BPR Week in Review: Moral Hazzards
Sunday, March 30th, 2025
Laramie, Wyoming
Dear Reader,
‘No mate, that’s not what moral hazard means. Have another whiskey. I’ll explain.’
That was from a conversation I had in a pub near Shad Thames, by Tower Bridge, in London the spring of 2017. I lived nearby. It was after work along the river. I’d fallen into a conversation with a young insurance broker from Lloyd’s of London. He assured me that I was mistaken.
Speaking of young people, has the Millennial generation discovered gold? The Wall Street Journal thinks so. Over coffee this morning in Laramie (with a fresh blanket of spring snow on the ground) I read how younger investors are giving up crypto for the shiny yellow pet rock. Gold futures set an all-time closing high on Friday at $3,086.50/ounce.
The Journal is wrong. Not ‘everyone’ is a gold bug now. Barely anyone is, as far as I can tell. And based on the image below, I’d say gold has a lot further to go before newbie curiosity turns into full down Beanie Baby Bullion Mania.
The Congressional Budget Office (CBO) released its updated Long-Term Budget Outlook late last week. It contained the now-familiar chart above, which tracks the growth of federal debt as a percentage of GDP. For new readers, despite the pretty pink color, the chart shows that US government debt levels today are at the same level they were at the peak of World War II, when the entire American economy had been mobilized to become ‘the arsenal of democracy’ and defeat the National Socialists in Europe and the Empire of Japan in Asia.
You can read the report. But I don’t recommend it. I’ll save the trouble. CBO says that the debt-to-GDP ratio will be 155% by 2055 (debt of around $122 trillion by my calculations, assuming nominal GDP growth of 3% a year between now and then). It said spending will grow faster than revenues. And that interest payments will be 28% of all federal revenues by 2055.
Surely a fiscal crisis–a default on the debt or a crash in the dollar–would come long before then, right? Surely a debt-to-GDP ratio of 130% is a trigger point, as it has been in all developed economics in the last 200 years, according to the research. But CBO backed off sounding the alarm. It concluded that (emphasis added is mine)
The risk of a fiscal crisis depends on more than the amount of federal debt. Ultimately, it is the government’s cost of servicing the debt and its ability to refinance that debt that matter. Among the factors affecting debt-service costs and the ability to refinance are investors’ expectations about the budget, the economy, and domestic and international financial conditions, including interest rates and exchange rates. CBO cannot reliably quantify the probability of a fiscal crisis. In the agency’s assessment, no tipping point can be identified at which the debt-to-GDP ratio would become so high that it would make a crisis likely or imminent, nor is there a specific tipping point beyond which interest costs would become so high in relation to GDP that they were unsustainable.
Really, CBO? Really? Let me save you the trouble. The tipping point is a debt-to-GDP ratio of 130%. There’s no immutable force of nature at work here. You just start chasing your tail at that point–printing more money to pay the interest on money you’ve already borrowed. It’s a debt death spiral and history is full of the corpses of dead currencies that couldn’t survive it.
Government borrowing crowds out private investment and capital formation. It hoovers up private savings and funnels it into unproductive interest payments, endless wars of fruitless conquest, transfer payments, or waste, fraud and abuse. A bloated, corrupt, and belligerent government produces nothing of value and is a constant danger to liberty and financial freedom. Perpetual debt with perpetual war is no way to run a Republic.
Of course 2055 is a long way from now. And as John Maynard Keynes famously (and cynically) wrote in ‘A Tract on Monetary Reform, ‘In the long run, we’re all dead.’ But that does not absolve you from thinking through the long-term consequences of your decisions and then taking what you think is the right action today. You can’t control the outcome. But you still have decisions to make.
Hopefully some of what we published this week at Bonner Private Research will help with those decisions. Tom Dyson published the April Monthly Strategy Report on Wednesday, with a new shipping stock pick. Bill Bonner was hard at it all week looking at how big policy and economic mistakes are made (and how to avoid them). And I sat down with my old friend Byron King for a Private Briefing on rare earth elements. You’ll find links to all that research below.
Enjoy!
Dan
P.S. ‘Moral hazard has nothing to do with ethical behavior. It’s an insurance term. Or at least it started there. It means taking on more risk than you should because you think you’re insured, that someone else is going to bail you out. It’s behavioral economics. It means you have bad moral character for knowingly doing something you shouldn’t be doing.’’
That’s the explanation I got from the young insurance broker from Lloyd’s of London about ‘moral hazard.’ And when I looked into it, he was right. Lloyd’s was established in the late 17th century in Edward Lloyd’s coffee house. It started off as a place for sailors, merchants, and ship’s captains to trade shipping news. Later that turned into maritime insurance (you might even call it an early newsletter based on a unique kind of investment intelligence).
The memory came back to me this weekend after I read this abomination of a policy paper about bailing out hedge funds. It pleads for a Fed bailout of a small group of traders, ‘moral hazard’ if I’ve ever seen it. You have to wonder about the ‘moral character’ of academics and experts who argue the Fed should set up a facility specifically to bail out hedge funds who’ve taken a leveraged position in the US Treasury market.
Say what you will about President Trump and his economic team. But this paper highlights the exact sort of ‘Wall Street’ first mentality they are trying to reverse. Using the central bank (which, I remind you, is owned by Wall Street banks) to bail out private bets made by traders is what happened in 2008. They blew an even bigger debt bubble and now we all must plan for its inevitable destruction.
“Not ‘everyone’ is a gold bug now. Barely anyone is, as far as I can tell.”…perhaps. But I just had a neighbor tell me I should be buying gold. Starting to sound am awful lot like the shoe-shine guy giving stock tips.
…and one other question for retired gold bugs that use their retirement account(s) for income (not for what seems to be the standard BPR reader that has ‘living expense’ wealth outside of what they use to follow BPR investing): when the fiscal merde finally hits the ventilateur, and the dollar is just paper, what’s your plan to use that gold for day-to-day existence?