Make 'em Laugh

Trillions of dollars in debt will be marked down, written off, or inflated away. This fake wealth will disappear, in other words. The voters, already restless, will sharpen the guillotine.

Friday, June 28, 2024 

Bill Bonner, writing today from Poitou, France

This is how our republic ends. Not with a debate but with a snivel between two candidates vying to demonstrate how utterly unqualified either is to lead us. 

— Comment found on the Internet 

We connect the dots. We look for patterns. 

Sometimes right. Sometimes wrong. Always in doubt. 

And always with a jolly demeanor. Which is probably easier to do from abroad than at home. ‘Laugh and know,’ said the Roman philosopher Martial. You don’t always know; but you can always laugh. 

Words alone cannot describe last night’s presidential debate farce. That’s why God gave us laughter. We laughed at Trump. We laughed at Biden. The two geezers volleyed their much-rehearsed lies... like blind tennis players, hitting the ball only occasionally and only by accident.  

And then we laughed at the reporters. At least they realized that there was no substance to the debates, so they focused on Biden’s ‘raspy voice.’ 

Did either candidate mention the huge, dark cloud hanging over the US economy? America’s monetary experiment was expected to show that governments and central bankers are perfectly capable of running a money system. We don’t need no stinkin’ gold to keep it honest, said Milton Friedman (or words to that effect). Last night, we saw two reasons why he was wrong.  

Inherent Value

This is not the first time the experiment has been run. Always and everywhere, the results have been the same — ‘paper’ money always returns to its inherent value…zero. Because the people who run governments and their central banks are merely human, all too human. Inevitably, many of them will be morons. 

But as we all know, we’re so much smarter today. As Hitler may or may not have remarked to Goebbels, “okay... invading Russia didn’t work out for Napoleon... but now we have tanks!” 

Past experiences with paper money (unbacked by gold) failed. But this time will be different, said Richard Nixon’s financial advisors. Now we have PhDs! 

And since the dollar was the go-to currency for the entire world, and since the PhDs go to the same universities and study the same misguided economists, their mistakes spread far and wide. 

Here’s Tom from his July Monthly Strategy Report published on Wednesday: 

Today the Japanese yen set new 38-year lows against the US dollar. The last time the yen was this cheap against the dollar was in 1986. 

Savers in Japan have realized the government is not going to protect the real value of their yen-denominated savings. They’re panicking.  

The Big Picture is simple. We’re in the initial stages of an epic government debt crisis. They spent, promised, printed and bailed out more than they can ever repay. The State is the apex creditor. But unlike a hedge fund, a bank or big corporation, no one stands behind the State to bail it out when it gets in trouble.  

Now there’s a gigantic default coming. The run on Japan’s currency is just an initial symptom. 

But there’s more to that pattern. The yen may be down against the dollar. But the dollar is down too. Since 1986, it has lost — based on official inflation figures — 65% of its value. Against gold, the loss is 84%. 

Our hypothesis is that after 1971 the fake money and fake interest rates led to flakey, fakey GDP and fictitious asset values. Debt (coaxed by Fed interest rates that were below zero, in real terms, for almost the entire period, 2007 to 2022) grew to the point where much of it can never be repaid. In the US, total debt approaches $100 trillion.  Worldwide it is over $300 trillion. 

In the next downturn, already underway, trillions of dollars’ worth of this debt will be marked down, written off, or inflated away. This fake wealth will disappear, in other words... and the voters, already restless, will sharpen the guillotine and look for necks.   

Did either Biden and Trump mention that?  

We didn’t think so. 

Regards, 

Bill Bonner 

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Research Note, by Dan Denning

Inflation was a hot topic in last night’s Presidential debate, although neither candidate noted (nor took the blame for) the 22% expansion in money supply over the last four years—a permanent shift higher in the price level. This morning, thanks to a ‘cool’ inflation report from the Bureau of Economic Analysis (BEA), interest rate cuts may be back on the menu in the second half of 2024.

The BEA said the Fed’s preferred measure of inflation, the core personal consumption expenditures index (PCE) was up 2.6% on an annualized basis. Core PCE excludes food and energy costs (because they’re volatile). ‘Suprecore’ PCE, which excludes food, energy, and housing costs, was also up 2.6% year-over-year. Both numbers were in line with Wall Street estimates and still above the Fed’s 2% target for inflation.

On the last trading day of the first half of the year, the ‘tame’ inflation numbers have investors pricing in two Fed rate cuts in the next six months. As a reminder, the last ten rate cutting cycles have coincided with a recession and corrections in the S&P 500. The chart below shows the Fed funds rate (in blue) and recessions (the grey vertical lines). Be careful what you wish for. More on what this means for stocks in my research note for paid subscribers later today.