Dear Reader question: I have been reading the Diary for quite some time now. Generally, I enjoy your wit and wisdom. But one of the latest gives me pause. I cannot understand how you could say “Whee!” I will soon be 89 years old, and I fully depend on retirement funds for income. If I read you correctly, most of that may soon disappear down into the bowels of the ever-hungry federal government. Will I last long enough to see that?
Our answer: Probably not …
NEW YORK — On Saturday we looked at how The Swamp drenched American capitalism in regulation, corruption and cronyism … making it the laggard among the world’s three major economies.
Today, we’ll look at the other major cause of America’s decline.
In preview, our Dear Reader can relax. It takes time to build a great economy — and it takes time to destroy one.
America’s Money, Old and New
We’re sitting in a little coffee shop on Madison Avenue in Manhattan. It’s cold outside. Inside, it is bright and cheery.
There’s a lot of money here on the Upper East Side. At one table is a group of girls wearing expensive Canada Goose jackets, on a break from a private school around the corner. At another is a group of older women, all botoxed up … and with hair suitable to much younger women.
The customers are almost all blonde-ish. Some of them look like they are new to the area … the wives and families of successful hedge fund operators from Indiana and the Carolinas. Others are the residue of the people who have been around for generations.
All are being attended to by a crew of about 10 dark-haired, dark-skinned, Spanish-speaking Latin Americans who seem happy to serve coffee and donuts until they are deported.
Deep State Battle
Meanwhile, the fight for control of the world’s deepest and most powerful state continues in Washington. Democrats hope to weaken Mr. Trump by showing him to be incompetent and corrupt. Republicans rally round their flawed champion, for better or for worse, and vow to stop the attack at the trenches of the Senate floor.
The impeachment battle — like the coming election — is not about the direction of the country, but about who rides and who walks.
To the extent that Mr. Trump’s policies have any consistency, they put the rich on wheels and favor the military-industrial complex on the south bank of the Potomac.
The Democrats favor the rich too … but they pretend to have a liking for the minorities, women, the poor and anyone who can say “post-structuralist queer theory” without laughing. They claim their spending will save the planet … right the wrongs of this world (inequality, sexism, racism, etc.) … and probably straighten out the next one too.
Going Broke
But what does it matter?
Mr. Trump was not in the White House for the first 229 years of the republic; life went on tolerably well. Whether he stays or goes now is unlikely to make much of a difference.
On the other hand, we predict that there will be wailing and gnashing of teeth … Young men will throw stones … old men will dream ugly dreams … and the lamb will be devoured by the lion … when the nation goes broke.
But nobody’s worried about it. The press doesn’t mention it. Economists think they can dodge it. And Mr. Trump thinks the solution is lower rates. Here’s the president on Tuesday of last week:
At my meeting with Jay Powell this morning, I protested fact that our Fed Rate is set too high relative to the interest rates of other competitor countries. In fact, our rates should be lower than all others (we are the U.S.). Too strong a Dollar hurting manufacturers & growth!
No Real Boom
The key Federal Reserve rate was as high as 20% in 1980. It fell over the following 39 years to its present 1.75%. So, if lower rates really helped an economy grow, you’d think the U.S. economy would be in an unprecedented boom.
It’s not. Over the last 20 years, the U.S. grew more slowly than either the Chinese or European economies. What’s more, GDP growth rates have been coming down for a long time. From an average around 4% in the ’60s … they’ve fallen more or less steadily.
When interest rates rose in the ’70s, GDP growth rates kept falling. Then, rates fell sharply … but still failed to reverse the trend. GDP growth continued to slow, and clocked in at an average of only 1.7% for the last 12 years.
So you see, higher interest rates are not the cause of slower growth. And lower rates are not the solution. Instead, the two things that have coincided with, and probably caused, slower growth are 1.) more politics (a deeper Swamp… as we showed Saturday) and 2.) more debt.
Today, we look at debt …
Funding Speculators
When Ronald Reagan was elected in 1980, U.S. government debt stood at 31% of GDP. Now, it’s over 100%.
Total debt in the U.S. — public and private — was about $52 trillion in 2007. Now, it’s $73 trillion. The economy, meanwhile, rose from about $14 trillion to $22 trillion.
In other words, total debt is now going up three times faster than GDP. Government debt is growing almost twice as fast as GDP — from $9 trillion to $22 trillion since 2007.
As debt levels increase, growth slows. Why? Because debt is an obligation that the future owes to the past. As it increases, there is less left over to drive an expansion. Let’s look at it in more detail.
When the Fed lends fake money at fake rates, much of it goes right into financial speculation. Asset prices go up. The honest information capitalism needs to flourish is distorted. Real capital investment, productivity and growth decline.
Then too, at ultra-low rates, corporations find it is easier to pass out the fake money to shareholders than to do the hard work of expanding markets and improving products.
Over the last 10 years, for example, approximately 100% of additional corporate debt has been used to buy back shares.
New factories weren’t built. New businesses weren’t started. Good jobs weren’t created. Real wealth was not produced. That’s why real before-tax corporate profits have been flat for the last seven years. But during that same time, shareholders doubled their money.
Fake-Money Scheme
Consumer debt is different. Households can’t borrow at ultra-low rates. And they operate on a pay-as-you-go basis; they pay their interest expenses in time on the job. There’s only so much time available; eventually, they run out.
That is what happened in 2007; they hit their limit. It’s why final sales are so weak now. And it’s part of the low-unemployment story; desperate for income, consumers take multiple low-paying jobs just to make ends meet. Again, the economy slows as households find it tough to continue spending.
That leaves the biggest pile of debt of all — government. The feds can, theoretically, borrow until the cows come home. But the feds don’t produce wealth. And the more they borrow, the more time and resources they take out of the real economy and squander on boondoggles, bamboozles, and B.S. This, too, slows the growth of the economy and makes people poorer.
Remember, the feds’ fake money is a claim on real time and resources.
At first, the fake-money scheme is just a way of redistributing wealth — from the middle classes to the rich. Wealthy asset holders become more wealthy as the Fed boosts asset prices … and the wealthy use them to claim houses, lawn care, automobiles and other real-world goods and services.
Gradually, though, the economy slows, and real output declines … then, the feds “print” more and more money to try to keep up with soaring prices.
But take it easy … the whole process takes time. Venezuela, with 3 million percent inflation, wasn’t built in a day. If you’re 89 years old, you’ll probably never notice.
Regards,
Bill
• This article was originally published by Bonner & Partners. You can learn more about Bill and Bill Bonner’s Diary right here.