The Grand Finale
Plus Jerome Powell's nightmarish visions, escaped baboons, a Maple Leaf Revolution and more...
Bill Bonner, reckoning today from Dublin, Ireland...
We were on the “thread” yesterday…. Our investment director, Tom Dyson, was leading a discussion, loosely, on what will likely happen to gold as the debt bubble pops.
Readers’ comments were impressive. Thoughtful. Intelligent. We could barely keep up. (You can find it on our BonnerPrivateResearch website, right here.)
But each one had us wondering even more… how does this amazing circus end? What is the Grand Finale?
Brian Hirschmann of Hirschmann Capital:
Since 1800, 51 out of 52 countries with gross government debt greater than 130% have defaulted, either through restructuring, devaluation, high inflation or outright default.
Government debt in the US went to 130% of GDP in 2020. It has since retreated slightly. But it won’t be long before it hits 130% again...and then 140%. And then what?
When we left you yesterday, we were just doing a little simple math. What we discovered was that it was impossible to refinance America’s enormous debt at anything approaching ‘normal’ interest rates.
Just to rehearse the numbers, we figured that a normal ‘real’ (after inflation) rate would be about 3%. With inflation at 7%, that means the nominal rate would have to be about 10%. Is there any way to refinance America’s $86 trillion in debt at 10%? Nope. It’s not possible… it would mean debt service payments of more than a third of GDP.
Between Scylla and Charybdis
Jerome Powell must toss and turn at night… visited, perhaps, by angry visions of demented clowns and hungry lions. Surely, he must feel some responsibility for what US ‘capitalism’ has become. His ultra-low interest rates made the rich richer than ever. But they also distorted the whole economy, causing businesses, households and the government itself to borrow far more than they would have otherwise.
In an honest economy, debt levels are self-regulating. As people borrow more and more, interest rates rise; the EZ money disappears. But not when the Fed is actively buying up debt, driving down interest rates, and printing up money.
And now, with so much debt, if the Fed tries to go back to normal rates, it will cause the whole Big Top to come crashing down. Even smallish increases in the inflation-adjusted Fed Funds rate… say from MINUS 6% currently… to, say, MINUS 5%... hit the stock market like escaped baboons.
As we have seen many times, the US is trapped. Its rock is an $86 trillion debt. Its hard place is rising interest rates. Its Scylla is the need to ‘normalize’ and reckon with its debts before they get any worse. But its Charybdis is an Elite Establishment that would lose $35 trillion… and doesn’t want to.
In other words, as Hardy used to say to Laurel: ‘here’s another fine mess you’ve gotten us into.”
So what could happen? What should you be watching out for?
Mr. Hirschmann laid out the possibilities – restructuring, devaluation, hyperinflation or outright default.
But wait. Maybe there will be no need. Here at BPR, we rule out nothing. A bountiful, or mischievous, god may cut Mr. Powell some slack. Maybe consumer price inflation will retreat… with no need to give battle.
Bloomberg:
[US Treasury secretary Janet] Yellen said she would closely watch month-over-month inflation figures, as they are more useful at revealing whether price pressures are subsiding. By that measure, she expects inflation will drop in the second half of 2022, and will reach “levels consistent with around 2%-2.5% by the end of the year.”
The economy is not booming… there are always new colds and flus to panic the public… and a market sell-off and/or recession are bound to come sooner or later. So, yes, maybe inflation readings will go down… giving the money-printers more ‘fiscal space.’
But then, what will they do? They will fill it up… like an empty closet; it will soon be chock-a-block with stimmies, boondoggles and bailouts.
Hirschmann continues:
If central banks (CBs) could always keep interest rates low, no government would ever default. Yet, in 2020 alone, Argentina, Ecuador and Lebanon have defaulted despite their [central banks’] best efforts. Rich-country [central banks] have also been overwhelmed often (e.g. the 1965-82 US Great Inflation, the 1976 UK IMF bailout, Iceland’s 2008-11 crisis and the 2015 Swiss currency peg collapse). Worse yet, government debt is also currently at dangerous levels in other major economies, including Brazil, China, Japan, the UK and the eurozone. Further, the BOJ and ECB, among other major central banks, are executing reckless carry trades similar to the Fed’s. Thus, a government debt crisis in one country might easily ignite a global government debt crisis that pops the bubbles in China, US equities and US real estate
Inflation? Deflation? Crashes? Busts? Blow-offs? Blow-ups? Blow-downs? Depression? Devaluation? New currencies?
Yes – strike up the band and bring out the fireworks! The elephants! The freaks! The high-wire act! It’s all ahead – the Greatest Show on Earth.
Let’s just be sure we’re watching from a safe distance!
Regards,
Bill Bonner
P.S. Has a Canadian Spring come early? Colleague Byron King, with an excellent commentary on the trucker revolt north of the 49th parallel.
I am still a free subscriber because I don't invest in either commodities or stocks, I'm all in real estate. That said once again I have to voice my suspicions. An honest accounting of a nations GDP would have to include only those activities that actually produce a return. It's an idea not a law. If that were true then our actual GDP is nowhere near what is advertised. The debt I'm concerned about is the 30 trillion national debt. Whose got it, 9 to the fed, 5 to 6 to foreign sovereign holders, God knows how much is held by the social security admin., leaving a few bucks held by private suckers for treasuries. Point being, no one is buying treasuries hence the feds balance sheet. SOOOO, now what? Well you could pay it down at 300 billion a year over 100 years no interest, ..... provided, ...... you balance the budget. So, where do you find 300 billion, and the obvious answer is the DOD. If you think the DOD is part of the GDP you'd be mistaken, the DOD has dropped 47 bombs a day for the last twenty years and the sound they make is the sound of the toilet flushing your tax dollars down the sewer. The DOD hasn't won an engagement in 75 years and an argument could be made for much longer than that. We are being conned and it has to stop!
The hypocrisy around the so called trucker protest is so thick you can cut it with a chainsaw.
So, these brave men and women are fighting for “our freedoms”. But the last time I checked the trucking industry is heavily regulated. They have no qualms that the government requires them to have a valid driver license, that they must stop frequently at inspection stations, etc. Doesn’t these regulations also infringe on their so-called freedoms? What about the requirements that their children be vaccinated? Have these individuals and their children been vaccinated for smallpox, polio, measles, etc? They and their children have been vaccinated so they could attend school but taking a vaccine that will prevent them from becoming seriously ill and requiring hospital care is too much to ask from them.
Meanwhile, Ottawa has been taken hostage. Businesses have been forced to closed, people who live in the area have been intimidated and are being subjected to 24 hours a day horn blaring, etc. What about the rights and freedoms of the citizens of Ottawa? Do the rights and freedoms of the many become hostage to the noisy few? Meanwhile the police allow food and fuel to be brought in so these individuals can continue to make headlines and have their 5 minutes of fame on the evening news.
Meanwhile our healthcare system is at the breaking point with most people in the hospital and occupying the ICU’s with Covid are the unvaccinated. So their freedom gives them the right to deny surgery to the many since the ICU bed that would be given to someone who would have had heart or cancer, or other type of surgery is occupied by an anti-vaxer.
And what about their manifesto that the current government be overthrown, the Prime Minister and his cabinet put on trial for treason? Tucker Carlson seems to think it is a good idea which for most rational individuals if Tucker Carlson thinks its good then its most be a bad one. In democracy we have elections and if the majority of Canadians think the current government should be removed from office, then it will happen.
Poll numbers have about 28% of Canadian supporting the so called Freedom Convoy. Hats off the 72% of Canadians who support the current vaccine mandates to keep the community at large healthy over the few who thinks their rights and freedom take priority above all else.