Heaven from Hell

Debt and deficits join forces with war and inflation to assail the reigning empire...

(Source: Getty Images)

Bill Bonner, reckoning today from San Martin, Argentina...

So you think you can tell,
Heaven from Hell,
Blue skies from pain

~ Pink Floyd

Our story so far…

The feds spent too much money. Prices went up. The Fed raised rates. Stocks and bonds went down.

‘Not to worry,’ they said; the inflation was “transitory.” But months go by and prices are still going up. Friday’s news from Breitbart:

With the February jobs report delayed until next Friday, a lot of focus today was on the Institute for Supply Management’s (ISM) services sector index for February. The ISM index held steady at 55.1, just one-tenth of a point below the January reading and above the consensus estimate.

Readings above 50 indicate expansion, while readings below indicate contraction. A reading at 50 exactly indicates levels were unchanged from the prior month.

In other words, this was a serious blow to Team Transitory.

The subindexes were also uncomfortably hot and point to inflation pressures remaining high. The employment index jumped from 50 to 54, indicating payroll expansion. That suggests we may get a hotter-than-expected payrolls number next week, which would increase pressure on the Federal Reserve to ramp up the pace of its rate hikes to 50 basis points.

Cluster Threats

So, the Fed must continue to raise its key rate until either 1) it gets ahead of inflation and/or 2) something goes seriously wrong.  

Note that as long as assets are going up faster than interest rates, people will continue borrowing to speculate. This raises stock prices. But it also increases the money supply (banks create money as it is lent out). As the supply of fast money increases, prices rise (inflation). One way or another, the Fed must bring down the financial markets as well as inflation.

That is why Number 2 is what we’re prepared for here at the Bonner Private Research headquarters in Argentina; it’s where the risk is. We avoid it by only owning things (stocks, gold…real estate) that we want to hold for a long time, even through a major 10-year bear market.

All of that seems obvious to us.  

Less obvious are the bigger, ‘cluster’ threats. Those are:

…The growing, unpayable, ‘national’ debt

…War, and the decline of the US empire

… The forced abandonment of traditional energy sources 

…And the destruction of the US economy by excess government spending and regulation…silly, distracting ‘culture wars’…sanctions and tariffs…and inflation.

Regulatory Drag

These things pose even more risks to investors. We already have a government with $31 trillion of debt. The deficit for this year is headed towards $1.4 trillion. And interest payments of more than $1 trillion per year are coming soon.   

The ‘green transition’ crusade is going to be expensive too. ‘Alternative’ energy costs more than traditional oil and gas. And since energy is an essential component of modern life, at a minimum, standards of living will fall.      

Regulations also cost money. Here’s Gilder Guideposts:

According to the American Action Forum, quoted in the Wall Street Journal, in two years the Biden administration has imposed 517 “regulatory actions,” with some $318 billion in total costs, worse even than the Obama administration’s $208 billion in costs in its first two years.  In his entire term, Trump’s additional regulatory burden came to just $64.7 billion.

Federal regulations are gouging at least $2 trillion a year from the U.S. economy, some 8% of U.S. GDP, according to the Competitive Enterprise Institute (CEE). That comes to some $14,684 per family more than is extracted by the federal income tax, the CEE reported.

And then, there’s the war agenda. It already costs as much as $1 trillion per year – 4% of GDP – to fund the Pentagon, spy on everyone, everywhere, maintain bases all over the world and meddle in the affairs of foreign nations.

Enemy of the People

Between war, interest on the debt, and regulation, we’re already facing $4 trillion a year. This is equivalent to spending about 85 cents of every dollar of federal tax income on things that ‘The People’ don’t really want or need…things that will make us all poorer.  

Last week, we recalled our Bad Guy Theory (BGT). It’s a way of explaining the otherwise incomprehensible tendency for the press and the public to suddenly make an enemy out of people who’ve done them no harm…and to spend trillions of dollars going to war with them. 

In 2002, for example, George W. Bush’s speechwriter, David Frum – who later went on to greater fame by suggesting that people who didn’t get vaccinated against Covid should be punished – came up with the “Axis of Evil” jingo. The idea wasn’t that Iraq, Iran and North Korea had actually done anything for which they should be penalized; it was that they were “bad guys.” Frum et al think they can tell Heaven from Hell. In their doltish way, they think some people are good; some are bad. You can make a better world, they believe, by eliminating the bad ones.  

The US soon invaded Iraq…spent 2 trillion dollars…killed thousands of people…turned millions into refugees. And now Iraq is arguably a worse guy. But no one talks about Iraq anymore. Now we have a new bad guy, China!  

Stay tuned...

Bill Bonner

Joel’s Note: As the third largest line item on the Federal Government’s expenses, National (ahem) Defense costs the nation roughly the same amount as net interest on the debt, education, veteran’s benefits, transportation and all those pesky expenses lumped together under “other”… combined.

See the nifty chart below, which BPR’s macro analyst, Dan Denning, forwarded over yesterday…

The chart shows total receipts and outlays for the Federal Government so far for the fiscal year 2023 (which, for their own accounting purposes, the government begins each year in October).

That little yellow line you see dangling beneath the green receipts, the $406 billion underlap, represents the deficit… so far.

“That's 9% above pace from last year,” writes Dan, “and on pace for $1.4 trillion for the year.”

Continues Dan…

The top five spending items make up 95% of federal revenue year to date. Every other dollar of spending is borrowed. And remember, the YTD $194 billion net interest is just interest on money we've already borrowed.

Annualized, through the end of 2022, net interest expense was $852 billion. Probably higher now.

Here’s another chart Dan shared, this one depicting the Federal Government’s interest payments…

(Source: US Bureau of Economic Analysis, fred.stlouisfed.org)

Perhaps more concerning even that the total outflows here is the accelerating trend, the dreaded “hockey stick” you see in the upper right corner. Not pretty.

“I began the chart in 1971,” Dan notes, “the year of our Fake Dollar (In FD terms, we are in year 52...52 FD).”

For comparison, annualized net interest expense on Federal debt was $34 billion back in Q1 1971… or about as much as the Biden’s Climate Envoy, John Jetsetter Kerry, spends on restocking his Gulfstream minibar every year…

The final line of Dan’s email is worth reprinting verbatim.

“If the Feds ever do default, I don't think you want a piece of paper in your hand, or a few digits in the ether, as the substance of your bet. I'd prefer something more physical, dense, and golden.”

Members can download the BPR Gold Report, along with a growing archive of in-depth research reports Dan and Tom have authored which live on our Substack page, here. If you’re not already a member, but you’d like to join us, simply find a plan that works for you, below…