Barbarians on the Potomac

A nation can only afford so much debt. When the limits are passed... something’s gotta give. Either stocks crash and debt goes unpaid... or the money itself gives way.

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Monday, September 9^th, 2024 

Bill Bonner, writing today from Poitou, France

At a minimum, rate cuts will... entice individuals and businesses to borrow money and spend it on things that would otherwise be too expensive. Individuals may see a dip in mortgage rates and take on a mega home loan. Businesses with little growth prospects may borrow money to buy back their own shares. 

MN Gordon 

Last week, we took up a question that has been buzzing around like a mosquito for years. What’s wrong with stocks at thirty times earnings? This led to a whole swarm of questions: what’s wrong with a national debt that is more than GDP? Why can’t Nvidia be worth more than $3 trillion? And why shouldn’t the Fed cut rates to make it easier to borrow money? 

In the weekend news came this update, Fortune: 

U.S. debt is so massive, interest costs alone are now $3 billion a day 

With U.S. debt now at $35.3 trillion, the cost of paying the interest on all that borrowing has soared recently and now averages out to $3 billion a day, according to Apollo chief economist Torsten Sløk. And that includes Saturdays and Sundays, he pointed out in a note on Tuesday. The daily interest expense has doubled since 2020 and is up from $2 trillion about two years ago. That's when the Federal Reserve began its campaign of aggressive rate hikes to rein in inflation. 

On Friday, we revealed the secret: Say’s Law, which tells us that real money (purchasing power) comes from output... not from the feds’ printing presses. The feds can print and borrow as much money as they want. They can distort prices and cause the economy to shake, rattle and roll. But they can’t control the value of the money they print... or prevent the system from adjusting to the real, underlying financial truth. 

Say’s Law is usually abbreviated as ‘supply creates demand.’ You make a nice loaf of bread. You sell it for a dollar. Now you have a dollar’s worth of ‘money.’ Before making the bread, you have nothing. 

And if it only cost you ninety cents — in labor and materials — to make the bread... you made a 10% profit. This extra, value-added, represents not only the wealth you added for yourself, but additional wealth for the whole world.  Where previously it had ninety cents worth of raw ingredients (including your labor), now it has a loaf of bread worth $1. 

The whole system — an elegant jungle of surprises and ‘moral’ lessons — is replete with predators and their prey, cooperation and competition, checks and balances.  

In the aggregate, for example, employees are also customers. So, the more corporations pay them, the more purchasing power they give consumers. Sales and gross profits increase. But when they pay too much in wages, net profits go down. 

Debt is limited too. First, borrowers can only borrow the money savers have earned... and saved. Second, as borrowers bid for more of the available savings, the price of credit (the interest rate) goes up, making it less attractive to borrow. Third, as interest rates go up, so does the reward for saving money. But as more money is saved, less is spent, reducing sales and profits. Then, as sales go down, companies feel less desire to expand... and less desire to borrow money, so interest rates go down too. 

The Feds come barging in

It is into the marvelous, intricately balanced... finely tooled... and infinitely complex system that the feds come barging... like Vikings into a nunnery. These bulls break every piece of china in the shop. Interest rates are pushed down into the cellars. Stock prices are tossed up into the rafters. And the productive industries — the looms, the gardens and ovens — are ruined. The poor gals don’t know what to think. Kneel for prayers... or run to the hills? 

The feds ‘print’ extra money. No need to increase workers’ wages. No reason to increase the supply of goods or services. Forget Say’s Law; now it’s not supply that creates demand... or real output that provides purchasing power. Now, there’s fake money pretending to be real. The extra money chases a stable supply of things to buy — and prices rise. 

Still, there are limits. A person can take all the supplements he wants... visit the doctor twice a week... take 1,000 steps a day; he’ll still die.  

So too, stocks are only worth so much. And a nation can only afford so much debt. When the limits are passed... something’s gotta give. Either stocks crash and debt goes unpaid... or the money itself gives way. 

You already know our bet. As Ben Bernanke put it: 

The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. 

And lo! The barbarians are already paddling up the Potomac. Despite new stock market highs... and $400,000+ average house prices... the Fed is preparing to cut rates and boost prices even higher. 

Regards, 

Bill Bonner