Send this article to a friend:


America’s Real National Emergency
Bill Bonner

PARIS – Donald Trump thinks there’s a national emergency on America’s southern border.

Bridgewater’s Ray Dalio was on 60 Minutes over the weekend; he thinks American capitalism is such a mess – and that inequality of wealth is so skewed – that the president should call a national emergency to fix it.

But the real emergency lies elsewhere.

Hard Habit to Break

We left off yesterday by noting that the masses didn’t feel they should have to worry about deficits and debt.

They’ve been told that deficits don’t matter. And government finances are always a mystery, like the Virgin Birth and who shot JFK; it’s best not to ask too many questions.

Besides, why should they worry about it? They have elites to take care of things like that.

But like the masses themselves, the elite – the feds, their cronies, Wall Street, special interests, lobbyists, the Pentagon, the social welfare complex, the Deep State, and (generally) the rich – have been corrupted by fake money. They’ve grown accustomed to spending money neither they nor anyone else ever earned. And it’s a hard habit to break.

Fake money came from the Fed – $3.6 trillion of it between 2009 and 2019. Under the guise of “quantitative easing,” the Fed bought financial assets, mostly Treasuries. Yields sank. Stocks climbed. The ultra-rich got richer.

The Fed also kept interest rates below the rate of inflation – a giveaway, in other words – financing stock buybacks, mergers, acquisitions, bonuses, and other financial razzmatazz. 

Altogether, the feds shifted about $30 trillion their way (a very rough estimate) and they weren’t about to give it up.

By 2016, both Republicans and Democrats were in on the racket. Neither was going to fight for a balanced budget. Because that would mean going up against both the retiring baby boomers and the Deep State.

And it would mean pain – big pain… spending cuts, falling stock prices, and a tough recession. Who wanted that? Everybody wants to go to Heaven, but nobody wants to die.

Two Parts

By 2016, too, the Fed had begun to normalize its monetary policies. There were two parts to it.

The Fed needed to raise rates to more normal levels… and it needed to unload the $3.6 trillion of bonds it had acquired after the 2008-2009 emergency.

But either action would cause the very crisis that it sought to avoid – a crash on Wall Street and a recession. It had trained the economy to survive in an abnormal financial climate. Normal weather would kill it.

Which is exactly what was underway in the last quarter of last year. Finally, for the first time in nearly 10 years, the Fed had nudged up interest rates so that the after-inflation cost of borrowing was (a tiny bit) above zero. And the stock market swooned.

Then, with stock prices down barely 10% from the 2018 high, the Fed lost its nerve. First, in late January, it paused. And then, three weeks ago, it renounced the whole “normalization” program.

With no emergency in sight – in fact, Mr. Trump says we are in a big boom – the Fed said it would cease raising rates and wouldn’t necessarily sell those bonds, after all.

Rocket Ship

Meanwhile, Mr. Trump had put through a tax cut, which he thought stimulated the economy and set off a new boom. As for runaway spending and compounding debt, the president thinks it is merely a nuisance, not a matter that is worthy of his attention. 

Au contraire, he wants to stimulate the economy even more:

I personally think the Fed should drop rates, I think they really slowed us down. There’s no inflation. I would say in terms of quantitative tightening, it should actually now be quantitative easing… You would see a rocket ship. Despite that, we’re doing very well.

Well, we just got off of a rocket ship – when we left Argentina on Sunday. The theory of “stimulation” – whether by tax cuts, low rates, deficits, giveaways, or quantitative easing – is that if you put more money in consumers’ and businesses’ hands, they’ll spend it. Then, the spending will bring forth more production, jobs, profits, and growth.

But it doesn’t work.

In Argentina, everybody spends everything they get – as fast as they get it. Talk about stimulus! The currency is losing as much as half its purchasing power per year. Nobody wants to save it. Nobody. Not even for a weekend.

Meanwhile, the central bank of Argentina lends at 40%. In real, after-inflation terms, that’s negative by as much as 60 percentage points. That oughta get the economy off the ground, right? A whole lot of stimulating going on! So, you think Argentina would be a rocket ship economy, right?

Nope. It’s a dud.

GDP is falling, not rising… at a 6% annual rate. And if this keeps up, it will rival America’s Great Depression in severity.

What to do about it? Print more money… so the inflation rate goes to 200% and people will want to spend even faster? Stimulate with lower rates… lower taxes… and bigger deficits?

It won’t work. Because the whole “stimulus” idea is a fraud. You can’t make people richer by giving them fake money. Period.

And you can’t make them richer by cutting their taxes… unless you also cut government spending.

And you can’t make them richer by running bigger government deficits, or by suppressing interest rates, or by putting more fake money into the system…

There are just no shortcuts to real wealth.

More to come…






Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies, and the author of the free daily e-mail The Daily Reckoning. Bill's passion for international travel and big ideas are reflected in the company he's successfully built. In 1979, he began publishing International Living and Hulbert's Financial Digest. Since then, Agora has grown to include dozens of newsletters focusing on finance, health and travel. Since the early '90s Bill has vigorously expanded from Agora's home base in Baltimore, opening offices in London, Paris, Bonn, Waterford, Ireland and Johannesburg, South Africa.

Send this article to a friend: