30 Trillion Reasons

Plus real debt, phony notes and pounded sterling...

(Source: Getty Images)

Bill Bonner, reckoning today from Youghal, Ireland...

“Pound Crashes to All Time Low” is the headline at Bloomberg this morning.

The pound plunged almost 5% to an all-time low after Kwasi Kwarteng vowed to press on with more tax cuts, stoking fears that the new Chancellor of the Exchequer’s fiscal policies will send inflation and government debt soaring.

The pound is down against the dollar. But why? Our own Tom Dyson asks:

“Why is the dollar so strong when the economy is entering recession, the stock market is in correction, and the government is $31 trillion in debt?”

He might have added that the dollar is losing value at an 8.3% annual rate.  

What is the meaning of it? Is Britain headed towards more inflation? Mr. Kwarteng is the UK’s new treasury secretary. His tax cut policy is similar to Donald Trump’s tax cut in 2017. It is designed to light a fire under the economy.

Investors expect that it will light a fire under inflation instead; they’re selling pounds and buying dollars.  

The dollar is still the world’s go-to currency. But as the go-to dollar goes up, other currencies are looking like goners. Especially those from emerging markets. They borrowed cheap dollars. Now, they are expected to pay back in much more expensive currency.

And what about Americans? Didn’t they borrow dollars too? And doesn’t each rate hike make their dollars dearer and their debts harder to pay? Are they goners too?

The Sneaky Tax

Last week, we took up a provocative subject. Maybe inflation is not so bad for everyone. And maybe the feds – in the UK as well as America – are not as eager to fight it as they appear.

But let’s back up.

There are universal rules. And there are policies. The rules – don’t kill, don’t steal, drive on the right side – benefit just about everyone. The policies (regulations, programs) always benefit a few at the expense of the many.  

And inflation? 

Inflation is a policy. It’s a tax. Like all taxes, it lands on some harder than others. And the farther you go down the wealth mountain, the harder it falls.  

For the first 20 years of this century, inflation was a gift to the elite. The Fed inflated the currency and bought bonds, putting $8 trillion in new money into Wall Street. This new money drove down interest rates and increased asset prices while leaving consumer prices scarcely touched.  

But the Fed’s claptrap zero interest policy caused people to borrow far too much money. That excess is now embedded in debt – $30 trillion for the US government, $60 trillion for business and households. Somebody’s gotta pay that debt.  

And this may be the only thing the Republican and Democratic elite agree on – it ain’t gonna be them.

Right now, the Fed is raising the carrying cost of debt. Stocks and bonds have come down – 15% to 20%, some of them even more.

Jerome Powell says he will keep at it, openly discussing a Fed Funds rate north of 4%. With every step, Powell believes he grows taller, following in the giant footsteps of Paul Volcker, and positioning himself for a Nobel prize… or at least the cover of TIME. He will be the man who saves the planet by defeating inflation.

But getting control of inflation will require more exertion. Paul Volcker had to put the Fed Fund rate all the way up to 20% – fully 700 basis points ABOVE consumer price inflation (CPI) – in order to bring inflation under control.

The Fed has a long way to go. 

Survival Mode

Remember, it’s either inflate…or the Bubble Economy dies. And if it dies, the graveyard gets crowded…with bonds, stocks, businesses, loans, mortgages, real estate – almost all assets. Much of the wealth of the elite gets buried.  

And while asset prices go to Hell…the federal government goes into purgatory. Not completely dead, but with much less room to maneuver.  

Colleague Dan Denning:

The US government cannot afford to pay $1 trillion in interest on its trillions of dollars’ worth of debt that must now be refinanced at much higher interest rates.

Expenses would have to be cut back – drastically. No more ‘stimmies’. No more giveaways.  No more unemployment incentives.  No more checks to the Ukraine.  No more ‘green energy’ transition; the feds would be in survival mode.  

The rest of the economy would be back-pedaling too… reeling from much higher interest expenses. “Liquidity” (ready cash, when you need it) would disappear.  Lenders would see defaults coming from every direction. America would enter a deep depression, probably accompanied by riots, strikes, social chaos and political violence.

Is that going to happen?  

We don’t think so. An honest man, when he can’t pay his debts, admits it and accepts the consequences. He tightens his belt. He goes meekly into Chapter 7 or Chapter 11. He tries to make amends.  

But a man with $30 trillion in debt and a printing press in the basement? He has another option: inflation. Every year, inflation reduces his debt burden. 

He is happy to print money. He pays his debts with his phony notes. And everyone wonders why things are getting so expensive.

Regards,

Bill Bonner

Joel’s Note: “The panic to buy gold will override everything else. It will be one of the greatest financial phenomena that most of today's investors will ever see. It will blot out everything else like a cloud blotting out the sun.”

That’s the late, great Richard Russell, author of the Dow Theory Letters… writing back in 2011.

Gold didn’t hit its (nominal) all time high for another 11 years – $2,074/oz in August, 2020. (Its real all time high – that is, adjusted for inflation – would have been in 1980, when it hit the equivalent of $2,429/oz.)

Right now, cash (in the form of USD) is king… even as it’s losing 8.3% per year (officially) to inflation. But what happens if the Fed loses its nerve and hit’s “print?” Could we begin to see another bull run on the Midas Metal?

“Cash now… gold later,” reckoned Mr. Russell. It’s a sentiment echoed by Tom Dyson, who sent this chart earlier today…

(Source: TradingView)

“The UK gold price over the last 5 years,” wrote Tom. “Currently at 1,519 gbp. Marching inexorably higher. Bottom left to upper right as the great Dennis Gartman used to say.”