The Leaky Faucet Agency

Nine tenths of government is always a scam, pretending to make people better off while actually controlling and exploiting them. But bad government seems to have gotten worse.

You go out to western Maryland, or if you go out to West Virginia, or if you keep going and you go to a small town in the former steelmaking regions of Ohio, there are people watching their way of life crumble and disappear. There's no politician that has any intention of doing anything about it, or has a plan for doing anything about it. 

—Thomas Frank 

Tuesday, August 20^th, 2024 

Bill Bonner, writing today from Poitou, France

Yesterday, we saw Milton Friedman’s quote... that government spending is the ‘true tax.’ 

We also saw that he was wrong. The true tax is much more than just the amount the feds spend. It includes amounts they force you to spend. Donald Trump’s proposed tariffs, for example, will cost the average household $1,700 per year (according to the Peterson Foundation estimate).  

And then, there’s all the time they force you to waste — accumulated regulation, administration, red tape and assorted folderol — which, according to one study, has cut US GDP by $60 trillion.  

The numbers are squishy. But the idea is rock solid. Which is why Harris and Trump are both talking nonsense. Both claim that they can make Americans better off. One would introduce more giveaways, debt forgiveness, and price controls. Yesterday, at the Democratic National Convention, Kamala Harris revealed how she would pay for these things. CNN: 

Vice President Kamala Harris will push to increase the corporate tax rate to 28% from the current 21%, her campaign said Monday, the first day of the Democratic National Convention in Chicago…Raising the corporate tax rate would reduce the deficit by $1 trillion over the next decade, according to the Committee for a Responsible Federal Budget. The watchdog group estimates the price tag of Harris’ economic package would be $1.7 trillion over the next decade. 

Let’s see, Harris proposes to spend $1.7 trillion on various swindles. She would also force corporations to collect $1 trillion from their customers, employees, and shareholders to pay part of the bill. How does this make voters better off? 

Donald Trump, meanwhile, proposes to make the public pay more for its imported products. How does forcing people to buy inferior products at higher prices help them? 

He’s also committed to extending his 2017 tax cuts – with a projected cost to the Treasury of $5.2 trillion over the next ten years.  That amount will have to be made up later— presumably in higher prices.   

But this is politics. And politics is like French cheese. The slogans are attractive — ‘Tax cuts!’…‘Make the rich pay!’… Or, ‘make the foreigners pay!’

Later, they turn rancid and foul.  

---

---

Last week, we looked at Joseph Tainter’s idea... that societies solve problems, and then suffocate under the accumulated solutions. 

In our private lives, we solve problems all the time. A faucet leaks. We fix it. Problem solved. 

In public matters, a faucet leaks. The feds set up a commission to investigate. Then, they set up an agency to control it. And then they prohibit you from taking a shower. 

A half a century later... after costly studies have been done, bids gathered, and a hugely expensive program has completely redone the plumbing, the Leaky Faucet Agency is still at work. Because everyone involved has a perverse incentive to keep the faucets leaking. Leaky faucets are now the source of jobs, incomes, contracts; the Leaky Faucet Agency (LFA) is now a cabinet-level post... and its chief, whose expensive ‘surge’ in fighting the leaky faucet never worked, is widely proposed as a presidential candidate.  

‘Bad government is a normal cost of government,’ says Tainter. Nine tenths of government is always a scam, pretending to make people better off while actually controlling and exploiting them. But bad government seems to have gotten worse. 

No Pyramids

The ancient Egyptians used their resources and time to build great pyramids. Instead of producing more food, improving their houses, or just enjoying more leisure time, huge blocks of stone were hauled across the burning desert to create monuments to defunct rulers. They were all the society had to show for hundreds or thousands of years of ‘investment.’ 

At least they were paid for. America’s great monument is $35 trillion in debt... soon to reach $50 trillion. And unlike the pyramids, it is not an inert Rushmore, meant to glorify past vanities... but an ongoing charge on the labors of 330 million US residents. The interest on the national debt alone now costs each four-member household about $7,500 annually…expected to more than double by 2034.  

But the credit-money system makes it possible for Washington to squander not just today’s resources…but tomorrow’s too. 

It is as if contracts had been let and everyone involved in building a pyramid had gotten paid... the stonecutters, the crew bosses, the architects, the masons, top management, middlemen and day laborers. But they didn’t build anything. They left it to the next generation to build the pyramid — with no money to pay for it! 

Stay tuned. 

Regards, 

Bill Bonner 

---

---

Market Note, by Tom Dyson

An update on the crude oil tanker markets…

We’ve been long oil tankers in the Bonner Private Research stock picking strategy. We see oil tankers as an attractive hard asset that protects us from currency debasement while generating big dividends. 

Tankers are a critical link in the supply chain. But the fleet is aging and many ships will soon need to be scrapped. Meanwhile, because of the uncertainty about the future of the oil industry and ship propulsion, and the enormous sunk costs involved in building new ones, no one is willing to invest in new tankers, so it’s almost certain there’ll be a tight market over the next few years. 

Also, tanker returns are uncorrelated to gold, so they’re useful diversifiers for unconventional portfolio designs like ours. This chart shows spot rates for VLCCs, the largest crude tankers and the workhorse of the industry. Rates are a little above-average for this time of year.  

And the chart below shows the stock price of Frontline PLC [FRO], the leading company in the crude tanker sector. Frontline has tripled from the Covid period and is now trading at a Price/NAV of 1.23, which is expensive, even for Frontline.

Frontline briefly traded at a Price/NAV of 0.76 in October 2022, which we capitalized on at the time.

Oil tanker stocks are notoriously volatile. If Frontline’s valuation would fall by 20% or so, which wouldn't be a big surprise, we’d buy it aggressively. But for now, we wait. 

---