Shut It Down

Unfunding the government to avert financial catastrophe

(Source: Getty Images)

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

We left the question hanging yesterday…like a man dangling at the end of a rope…lynched and gurgling…

Why didn’t the Argentines stop the cycle? Spending, borrowing, defaulting, printing…from excess to distress…back and forth, over and over, for the last 70+ years.

Why didn’t they stop it? Why did Zimbabwe, Germany, Venezuela…et al…let inflation go to over a million percent?  

One of the ‘basket cases’ we hear little about is Lebanon. Here’s our son, Henry, reporting from Paris:

In 2021, the Lebanese pound traded on the black market for 10,000 pounds to the dollar. In February 2023, it dropped to 74,000 to the dollar. Two months later, the rate is 97,000 pounds to the dollar.

According to the theory of ‘stimulation’ of an economy by adding money, you’d think Lebanon would be enjoying incredible prosperity. But the theory doesn’t match the reality. Lebanon’s GDP was $55 billion in 2018. It fell to $23 billion in 2021.  

Financial Catastrophe?

That’s how inflation really works. You increase the supply of currency 1,000%...and you cut the real economy in half.

The harm is so predictable, and so grave, it brings us back to our question: how come the authorities don’t stop it? And to answer it, we turn, via CNBC, to no less of an authority (because we can’t think of any less of an authority) than Ms. Janet Yellen:

The U.S. government risks “economic and financial catastrophe” if the House fails to pass a bill to raise the $31.4 trillion debt ceiling, Treasury Secretary Janet Yellen said …

“America has paid all of its bills on time since 1789, and not to do so would produce an economic and financial catastrophe,” Yellen told ABC’s George Stephanopolous …“And every responsible member of Congress must agree to raise the debt ceiling.”

And here’s the bond market chiming in. Business Insider:

The bond market sounded the alarm on US default risks as the deadline for reaching a deal on lifting the debt ceiling may come sooner than expected.

On Monday, the US sold $57 billion in three-month Treasury bills — which would mature around when the government could run out of money — at a yield of 5.1%, the highest since January 2001. 

That comes a week after a similar auction of three-month bills also saw lackluster demand.

Government Unfunding

You see, bond investors, like Ms. Yellen, fear that things might get back to where they should be. Yields are at a 22-year high specifically because investors worry about the ‘debt ceiling.’ And Ms. Yellen insists that the consequences of not increasing the debt ceiling – which will mean ‘printing’ more money – would be “an economic and financial catastrophe.” 

And in the press, too…alarms are sounding: ‘the government would shut down’…a US default would be a ‘worldwide calamity’…etc. etc. blah, blah…

What would really happen if the feds couldn’t borrow more money? Isn’t $32 trillion enough?

Suppose the mighty federal government were forced to live within its means; would that be so terrifying? The Treasury is expecting tax receipts of about $3.5 trillion for the year. That’s as much as the federal government spent, in toto, in 2019, just 4 years ago.

Do you remember a catastrophe in 2019? Did people go hungry? Was the US Army disbanded because we couldn’t pay the soldiers? Did the old folks get their checks? Police? Schools? Hospitals? The SEC?

We don’t recall any problems. The feds continued to ‘drive it like they stole it’….which is to say, they spent money like it belonged to someone else – which it did. And today, if the feds had to spend only what they could get from tax receipts, they would have plenty of money to keep the lights on and the scams going.  Besides, unfunding is what a lot of the government needs – especially unfunding the ‘transfer payments’ that keep the voters hooked on free stuff.

Push and Shove

The experience of Argentina shows us that once the masses get hooked on free stuff (transfer payments), inflation is almost impossible to stop. Practically everyone comes to believe that whatever terrible damage inflation inflicts… politically, deflation is worse.

Push come to shove, politicians would always rather inflate than deflate. When they inflate, the costs are moved into the future. Deflation, on the other hand, hits hard and fast. It costs them votes. And power.

And when more than half the voters rely on free stuff, ‘Stop the Spending” is not a campaign bumper sticker you are likely to see. And the party that calls for a Balanced Budget is not likely to be the one calling the shots.  

And so, the US stands on the brink of a fateful decision. More than half the “taxpayers” pay no federal income taxes. According to the Tax Foundation, more than 60% receive more in transfer payments than they pay in taxes. Fighting inflation means pain for them, but also for the rich (whose assets go down), and the whole ‘political’ class itself (whose power gets deflated along with everything else).

Can they stand it?   

Stay tuned…     

Regards,

Bill Bonner