Joyride to Catastrophe

The bond rout deepens, the empire recedes and your fellow readers weigh in on what comes after the US Dollar...

(Source: Getty Images)

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

Geopolitical tensions are highly elevated and pose important risks to global economic activity.

~ Jerome Powell, last week

We have no reason to abandon our hypothesis. The financial world shifted in the summer of 2020. Thenceforth, the last shall be first...  

We’ve seen how the bond market has been turned upside down, with the world’s safest credit – the US Treasury 10-year bond – losing 40% of its real value. What we haven’t seen is a massive selloff in the stock market. Instead, equity values are being chipped away by inflation.

And while bonds should bounce…inflation might take a break…and stocks might go up…the Primary Trend will probably be with us for many years – bond yields up, stocks down, with inflation going up and down, but not going away.

The Spiral Effect

This new Primary Trend will require large-scale adjustments, including erasing trillions of dollars’ worth of ‘investments’ that can never pay off. That is just the way of the world…nothing to worry about, provided you’re on the right side of the adjustments…and the authorities don’t make the situation worse.

But that is exactly what they are doing. Rather than cut back on spending and borrowing – Congress continues its joyride to catastrophe. Business Insider:

Treasury bond supply could soon hit record levels as unsustainable deficits and high rates create spiral effect, Bank of America says

"Higher interest rates will likely have a meaningful impact on deficit spending and result in larger UST issuance, creating a spiral effect. Rates will have to materialize more than 100bps below forwards for costs to not rise materially as a share of GDP," the analysts wrote. "A daunting supply picture becomes even more challenging given the backdrop of higher financing costs."

With the $1.7 trillion deficit of fiscal year 2023 topping expectations, BofA adjusted its outlook for future years: between 2024 and 2026, deficits will steadily climb from $1.8 trillion to $2 trillion.

Meanwhile, net interest payments will account for an increasing share of GDP, climbing to a record 3.5% in 2026.  

Which brings us to our theme. It’s the ‘more to the story’ we’ve been hinting at.  Several intriguing and dangerous trends are afoot; other ‘primary trends.’

Bombs Bursting in (their) Air

Already, the US firepower industry is doing all it can to keep the killing going in the Ukraine and Israel. Last year, Putin and Zelensky were reportedly ready to reach a negotiated settlement. The US and Britain insisted that the war continue. And last week, Brazil proposed a ceasefire in Gaza. Most of the UN was in favor. But the US vetoed it. And here comes Joe Biden with a request for $105 billion more of firepower.  

The mistake is so obvious, it must be no mistake at all. In WWI, by 1916, England, France and Germany were already worn out from two years of war. Left alone, they would have had no alternative but to work out a peace settlement. Enter the US with an almost inexhaustible supply of new money, soldiers and delusions…and the war continued for another two years – with perhaps 10 million more deaths, leading to the Bolshevik Revolution in Russia and the rise of Nazism in Germany. 

Today, without US support, the guns would probably soon stop blazing in the Ukraine and in Israel, too.  

But the situation is also fundamentally different. The US was the young, rising power of the 20^th century. Now, by our reckoning, it is a declining one.  

A man of a certain age fears losing his masculinity. He colors his hair. He takes the ‘blue pills.’ He ditches his old wife and takes up with a chorus girl. Trying to deny the inevitable, he risks making a fool of himself…and a disaster of his life.

Geriatric Caesar

A great empire has its night sweats and daylight dreads as well. Its aristocrats and political heavies fear being upstaged, outgunned, and overshadowed by an upstart competitor. It sends out its warships…it offers its bribes and payoffs…it builds up its garrisons – like the poor Roman limitanei shivering on the banks of the Danube or poor Charles Gordon starving in Khartoum while waiting for his neck to be cut.  

The inevitable loss of US power is a kind of Primary Trend of its own. Insecurity increases…as the costs for fake security increase (more and more of the expense pays for yesterday’s security… military pensions, legacy weapons systems maintenance, veterans’ benefits, interest on ‘defense’-inspired debt, etc.)

But the real risks to the US are neither in China, Israel or the Ukraine. They’re right at home, the usual, predictable ones – financial and political. The US is spending more than it can afford. If it continues, it invites more inflation, bankruptcy and weakness.  

And with the decline in US power comes a decline in US leadership. Those with the ‘power of the purse’ can barely elect a speaker…and when they do, they choose one of the biggest dopes in the House. How can they tackle difficult trade-offs…or confront the powers-that-be behind the lurid and distracting headlines?

Joe Biden claimed, ‘American leadership is what holds the world together.’ If that were true, the world should buckle up. Fortunately, Biden’s palaver is just the blah-blah of the geriatric Caesar of a degenerate empire.  

Only a small group of Republicans has shown any interest in cutting back on spending. And even they are deeply conflicted by their desire to maintain the empire at all costs. Fund the Ukraine…fund Israel…fund a new war against China! The result is: no serious cost cutting is ever considered…and no serious effort is made to ‘balance the budget.’ In fact, there is no budget to balance…just a series of ‘omnibus spending bills’…stumbling…improvising on the way to catastrophe.

The financial disaster is so clear…so obvious…and becoming so imminent…that only a fool could miss it. Yet, somehow…in one of the great mysteries of modern democracy, ‘the people’ have elected about 450 of them.

More to come….

Regards,

Bill Bonner

Joel’s Note: We asked; you answered.

A few days ago, we wondered aloud what might replace the almighty greenback, should the day come when the preferred plaything of America’s elite reaches its intrinsic value. This was no exercise in self-pity, mind you… all government-issued currencies eventually return to the dust and ash whence they came.

Down here in Argentina, for example, the peso is evaporating in real time. Restaurants in our neighborhood have even stopped printing prices on their menus, having tired of the effort (and cost) of constantly updating them. And while the ruling sanguivores drain every last drop of lifeblood out of the economy while they still can, talk among the challenging opposition is of imminent dollarization…

Professor Steve Hanke of Johns Hopkins University, who measures annual inflation down here on the Pampas at a blistering 221%, says “dollarization is the only cure for the economic destruction caused by Peronist policies.” And Professor Hanke would know, having helped design and implement dollarization policies in both Montenegro (1999) and Ecuador (2001). 

Of course, Argentina doesn’t enjoy the “exorbitant privilege” of being able to print the world’s reserve currency… only the end of the world’s full retard fiat. What would happen, we wondered, if an Argentine-like currency catastrophe were to descend on the American Empire?

In the case of total greenback collapse, in other words, what might replace the US dollar?

With just over 1,750 votes cast in 24 hours, the results were as follows:

Four percent of you foresaw your new Chinese overlords imposing a yuan reserve currency on the once-proud United States...

Six percent of you thought a new paper dollar was the most likely replacement for a withered greenback...

Thirty percent of your fellow readers reckoned a gold-backed dollar would serve as a likely substitute for the fallen greenback…

And finally, at fifty-one percent, a majority of you see a digital dollar, or Central Bank Digital Currency, in your future…

That left (for those of you counting along in your heads… you know who you are!) roughly one in ten who went with “other”… including sardines, canned beef and "precious metals" (copper jacketed lead). Gotta love the BPR readership!

Thanks to all those who voted and/or wrote in. Look out for some more of these little “group research projects” in future notes. And don’t forget to invite some mates along for the fun, below. Cheers!