Mega Minsky Moment

After long periods of calm and tranquility... comes the real market meltdown

(Source: Getty Images)

Bill Bonner, reckoning today from Poitou, France...

"I don't think there's ever been a moment when the trajectory looks nearly as ominous as it does now."

~ Larry Summers

Summers was speaking about federal finances. The feds have gotten into the habit of spending money they don’t have and never will get. As we saw earlier this week, the Biden Team added $1 trillion to US debt in just 5 weeks. And the Trump Team before them did more fiscal damage than any administration theretofore. 

All government spending is merely redistributing wealth. Those transfer payments – taken from some, given to others – were running at an annual rate below $3 trillion before Trump took over. When he left, the money was changing hands at an $8 trillion annual rate – the biggest, most reckless giveaway in world history.

And now, both parties are looking for ways to spend more money. What better reason than ‘national security?’ The CHIPs act provided a $53 billion boondoggle for silicon chip makers. How long will it be before the money flows to ship makers?

From Chips to Ships

Thedrive.com warns:

Alarming Navy Intel Slide Warns Of China’s 200 Times Greater Shipbuilding Capacity

The data compiled by the Office of Naval Intelligence says that a growing gap in fleet sizes is  helped by China's shipbuilders being more than 200 times more capable of producing surface warships and submarines. This underscores longstanding concerns about the U.S. Navy's ability to challenge Chinese fleets, as well as sustain its forces afloat, in any future high-end conflict.     

The slide also includes projected sizes for the U.S. Navy and PLAN "battle forces" – defined as the total number of "combatant ships, submarines, mine warfare ships, major amphibious ships, [and] large combat support auxiliary ships" – for every five years between 2020 and 2035. It says that as of 2020, the PLAN had 355 battle force ships and the U.S. Navy had 296. By 2035, the gap between the figures for China (475) and the United States (305 to 317) widens substantially.

All right. Remind us. What gave the North the edge in the War Between the States?  The yankees’ fighting spirit. Its great generals? Or the fact that it could make a lot more ships, guns and shoes than the South?

And what about WWI? Was French commander Joseph Joffre’s ‘Plan XVII’   better than Helmut von Moltke’s ‘Schlieffen Plan’?  Or did the allies simply have the world’s biggest economy – the USA – on their side? 

And in WWII, was American military genius triumphant…or the fact that the US could turn out three times as many fighter planes as Germany? Shipbuilding in Germany came to a near halt in WWII, while America built nearly 6,000 vessels.

And now, what to do? ‘Spend more money – on ships…and chips!’ So say the loose lips in Congress. 

Deluge Incoming

A word of caution: nations win modern wars by spending on bombs and guns. But the economy that can produce an abundance of guns and bombs is most often the one that didn’t waste its money on those things when it didn’t really need them.

What? Huh?

It’s a ‘slow-burn Minsky moment,” writes James Montier.

Hyman Minsky was an economist who noticed that periods of volatility seem to follow periods of stability. The reason for this is pretty obvious. The longer it doesn’t rain, the fewer people fix their roofs. Then, when the water comes down, it drenches everything.

The future casts its shadow back over the present. If property prices go up steadily, year after year, people begin to expect them to go up forever.  Then, lenders lower interest rates, because they think the value of their collateral is increasing. Sellers raise prices; they think they are giving up future gains. Buyers, looking ahead to higher house prices, are willing to pay more for an appreciating asset.

This causes prices to rise…and soon to reach levels that are unrealistic and unsustainable. The average person can no longer afford an average house. Sales slow. Prices sag…and then fall.  Families, whose mortgages are higher than their home values, leave the keys in the door and move on.  

In any complex system, there are always pressures, mistakes, and contradictions. If they aren’t corrected, they build up. Then, the correction can be catastrophic.

Uncivilization Ahead

The phenomenon happens across the whole range of human activity. Stability begets chaos. We tried to explain the yin and yang of it in our classic “Uncivilizing America.” There are only two ways to get what you want (here, we’re talking about the material aspects of life). You make it…and trade. Or you take it by force or fraud. The deals are either win-win. Or they are win-lose. They are either peaceful, free-market transactions…or they are political transactions.  

We bring it up because ‘politics’ appears to be on the rise. And ‘politics’ are always volatile...chaotic…and, in the end, destructive.  They also have a logic of their own.  As hinted above, the nation that practices ‘politics’ most enthusiastically (North Korea?) is the one least likely to afford the latest weapons…and least likely to prevail in the ultimate political struggle – war.

Yes, there are Minsky Moments in megapolitics, too, when the stability of one era tips over into the volatility and violence of another. At some points in history, for reasons that have never been clear to us, the “zeitgeist” shifts…from favoring freedom and markets…to getting into a lather for war, sanctions, funny money and central planning. Civilization leads to peace and prosperity (and the ability to build ships and guns).  

Then come the deficits, the subsidies, the industrial plans, the sanctions…

…the barbarians…and the defeat.

Regards,

Bill Bonner

Joel’s Note: Have you got a hold of Bill’s latest book, Uncivilizing America yet? In it, Bill explains in detail how “Win-Win” deals made the west rich… and how “Win-Lose” deals may well lead to our undoing…

Uncivilizing America debuted at #1 on Amazon under “Economic Theory.” Here’s what a handful of happy readers had to say…

You can order a copy for yourself, right here…