Pattern Recognition

If the pattern holds, America will sink further into debt and …and its capital – in stocks, bonds, and real estate – will become less valuable

Friday, July 19, 2024 

Bill Bonner, writing today from Poitou, France

 

Those whom the gods would destroy are first driven mad 

—Euripides 

MarketWatch: 

Trump promises ‘massive tax cuts’ and an end to inflation in convention speech 

 ‘I will end the devastating inflation crisis immediately, bring down interest rates and lower the cost of energy,” Trump said during his wide-ranging address. “We will drill, baby, drill,” he added, predicting that will “lead to a large-scale decline in prices.’ 

Hold onto your hats; it’s going to be a wild ride. 

Anything could happen; but an end to inflation is unlikely. 

In 1999, the US was master of itself, and the world. As late as 2008, it could still control its national debt and raise interest rates, if necessary, to cool inflation and protect the dollar.  

But today, it is trapped.  The debt is six times bigger. It now controls us. The Fed can lower rates; it can’t raise them... or, not by much. And as the debt grows, so does the pressure not to fight inflation at all, but to welcome it... or even cause it. Inflation will be a policy choice. 

The US government is the world’s largest debtor. Its debts are, of course, calibrated in dollars, a currency it just happens to control. By lowering rates (and printing money) it causes prices to rise, and reduces the real value of its own debt. 

America has entered a ‘silly season.’ It has been on top of the world for so long... thus deprived of oxygen... it seems to have suffered a kind of brain damage. Its leaders say ‘crazy’ things... do silly things...  

Stop inflation? Why not pay off the national debt too... and grow orchids on the moon? 

But let us continue our brief history... we look at how we got where we are... how we became the world’s most powerful nation — ever. Then, we may see the rest of the pattern more clearly. 

New Money System

Among the critical enabling events, mentioned here often, was Nixon’s ditching of the gold standard. Thereafter, politicians had almost unlimited power to raise money without discomfiting voters. Borrowing credit dollars — produced by the new money system — allowed the feds to spend money that had not yet been earned, let alone taxed.  Instead, it passed the bill to non-voters, the next generation, in the form of inflation. 

It was this scammy financing that — in part — allowed another big enabling event. Ronald Reagan’s advisors — not including our friend David Stockman — convinced the Gipper that the Soviet Union was an existential threat to America. To protect the nation, Reagan abandoned his ‘conservative’ economics in favor of an activist agenda, financed on credit. And why not? Deficits didn’t matter; a debt crisis and inflation were far in the future. 

Reagan’s administration added 160% to US debt... the third biggest presidential gain, following Roosevelt and Wilson.  But it wasn’t just the money that changed things, it was what happened to the money... and what it did to the USA.  

Most of the extra spending went to the military. From there, much of it went to the private sector firepower industry... and a substantial part of that was put to work paying lobbyists, politicians, ‘think tanks’ and universities to sing the praises of... yes, the firepower industry.  

In effect, the warmongers, neocons, and big defense suppliers bought control of the government with money supplied by the US taxpayer. 

The Reagan Administration also marked the beginning of a major political change. No longer a ‘conservative’ party that eschewed unnecessary spending, debt and overseas military adventures... the Republicans became activists, big spenders and world improvers. Instead of counterbalancing the Democrats’ Big Government plans, Republicans took the key elements – overspending at home and over-meddling abroad — for its own.  

Today, the cost of the empire’s muscle is $1.3 trillion per year. Politically, it can’t be trimmed. Any politician who tries is marginalized. 

The other big component is Social Security/Medicare. Mr. Trump has promised to cut taxes... but not cut a penny from either Social Security/Medicare... or from the military. So, the debt rises. And the government’s monetary and foreign policies must now be adapted... not for the benefit of the American people, but to accommodate the debt and the powerful special interests who benefit from it. 

And now, if the pattern holds, America will sink further into debt and …and its capital – in stocks, bonds, and real estate – will become less valuable. 

More to come...  

Regards, 

Bill Bonner