Federal Reserve reckons it can “save” the bubble-era valuations of junk bonds by being the “buyer of last resort,” but it will end up being the “only buyer,” effectively making the system even more fragile and prone to collapse.

The public will eventually have to decide if the nation’s central bank should be bailing out assets owned by the financial elite while the upper-middle class watches its assets collapse in value.


Charles Hugh Smith
for The Daily Reckoning

The post Why Assets Will Crash appeared first on Daily Reckoning.

Recovery by the End of the Year?

This post Recovery by the End of the Year? appeared first on Daily Reckoning.

Will the recession end by the close of 2020?

One “economic expert” boasting a “perfect record calling recessions” believes it will.

Will it? Today we mount the judge’s bench, hear evidence… and render verdict.

First to the verdict of the marketplace. How did the stock market fare today?

Main Street Goes One Way, Wall Street the Other

The Dow Jones jumped 211 points today. The S&P gained 32, the Nasdaq 125.

The Nasdaq — if you can believe it — is now positive on the year.

But Wall Street is far removed from Main Street. Today’s spree once again follows bleak economic data…

The United States Department of Labor reveals another 3.169 million Americans filed unemployment claims for the week ended May 2.

They join the existing 30 million Americans recently turned out upon their ears.

But rejoice — the Nasdaq is once again in green.

Let us now turn to the question swirling in the air:

Will the recession end by the close of 2020?

A “Perfect Record Calling Recessions”

Dr. Campbell Harvey professes finance at Duke University. MarketWatch claims he enjoys a “perfect record calling recessions.”

Last summer — we are informed — this fellow projected recession for “2020 or early 2021.”

What was the rock of his case?

The yield curve. Specifically, an inverted yield curve.

Explains MarketWatch:

The yield on the 3-month Treasury bill was higher than the yield on the 5-year Treasury note for the entire second quarter of 2019. That “inverted yield curve” had been the harbinger of the previous seven recessions. Harvey first identified the inverted yield curve’s predictive power in his 1986 doctoral dissertation at the University of Chicago.

A Prediction Even More Accurate

We must be formidable future-seers as well. We began yelling about an inverted yield curve one full year before the professor — in July 2018.

We forecast possible recession “sometime in mid-2020.”

What is the expression — close enough for government work?

Twice last summer we hollered similar warnings.

In reminder, recession is commonly defined as two consecutive quarters of minus growth.

Q1 GDP contracted 4.8%. The Q2 count is not yet in.

But GDP will likely vanish at an annualized 30–47% rate… depending which crystal-gazers you choose to believe.

And so you will have your two consecutive quarters of contraction. That is, you will have your recession.

An Act of Self-Destruction

Of course, this recession is an act of self-destruction, a deliberate shooting of a bullet into the foot.

Let us not forget: Government chose recession in the broader interest of public health.

We cannot claim recession would have come in this year without the virus. Even if it did… it would not have raised one fraction of the hell.

A standard-issue recession does not plunge 33 million into unemployment within seven weeks. Nor does it dynamite GDP at a 30–47% annualized rate.

These times lack all precedent, all reference markers.

We will nonetheless claim the laurel as master economic psychic.

The Lesson of the Yield Curve

But why is an inverted yield curve such a menace? As we have explained prior:

The yield curve is simply the difference between short- and long-term interest rates.

Long-term rates normally run higher than short-term rates. It reflects the structure of time in a healthy market…

Longer-term bond yields should rise in anticipation of higher growth… higher inflation… higher animal spirits…

But when short- and long-term yields begin to converge, it is a powerful indication the bond market expects lean times ahead.

When the long-term yield falls beneath the short-term yield, the yield curve is said to invert.

A Nearly Perfect Recessionary Omen

As we have also explained before, an inverted yield curve is a nearly perfect recessionary omen.

An inverted yield curve has foretold recession seven of seven prior occasions… as confirms MarketWatch.

Only once did it spot a phantom — in the mid-1960s.

And now this recession fortune teller has foretold eight of the past eight recessions… regardless of the circumstances behind the eighth.

Next we come to this question:

Will this economy go backward four straight quarters, five straight quarters, six — or more?

A “skinny U” Recovery

Dr. Harvey, the man with the spotless record, says no. You can expect robust recovery early next year.

Not the “V-shaped” recovery the sunshine-blowers have projected — but a “skinny U” nonetheless. A vaccine will be the spark plug.


“In the global financial crisis [in 200809], we never could tell when it was going to end,” [Harvey] said in a telephone interview. This time, he said, “The cause is clear — it’s a biological event, and the solution is also clear: another biological event”

He doesn’t anticipate the V-shaped recovery that Wall Street touted a few weeks ago. “I think it’s more what I call the ‘skinny U,’ because I do believe that we will have a vaccine by the first quarter [of 2021],” he said.

Just so. But is a vaccine likely by the first quarter of 2021?

We instructed our minions to research the literature on vaccination. Are vaccines effective against viruses such as this? When can the world expect one, with history as our guide?

We ordered them off in pursuit of answers.

They returned with answers. But their findings did not encourage.

Do Not Count on a Vaccine

COVID-19 is of course a coronavirus. Not once — despite all the angels and saints — have medical men brewed a successful vaccine against a coronavirus.

Decades of effort have led them down blind alley after blind alley after blind alley.

We were further informed that the respiratory system is generally unreceptive to vaccination… as a round hole is unreceptive to a square peg.

It is walled off, inaccessible to the vaccinary machinery.

Dr. Ian Frazer — a scientist — has himself helped develop vaccines. According to him:

It’s a separate immune system, if you like, which isn’t easily accessible by vaccine technology. It’s a bit like trying to get a vaccine to kill a virus on the surface of your skin.

Not only are these vaccines poor fighters. They are turncoats who aid and comfort the enemy:

One of the problems with corona vaccines in the past has been that when the immune response does cross over to where the virus-infected cells are it actually increases the pathology rather than reducing it. So that immunization with SARS corona vaccine caused, in animals, inflammation in the lungs, which wouldn’t otherwise have been there if the vaccine hadn’t been given.

In conclusion:

I think it would be fair to say even if we get something which looked quite encouraging in animals, the safety trials in humans will have to be fairly extensive before we would think about vaccinating a group of people who have not yet been exposed to the virus.

They might hope to get protection but certainly wouldn’t be keen to accept a possibility of really serious side effects if they actually caught the virus.

A Drug Therapy Is More Likely

Of course it is possible the professionals will mix a vaccine that is both safe and effective. Heaps and heaps of scientists labor furiously for that purpose.

But the history is against them — at least to our understanding.

And the possibility of a functioning vaccine by the first quarter of 2021 appears… unlikely.

We hazard a workable drug regimen, or regimens, will emerge far ahead of a vaccine. They may not work a cure. But they might pack enough wallop to hold the killer off.

And a dependable therapeutic would likely coax Americans from their bunkers, from their foxholes. When this therapeutic comes on scene, we cannot say of course.

Americans Might Just Take Their Chances

But the economy — or greater segments of it — will swing open before long. The states are making plans.

And millions of Americans may choose to test their luck at work… rather than remain chained down at home, jobless and hopeless, waiting for a drug.

They will fare out into a changed America with their eyes open, their tread light… and their fingers crossed.


Brian Maher
Managing editor, The Daily Reckoning

The post Recovery by the End of the Year? appeared first on Daily Reckoning.

True Courage

This post True Courage appeared first on 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 capitala 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.

True Courage

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…


Brian Maher
Managing editor, The Daily Reckoning

The post True Courage appeared first on Daily Reckoning.

War on Cash Kicking Into Overdrive

This post War on Cash Kicking Into Overdrive appeared first on Daily Reckoning.

In the depths of the 2008–09 financial crisis, Obama’s first chief of staff, Rahm Emanuel, remarked that one should never let a good crisis go to waste. You probably recall him saying that.

He was referring to the fact that crises may be temporary but hidden agendas are permanent.

The global elites and deep state actors always have a laundry list of programs and regulations they can’t wait to put into practice. They know that most of these are deeply unpopular and they could never get away with putting them into practice during ordinary times.

Yet when a crisis hits, citizens are desperate for fast action and quick solutions. The elites bring forward their rescue packages but then use these as Trojan horses to sneak their wish list inside.

The War on Cash Is Decades Old

The USA Patriot Act that passed after 9/11 is a good example. Some counterterrorist measures were needed, of course. But the Treasury had a long-standing wish list involving reporting cash transactions and limiting citizens’ ability to get cash.

They plugged that wish list into the Patriot Act and we’ve been living with the results ever since, even though 9/11 is long in the past.

Obviously, the effort to eliminate cash is hardly new. It has been going on for many years and in many forms.

The U.S. discontinued the use of large-denomination bills in the late 1960s. Until 1969, $500, $1,000, $5,000 and even $10,000 bills were issued, even though they were printed decades earlier.

Today the largest bill is a $100 bill, but it has lost 80% of its purchasing power since 1968, so it’s really just a $20 bill from those days. Europe has ended the 500-euro note and today the largest note in euros is 200 euros.

Ignore the Official Reasons

Harvard professor Ken Rogoff has a book called The Curse of Cash, which calls for the complete elimination of cash. Many Bitcoin groupies say the same thing. Central banks and the IMF are all working on new digital currencies today.

The reasons for this are said to include attacks on tax evasion, terrorism and criminal activity. There’s some truth to these claims. Cash is anonymous, so it can’t be tracked.

But the real reason is because the elimination of cash would allow elites to impose negative interest rates, account freezes and confiscation.

They can’t do that as long as you can go to your bank and withdraw your cash. That’s the key.

In other words, it’s much easier for them to control your money if they first herd you into a digital cattle pen. That’s their true objective and all the other reasons are just a smokescreen.

And now, predictably, the latest attack on cash comes courtesy of the COVID-19 pandemic.

Crisis Meets Opportunity

This crisis is even larger and scarier than the 2008 crisis, which gives elites even more opportunity to ram their agendas through without serious opposition. They don’t intend to let it go to waste.

Sure enough, government agents and tech vendors are now claiming that cash is “dangerous” because it could contain traces of the coronavirus.

While that’s not impossible, it’s highly unlikely and no more likely than getting the virus from 100 other sources including package deliveries and shopping carts.

Should we ban cardboard boxes and shopping carts too?

If you’re really concerned about getting coronavirus from cash, it’s simple to wear sanitary gloves during any transactions (I do). Then put the cash to one side. The virus cannot live more than 10 hours or so on an inorganic surface. After a while, your cash is safe.

But if you get scared into giving up cash because of COVID-19, then don’t complain when you find that your financial freedom is also gone when the world moves to 100% digital money.

Because that’s the endgame here.

How to Protect Your Wealth

The time to protect yourself is now. The best way is to keep a portion of your wealth outside of the banking system.

I strongly recommend that you own physical gold (and silver). I recommend you allocate 10% of your investable assets to gold. If you really wanted to be aggressive, maybe 20%. But no more.

Just make sure you don’t store it in a bank, because it would be subject to confiscation. That defeats the whole purpose of having this sort of protection in the first place.

One Small Positive

As bad as the COVID-19 crisis is, and it is that bad, there’s one small positive to come out of it: It’s finally snapped investors out of their complacency regarding gold.

I recommended gold at $1,100 per ounce, $1,200 per ounce, $1,300 per ounce, $1,400 per ounce, $1,500 per ounce and so on… you get the picture.

But few people cared. They just yawned. Now that gold is $1,750 per ounce (up 75% since 2015), everyone wants gold!

There’s only one problem. You may not be able to get any.

That’s also something I predicted. I said years ago that when you most want your gold, you won’t be able to get it because everyone will want it at the same time and the dealers will be back-ordered and the mints and refiners will shut down.

Now it appears that’s exactly what’s happening.

The U.S. Mint at West Point is closing. That mint produces 1-ounce American Gold Eagle coins, so this will add to the shortage of Gold Eagles. The Royal Canadian Mint also closed for coin production temporarily a few weeks ago.

Gold refiners in Switzerland are either closed or are operating on reduced hours. Gold logistics firms like Brink’s are also cutting back hours and reducing distribution of gold bullion.

You Still Have a Chance

It’s still possible to find some gold bars or coins from dealers who have inventory, but delays are long and commissions are high. The scarcity factor will only get worse as gold prices continue their rally in this third great bull market in history that began in 2015.

Gold is difficult to get now but not impossible. If you don’t have yours yet, don’t wait any longer.

If you have to pay a bit of a premium for physical gold over the officially listed gold price, don’t worry about that. It means nothing in the long run.

I see gold going to at least $10,000 an ounce ultimately, so paying a little more right now is not an issue. It’s just an indication of the skyrocketing demand for physical gold right now.

When the next panic hits, and it will hit, there won’t be any gold available at any price.


Jim Rickards
for The Daily Reckoning

The post War on Cash Kicking Into Overdrive appeared first on Daily Reckoning.

Government Won’t Solve This Crisis

This post Government Won’t Solve This Crisis appeared first on 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:

    1. 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.
    2. All respiratory viruses end through herd immunity, whether through direct exposure or artificial vaccination.
    3. 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.
    4. 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.
    5. 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.
    6. 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.”
    7. 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.
    8. 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.
    9. 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.”
    10. 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.

Wrong Predictions

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.


George Gilder
for The Daily Reckoning

The post Government Won’t Solve This Crisis appeared first on Daily Reckoning.

The Fed Is Stealing Our Future

This post The Fed Is Stealing Our Future appeared first on Daily Reckoning.

The pestilence presented the Federal Reserve two options.

The first was to wash out the sins of the past decade. The second was to sin on a vastly mightier scale.

Lance Roberts of Real Investment Advice:

    1. Allow capitalism to take root by allowing corporations to fail and restructure after spending a decade leveraging themselves to [the] hilt, buying back shares and massively increasing the wealth of their executives while compressing the wages of workers. Or…
    2. Bail out the “bad actors” once again to forestall the “clearing process” that would rebalance the economy and allow for higher levels of future organic economic growth.

The Federal Reserve selected option two. That is, it chose sin on a vastly mightier scale.

All the imbalances, all the fraud, all the dishonesty of the past decade it is multiplying — by two, by three, by four, by five.

And so it is condemning the United States economy to a lost decade of stagnation and anemia.

Cutting off the Future

The Federal Reserve is dynamiting the bridges leading from present to future. To future recovery. And future growth.

That is because massive debt drains the future… and leaves it emptied.

Plunging into debt introduces a sort of hand-to-mouth living. It diverts cash flow to the service of existing debt — often unproductive debt.

And so investment in the future goes channeling backward. It is a titanic larceny of the future.

And artificially low interest rates are the stickup gun.

The Chains of Debt

Explains Roberts:

Low to zero interest rates incentivize nonproductive debt. The massive increases in debt, and particularly corporate leverage, actually harm future growth by diverting spending to debt service…

The rise in corporate debt, which in the last decade was used primarily for nonproductive purposes such as stock buybacks and issuing dividends, has contributed to the retardation of economic growth…

The massive debt levels being added to the backs of taxpayers will only ensure lower long-term rates of economic growth.

A debt-based financial system heaves every principle of sound economics out upon its ear.

It is an economics of the hamster wheel — frantic — but stationary.

In back of it all is a vicious hostility to savings…

The Fed’s War on Savings

The Federal Reserve would heat your savings into a potato so hot you cannot hold them for an instant.

You must throw them into profitable investments… which will coax the economic engine to life.

Or you must spend them on goods and services. That will yield the same healthful effect.

This is the royal route to growth — as the theory runs.

Thus the saver is a public menace, a criminal of sorts, a rascal.

Saving is a passable evil in normal times, most economists allow.

But in dark times — as these — saving locks needed capital out of the productive economy.

The central bank must therefore suppress savings to increase spending. And investment.

But there can be no investment without savings, say the old economists… as there can be no flowers without seeds.

Saving Equals Investment

Explained the late economist Murray Rothbard:

Savings and investment are indissolubly linked. It is impossible to encourage one and discourage the other. Aside from bank credit, investments can come from no other source than savings… In order to invest resources in the future, he must first restrict his consumption and save funds. This restricting is his savings, and so saving and investment are always equivalent. The two terms may be used almost interchangeably.

The more accumulated savings in the economy… the more potential investment.

An economy built atop a sturdy foundation of savings is a rugged economy, a durable economy.

It can withstand a blow.

In the past we have cited the example of a frugal farmer to demonstrate the virtue of savings. Today we cite it again…

The Prudent Farmer

This fellow has deferred present gratification. He has conserved a portion of prior harvests… and stored in a full silo of grain.

There this grain sits, seemingly idle. But this silo contains a vast reservoir of capital…

This farmer can sell part of his surplus. With the proceeds he purchases more efficient farm equipment. And so he can increase his yield.

Meantime, his purchase gives employment to producers of farm equipment and those further along the production chain.

Or he can invest in additional land to expand his empire. The added land yields further grain production.

This in turn extends Earth’s bounty in wider and wider circles — and at lower cost.

That is, his capital stock expands and the world benefits. Only his original surplus allows it.

He also retains a prudent portion of his grain against the uncertain future.

There is next year’s crop to consider. If it fails, if the next year is lean, it does not clean him out.

He has plenty laid by. And so his prior willingness to defer immediate gratification may pay a handsome dividend.

He can then proceed to rebuild his capital from a somewhat diminished base. Without that savings base of grain… he is a man undone.

We will call this man Farmer X. Contrast him, once again, with Farmer Y…

The Wastrel Farmer

This man enjoys rather extravagant tastes for a farmer. He squanders his surplus on costly vacations, restaurants, autos, etc.

He likes to parade his wealth before his fellows.

It is true, his luxurious appetites keep local business flush. But his grain silo perpetually runs low.

That is, his capital stock runs perpetually low. That is, he has little savings. That is, he has little to invest.

He deprives the future so that he may gratify the present… and rips food from future mouths.

And should next year’s crop fail, this Farmer Y is in a dreadful way.

Assume next year’s crop does fail.

The surplus grain that could have sustained him he has dissipated. He has no reserves to see him through.

He is hurled into bankruptcy. He must sell his farm at a fire sale.

If only this wastrel had saved.

The Lesson

Multiply this example by millions and it becomes clear:

A healthy economy requires a full silo of grain — of savings, that is.

An empty silo means no investment in the future. And society has nothing stored against future crises… like an imprudent squirrel that has failed to stock acorns against winter.

Henry Hazlitt, from Economics in One Lesson:

The artificial reduction of interest rates discourages normal thrift, saving and investment. It reduces the accumulation of capital. It slows down that increase in productivity, that “economic growth” that “progressives” profess to be so eager to promote.

The Enemies of Savings

The critic of savings will concede that saving may make individual sense.

But if everybody saved, he argues, consumption would wind to a halt.

Government must therefore race in to supply the demand that individual savers will not.

It must be “the spender of last resort.”

But that which applies to the individual applies to society at large, the old economists insist.

Saving Is Actually Spending

When society saves in lean times, it is not eliminating consumption. It is merely delaying it.

The demand that is supposedly lost is not lost at all. It is simply shifted toward the future.

Thus today’s savings are therefore tomorrow’s spending, tomorrow’s consumption.

Or to return to Hazlitt:

“‘Saving,’ in short, in the modern world, is only another form of spending.”

Artificially low interest rates drain the pool of savings… and leaves society poorer.

But the Federal Reserve has made its choice. It will drown us all in debt. And all for a mess of pottage.

Thus we face a future of limited growth… slender prospects… and frustrated ambitions.

But at least Wall Street will prosper…


Brian Maher
Managing editor, The Daily Reckoning

The post The Fed Is Stealing Our Future appeared first on Daily Reckoning.

Are We Wrong About Reopening the Economy?

This post Are We Wrong About Reopening the Economy? appeared first on Daily Reckoning.

Above the initials Scott B. we are dealt with as follows:

Listen, dumb****s! I am a professional on the front lines intubating these patients and years of education to understand this, but I will attempt to relate to the lowest common denominator mentality of this society and the financial segment in particular (notoriously self-involved)… I will make this simple. Have you seen anything cause bodies to be piled into refrigerator trucks or mass graves in your lifetime?!! Quit arguing just what the fucking death rate percentage is! It’s obviously high! Shut the [expletive] up and listen to people who obviously know more than you!

Legions and legions know more about respiratory disease than your humble editor. We know very little.

And no, we have never seen the phenomenon the reader describes.

Yet many vastly credentialed medical authorities believe the fatality rate — assuming a much larger number of possible infections than officially reported — is nonetheless low.

Antibody testing in New York City indicates that 21.2% of its residents have already hosted the virus.

The high recovery rate implies a low mortality rate.

Of course the true figures are uncertain. And testing is not entirely reliable.

The Grisly Human Toll

Regardless, a low mortality rate is thin consolation for the dead who suffered damnably. Victims slowly drown in their own liquids.

It is also thin consolation for the medicos like our reader. They must attend the miserable dying.

And our heart extends to them.

Alas, it appears that many who require ventilation stand condemned.

The numbers from New York reveal that 88% of its ventilated do not survive. The virus has plunged its teeth too deeply.

Are Ventilators the Answer?

Some studies — we of course know nothing of their validity — suggest ventilation may work more harm than good.

The pressure settings may exceed tolerances. Reports one physician:

It’s like using a Ferrari to go to the shop next door you press on the accelerator and you smash the window.

Yet since we are the very soul of fairness… some physicians claim ventilation is crucial under certain conditions.

But it requires a deep and subtle knowledge of the business. Not all physicians are equal to it. Says one pulmonologist:

It’s not just about running out of ventilators, it’s running out of expertise… We intensivists don’t ventilate by protocol. We may choose initial settings, but we adjust those settings. It’s complicated.

No doubt it is.

Meantime, the United States economy continues to wallow in mandated purgatory…

565 Lost Jobs for Every Fatality

The economy has shed 565 jobs for each confirmed COVID-19 fatality.

Thousands and thousands of businesses remain shuttered, dark, lifeless. Many will never get up.

How much longer can this economy exist in the present state… before the social fabric unravels?

Protestors have already taken to the streets. And we are warned of looming food shortages.

A dormant economy cannot be awakened at a stroke. It comes to gradually. It must rub the sand from its eyes. It must stretch its muscles. It must find its legs again.

And this economy will waken to a far different America than it knew before the coma…

The Mass Psychology Has Swung

COVID-19 will be with us for a good stretch.

Absent a proven virus killer, Americans will not likely swarm the restaurants, the pubs, the cinemas, the ballparks, the theme parks, the airports, the hotels.

That is, the mass psychology has swung. And it will not swing easily back.

Some of the mentioned industries peg along on thin profit margins even in flush times. How will they endure the depressed times to come?

Old Daily Reckoning contributor Simon Black examines the Black Plague of 1349 for parallels….

An Ominous Historical Example

Simon says:

When people sensed the worst was over, they slowly came out of their homes.

There was no grand reopening of the economy like some department store suddenly under new management. People remained highly mistrustful of one another, continuing to avoid even the most basic interactions with friends, family and professional colleagues.

Commerce was slow and the economy remained depressed for years.

Did the economy revive at that point?

Just when it seemed that the situation was finally starting to improve, the plague struck again in 1360. And again in 1374.

Medieval Europeans quickly realized that if there was just a single rat left on the planet carrying the disease, then another wave of the pandemic could begin anew.

And that made it next to impossible for anything to return to normal…

Commercial trade dwindled. Italy’s woolen textile industry practically ceased to exist. Many prominent banks in Europe collapsed. And there were even government debt defaults.

Concludes Simon, with a deep gulp:

Right now most people are barricaded in their homes while policymakers wait for this virus to die off.

But that’s not how biology works.

Just like in the 1300s, if there’s even a single carrier of the coronavirus remaining, then the whole thing starts over.

That person transmits the virus to two–three people, those people transmit the virus to two–three other people and the exponential growth curve begins again.

Lockdowns don’t kill off the virus. They just reset the clock.

Of course we cannot pit COVID-19 against the bubonic plague. The plague carried off some 60% of Europe’s population. The current pandemic is a sneeze next to it.

Returning to normal may nonetheless prove exceedingly difficult.

Not a Matter of the Economy vs. Lives

We are accused of placing economy above life, that we have no thought above the dollar.

Yet it is untrue. The choice is false.

The matter before us is not one of dollars versus lives. It is a matter of lives versus lives.

As we have reported repeatedly:

Each 1% increase in the unemployment rate may yield perhaps 30,000 deaths of despair… and from reduced living standards.

Each day, each week, each month the economy sleeps, the steeper the toll.

That is the bitter reality before us.

And what about the non-coronavirus sick?

They may be denied adequate doctoring. That is because the medical system is hurling such immense resources against the virus.

Many may perish from otherwise treatable maladies.

Sweden May Be Nearing “Herd Immunity”

We have held up Sweden as a model. It has maintained a fairly normal economic life throughout the pandemic.

It shielded the aged and vulnerable, while keeping commerce rubbing along.

Sweden reports a marginally higher fatality rate than the United States. But the virus has spread among the young and robust. And they have withstood it.

Thus the nation may attain “herd immunity” within weeks, some claim.

The virus will die in place, unable to spread among a heavily immunized people. And its evil reign will end.

This outcome is not certain. Only time will reveal the wisdom — or its absence — of Sweden’s choice.

Volvo Reopens Its Factories

But so confident is Volvo that it reopened its Swedish auto factories this past Monday. Some 20,000 Swedes thus resumed their livelihoods… and some measure of normalcy.

To whom they will peddle their vehicles, we do not know.

How many Europeans and Americans can presently purchase a new Volvo? Or Hyundai? Or Chevrolet?

And when can they? We have no answer.

“History is a nightmare from which I am trying to wake,” wrote James Joyce.

This virus is a nightmare from which we are trying to wake…


Brian Maher
Managing editor, The Daily Reckoning

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