The Late, Degenerate Empire

Debt we can't afford, an economy we can't support and politics we can't stand...

(Source: Getty Images)

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

Yesterday, all my troubles seemed so far away
Now I need a place to hide away
Oh I believe in yesterday

~ The Beatles

We pause to draw breath…tidy up…and say farewell to yesterday.

Last week, we looked at an approaching recession. We saw how the pain needed to escape from inflation is likely to fall mainly on people who can’t stand it. To make a long story short, they’ll use politics to try to stop the clock.

Another way to look at it: after a blow-out bubble, the next chapter is normally a blow-up correction…a recession. Life seeks ‘normal,’ so the bigger the bubble, the bigger the correction that follows. Then, in keeping with the cyclical nature of financial trends, the ‘correction’ will overshoot…leaving assets underpriced and setting the stage for a new boom.

But when things have been good for a long time, nobody wants to turn the page.    People have reputations to protect. Careers. They’ve written books about ‘stocks for the long run.’ Some have gotten Nobel prizes. Others have cushy, high-profile jobs at the Treasury and the Fed. 

Corrupting Math

We’ve seen how the poor have been trained to live on federal handouts. At any sign of a cutback, those pips are going squeak.  

The rich have gotten used to rising asset prices – from the Fed’s ultra-low interest rates. And remember, they’re the deciders. Ultimately, they choose what is good for them, not what is good for our grandchildren.    

As for the middle classes, their housing ‘equity’ is already shrinking…and their real incomes have been going down (thanks to inflation) for the last two years. A recession will only make things worse.

And it’s not just the money. The last 100 years have been kind to America. We were the richest, most powerful, most admired people on earth. Who wants to give that up?

Here, in stark focus, is the corrupting math of democracy, generally, and America’s late, degenerate empire in particular. We need higher interest rates to combat inflation. But financially, we can’t afford them (too much debt to refinance). Economically, we can’t support them (too many businesses depend on low rates).   And politically, we can’t tolerate them (too many voters- rich, poor, and the middle classes – with a keen interest in not allowing a correction to do its work.) 

They, the Deciders

For more detail…curbing inflation means a Fed Funds rate at least a couple hundred basis points above the CPI. But the Fed’s low interest rates brought $91 trillion in debt…$50 trillion in ‘excess’ asset valuations…and an average mortgage of $313,000.

A reasonable Fed Funds rate today should be about 7% – about 19 times higher than it was 3 years ago. Already, the average new monthly mortgage payment is at $2,538. And if the whole Everest of debt were refinanced at 7%, it would mean annual debt service costs of more than $6 trillion – or a quarter of GDP.  Not going to happen.  Not without an avalanche of defaults, bankruptcies, and crashing asset prices.

And then, who do ‘The People’ vote for? The candidate who promises to balance the budget? Or the one who promises more free stuff? The young one, who moves boldly into the future, by bringing the US empire to a graceful end? Or the old one who promises to hold onto the glories of the past with bigger military budgets?

In any government, over time, more and more people get a piece of the action – handouts, subsidies, protective tariffs, ‘excess’ asset values, tax breaks, jobs, contracts. Then, fewer and fewer can accept change. It’s why democracy degenerates into something else…something more disagreeable. The natural feedback loops that capitalist economies need (corrections, bear markets, budget cutbacks, reputational loss…) are unpleasant. People use politics to stop them.  Rivals are blocked by threats and sanctions. Money is printed to keep the show on the road. The news media, joining forces with the political elite, shuts out alternative views. The future still happens….but without the purgative or pedagogical benefits. Toxins aren’t eliminated, they are multiplied; the zombies shuffle along, indefinitely. Debts grow bigger. The danger of war grows more acute.

Smarter, Nicer, Stronger…

Unwilling to accept harsh reality, people hide away in fantasies and delusions.  

Americans are damned sure they know where the border between Russia and the Ukraine should be; and they’re willing to spend billions to keep it there. As for China, they’re sure she’s up to something even if they don’t know what it is.

They also think they know what the surface temperature of the Earth should be half a century from now…and they’re willing to pay the costs of setting the thermostat, provided the money can be printed, not earned.

They believe in ‘equality’ even though nothing like it has ever existed…and practically every American aims to be smarter, nicer, stronger, and cooler than his neighbors.  

And they are entrusting their futures to the most geriatric team in US history. Diane Feinstein is 89 years old; she might recall one of Franklin Roosevelt’s ‘fireside chats.’ Charles Schumer is 72; does he remember when Kennedy was shot or when the Beatles released their Sgt. Pepper album? Joe Biden is 80; maybe he remembers hearing Adolf Hitler’s voice on the wireless? Clarence Thomas is 74. Lindsey Graham is 67. Richard Durbin is 78. Nancy Pelosi is 83. Barbara Boxer is 82.  

We have nothing against old people. We’re among them. But whatever tomorrow brings these people, it is not likely to be as appealing as yesterday.  

Regards,

Bill Bonner

Joel’s Note: Bill addressed the “corrupting math of democracy” in last Friday’s Private briefing, which he recorded with Dan Denning (BPR members can listen to the full recording here.)

“One of the key points Bill makes in his Private Briefing,” wrote Dan in Friday’s note after the recording, “is that when unemployment goes up, house prices will go down. In fact, they already ARE going down. Rising interest rates have driven mortgage rates up to the point where house prices are now as unaffordable as they were at the peak of the housing bubble in 2007. When will unemployment go up?”

If history is any guide, unemployment will tick higher (maybe much, much higher) when a recession kicks off. But what if it’s already underway? Continued Dan…

“The chart below, from the Philadelphia branch of the Federal Reserve, is cold comfort for bulls. Any time the Philly Fed’s ‘General Activity’ Index has dipped below negative 30, a recession had already begun, or was just around the corner (the gray vertical lines on the chart are the eight ‘official recessions’--two consecutive quarters of shrinking GDP–since the early 1970s).”

(Source: Philadephia Fed)

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