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Death Spasms of a Debt-Driven Economy
I intended to post something on this days ago, but every day brings a new outrage that forces me to rewrite it. At this point, I’m simply stunned.
COVID-19 is not the fundamental cause of the stock market crash and the insane response to it of the Federal Reserve and the Federal Government. The fundamental cause is a nation that has not saved for a long time, lives on ever-expanding debt and cheap credit, and expects bailouts anytime something goes wrong. Such a system is extremely fragile, and what otherwise would be an inconvenient but manageable financial problem turns into an existential crisis. We are like the man with half a dozen maxed-out credit cards, living large as long as he can make the minimum payments, but has his life destroyed when he loses his job. Instead of having savings to tide him over until he finds the next job, he’s now homeless.
The financial system was already giving signs of falling apart before COVID-19 hit. The Federal Reserve’s plan to normalize interest rates came to screeching halt in Dec. 2018 after only reaching 2.5%. Since then it’s been slowly dropping them. They were also supposed to run off their balance sheet in a process that would be like “watching paint dry” in the words of Jerome Powell, but abruptly began expanding it again last Fall. Ominously, in September the Fed began intervening in the overnight bank lending market (the “repo market”) as banks suddenly decided lending to each other, even on a very short term basis, was too risky. The Fed has been supporting that market at increasing levels ever since. The virus was just the push that finally brought the house of cards down.
These past few weeks have brought Fed interventions that boggle the mind and snuff out whatever we had left of free-market price discovery. Zero percent interest rates (of course), daily intervention in the repo market to the tune of $1 trillion dollars, and QE Infinity. The latter finally ends the farce that the Fed was doing anything other than monetizing debt with its QE programs. And they are doing it with gusto, adding $586 billion to its balance sheet this past week, the equivalent of 7 months of its old QE3 program. The balance sheet is now $5.24 trillion and going parabolic.
The Fed traditionally manipulates interest rates by buying and selling U.S. Treasuries in the open market. Now they are buying everything in sight in a frenzy: Treasuries, corporate bonds, municipal bonds, stocks whatever, all with money created through a few strokes of the keyboard. Another name for “the Fed buying stocks” is the “nationalization of industry.” All this is 100 proof banana republic stuff. The result? Initial unemployment claims surge by 3.3 million and the stock market goes up! This is corporate socialism. Where is the outrage?
The Federal Government is doing its part with its grotesque $2 trillion “stimulus” package of payouts and bailouts. Do people realize that the Federal Government has no wealth and that any money it gives to anyone must come from either taxation or debt? How is a government $23 trillion in debt able to bailout anyone? We all know, of course, that this only works because the Federal Reserve’s printing press is behind it.
In a more sane world, people would have six months of expenses saved in case they lose their job or some other misfortune occurs. Things happen in this world. Corporations would similarly have cash reserves to fall back on. Instead, they spent their cash, and borrowed more at the Fed’s ridiculously low-interest rates, to buy back their own stock and goose the price to fatten year-end bonuses and stock options. Now, this has caught up to them and they are crying for a bailout. This is what you do in Bailout Nation.
We supposedly had the “greatest economy of all time” these past few years, but somehow it necessitated massive federal deficits and historically low-interest rates. The orthodox Keynesian idea is that the nation goes into debt and lowers interest rates during a recession, then pays down the debt and raises interest rates during the subsequent recovery. Orthodox Keynesianism is bad enough, but we’ve been lowering interest rates and ramping up debt even in the supposed recovery. What do we do now that a crisis has hit?
The only thing we know how to do: Bailout everyone in sight with yet more debt-funded by the printing press. I guess I understand it because we’ve been doing it so long that pulling back now would be too painful to contemplate. Given the absurd size of the interventions and the tepid response to them, it might be that we are finally at the end of the debt extravaganza.
The worst part of this is that it was authored by so-called “conservatives”, who pat themselves on the back because they prevented Nancy Pelosi’s woke priorities from being jammed through on the bill, completely oblivious to the socialist and even fascist aspects of this monstrosity.
The Tea Party is truly dead and buried. Its ghost isn’t even hanging around anymore. I’m simply stunned.
Published in General
Yes. Insofar as “the people” are to blame, it’s that we keep electing people who promise to solve all our problems and give us free stuff. Government is meant to secure our (natural and civil) rights, not solve our problems. Time to grow up.
Like Stina says, I was drawing an analogy between the government and an individual who is profligate.
But I also think the Government Socialism you mention has contributed to a non-savings culture, and not by accident. How many times have we heard over the years talk about “consumer confidence” and how important it is for the economy to get consumers spending again? Well, if consumers are spending, they aren’t saving. Government social programs support this by giving people the belief (or illusion) that the government will always be there should something go wrong. So there is no need to save.
The Federal Reserve has done its part. My bank savings account gave an interest of 0.28% last year, which is well below even the government calculated rate of inflation. Why save when your savings are just going to be melted away by inflation? So go ahead and spend now, because should something bad happen, the government will always be there with a program to bail you out.
These things and others have contributed to a culture of debt rather than savings.
Agreed that Gingrich was a fiscal conservative. That doesn’t mean the meaning of the term didn’t change in the 90’s. Gingrich ended the 90’s disgraced and reviled. Republicans stopped caring about balanced budgets and proceeded to squander yet another turn at the helm.
I won’t speculate on Romney, but I don’t think we need to speculate about Ryan. He blew his real chances to do real things. We got sequestration during Obama’s term, then somehow we gave it away. Ryan was teh Speaker of the House with a Republican Senate and a Republican President – he did virtually squat. Always giving ground to “live another day” even when we had the majority.
Believe me, my tire is flat and I really should not be driving on it. And now the road seems to be splitting in half.
You have the wherewithal and the sense to do something about it, which is a credit to you. But aside from the financial situation, our government has created a family situation with nearly 40% are born without a father and many more during the childhood years will lose their father to a divorce creating in the process a massive amount of emotionally wounded individuals who often as a result will not have your commons sense, education or intelligence. Couple that with a Indoctrination/Education system that is thoroughly anti-man and that instills only disgusting Leftist values and you will have lot of people who will not be able to cope. That is the Left’s intention; it wants pliable, dependent little sheep who will not being able to function by themselves.
The fundamental cause is a nation that has not saved for a long time, lives on ever-expanding debt and cheap credit, and expects bailouts anytime something goes wrong.
This comments criticizes and blames the entire nation and does not distinguish between those responsible and those who are not.
Yes, the Government of our nation has put us in a place where people need to live on ever-expanding debt and cheap credit , and where many expect to be bailed out when something goes wrong. But the forces driving that problem are way beyond the control of most of the populace. The Bailouts of the last decade went almost entirely to the Big Banks, and Big Corporations with some much ballyhooed crumbs to the victim class- they did not go to small business at all; in fact small business was government got hammered by these “bailout” actions.
I think you misunderstood. He was comparing the US Govvernment to a man living large. He’s blaming the government.
If that’s it great. But he did say the “nation” which is an indictment of us all. Yes we are headed down the road to a huge amount of QE and bailouts, but at this point in this situation, we have no choice. Through the Bailouts, Dodd-Frank, Sarbanes Oxley, QE and a host of other feats of Corporatism, we really are no longer a Capitalist society; we are a post- Capitalist society. The hallmark of a Capitalist society is that it’s capital is efficiently distributed to the means of production that will use it most efficiently. We no longer do that thanks to the Globalist, Crony Capitalists and Crony Socialists who have been long feeding at the public trough and have engineered a system with a complex system of effectively bribes to our “public servants” to facilitate a massive transfer of wealth to their interests.
But the issue is not just debt. Charles Hugh-Smith on the subject:
None of the giveaways being discussed address the core causes of our systemic financial disease:
— Erosion of real-world collateral supporting the ever-growing mountains of debt and leverage
— Diminishing returns on monetary stimulus (Federal Reserve financial cocaine no longer generates euphoria)
— Domino-like disruption of global supply chains and global demand
— Stagnating purchasing power of labor
— The use of debt to keep up with the soaring costs of essentials (rent, healthcare. childcare) and aspirational goods (iPhones) and services (vacations)
— Repricing of risk and risk assets
The stability of the entire system is increasingly fragile and brittle. The abuse of money-printing–creating currency to benefit bloated, inefficient, parasitic, predatory institutions, cartels and monopolies–is further eroding already-decaying confidence in monetary and fiscal authorities and policies.
The collateral supporting the global mountain of debt is crumbling as speculative bubbles deflate. What happens to margin debt when the $300 stock falls to $100? What happens to the $1 million mortgage when the decaying bungalow’s value falls from $1.2 million to $400,000?
The inevitable result of creating currency is excess of the creation of goods and services is a decline in purchasing power which we experience as inflation / shrinkflation (getting lower quality and less quantity even though the price has remained the same).
This loss of putchasing power has been masked by bogus statistical tricks and shrinkflation, but as the Helicopter Money trillions flood through the economy and global supply chain disruptions cause prices to rise, the usual bag of tricks will no longer be enough to hide the higher costs and declining purchasing power.
Then there’s the psychological impact of the reverse wealth effect as households and enterprises see their net worth and income dropping. The confident euphoria required to borrow and spend freely has evaporated and will not be returning, regardless of how much currency is created and distributed.
No, just so, Trump had little to do with the latest in a line of stock market bubbles created by the Fed. He certainly tried to take credit for it, though, right up until it burst.
In what meaningful way should we distinguish between the two? Have you seen the total amount of debt vs the total amount of savings in this country? If the debt implodes (and I think that’s a when, not an if), how useful is it going to be that some people saved while a ton of people did not?
That’s kind of why I asked my question about the micro management of personal finances in light of this little problem. I did the responsible thing. I’m not in debt. I have a nice little savings egg outside the 401k. But that’s meaningless if it can all go up in smoke because it exists in a system built on debt.
So, there’s a macro problem that our nation is a nation in severe debt – from the government to the population in general. Then there’s the micro problem of how to protect our hard earned assets in this house of cards.
I don’t think the OP is being as critical of the general “people” as you think he is. But we are all in this together and the decisions of government policy affect us all… so “we” the “nation” are going to both be people and government, but I think the OP’s emphasis was more on government manipulation and policy than on the populace along for the ride.
So, there’s a macro problem that our nation is a nation in severe debt – from the government to the population in general.
Our total debt is a problem, but not THE PROBLEM.
Our problem is the forces that caused us to get into debt. After WWII America’s national debt was a similar proportion of GDP, but we slowly reduced that debt because we strove to have a productive economy and achieved it for decades. Our current heavily regulated Crony Capitalist economy does not reward hard work, innovation, productivity, risk taking, and the real production of goods that people want. It rewards politically enhanced financial schemes that benefit a tiny class of connected people. It rewards graft by our political class. It rewards the fleecing of the economy by our “public servant” bureaucracy that makes unbelievably handsome salaries and benefits for doing little but shackling the economy and enforcing the latest politically correct whims of our elites.
We really are no longer really a free market economy; we are a “managed” economy that is managed for the benefit of the few and connected. The latest COVID-19 scam by the Dems is one that strives to drive tens of millions into poverty which will of course drive millions into the deeper debt that you loathe and of course which you by your reasoning will be the fault of those same millions derived from a situation they did not create or could avoid.
But while that debt will be a disaster, it will not the biggest problem by far. The loss of real jobs, real businesses and the ability to build back the economy will be the problem. Many businesses that were functioning very well just a few weeks ago will have trouble re-building because despite all the talk of bailouts bank financing no longer helps small business and regulation in far too many states is designed specially to wreck havoc on small business with the specific intent to drive them out of business. The Sicko Democrats Monsters now think they have found the perfect excuse from which to execute their fiendish plans to do just that and to exert even greater control over America.
Yes, ultimately I do blame us all. We get the government we deserve. If we were a nation of savers, we never would have let things get this far. But people preferred to listen to the lies.
The last significant political expression of savers in this nation was the Tea Party. We can blame the Republican Establishment for undermining and ultimately killing the Tea Party, and that’s true. But the fact is if the Tea Party had had sufficient political support by the people in this country, it wouldn’t have mattered what the Republican Establishment did. The people of this nation preferred the trillion dollar deficits and ever growing debt. A nation of savers would understand that any government bailouts must be funded by savers (i.e. them) and would not have permitted it. In a nation of spenders and debtors, everyone thinks someone else is the saver who will get fleeced.
The debt culture is a symbiotic relationship between the people and the government. The government tells the people lies about getting something for nothing, and that “consumer confidence” and spending are the key foundation of the economy. The people know from common sense that can’t be true, but can’t resist the idea that spending on that new SUV is a patriotic act. And they are happy to believe that social security and Medicare are all they need in retirement so they don’t have to save.
This morning I went for a long run through my north of Boston suburban town. I counted the number of pickup trucks and compact cars I saw in driveways. When I was done I had seen 105 pickup trucks and 33 compact cars. I know from commuting to work in my Honda Fit, in a sea of SUVs and pickup trucks, that few people buy compact cars. But I was surprised how uniform the suburban automotive fleet is: Every driveway had a pickup truck and an SUV or a crossover. Most of the compact cars were in driveways that also had a pickup truck and an SUV, so I figure they are for college students home on the school closings.
My town is a mixed town with McMansion neighborhoods all the way down to trailer parks. It didn’t matter what area I was in – everyone has pickup trucks and SUVs. Now if people want to spend $30,000 on a pickup truck, with the higher fuel and insurance costs, that is their business. I’m not judging them. But neither will I then believe that they are pinching pennies and barely making it from paycheck to paycheck. No one is holding a gun to their head forcing them to buy a Chevy Silverado.
Yes, sadly, we’re a nation of humans. The founders did their best to save us from ourselves, but we failed them ultimately. The temptation to believe in false promises was just too great.
Yes, ultimately I do blame us all. We get the government we deserve. If we were a nation of savers, we never would have let things get this far. But people preferred to listen to the lies.
What a victim that wants to give up and blame others. !
The real problem I have with your analysis is that you are defining our nation’s problem incorrectly on a massive scale. If you define the problem incorrectly by a huge margin there is absolutely no chance you will be able to solve it.
There are reasons why our nation has failed to save and it is not because of some moral or human failing not to save. People save or fail to save for a reason. Our huge debt didn’t just happen for no reason; there were purposeful decisions made to bring about this huge debt. The reasons are complex for our huge government debt but generally they have to with several factors including the purposeful ruining of lives of millions in order to make them more dependent on government subsidy and handouts, the desire to corrupt our government in order to enrich special interests and the purposeful grab of power and wealth for a connected few.
When because of your weakness and need to blame our nation’s problem on ” we get the nation we deserve” nonsense, you are aligning yourself with those who want to take this nation down in order to transform it into just another socialist dictatorship whether you want it or not. You have then become part of the problem, not the solution.
Similarly, I am sure the moped-ers don’t judge you either.
(I kid.)
There’s a contradiction at the heart of your analysis. Your theory is that we the people have no part in creating our current predicament, and instead have been the victim of powerful, nefarious forces before whom we have been helpless. These forces made people buy SUVs and pickup trucks instead of compact cars, when they could have saved the difference. I guess it also made them take out massive college loans to get Sociology degrees at expensive private universities, when they could have gotten a business degree at a state school for half the cost or less. They also did Jedi mind tricks forcing people to vote against Tea Party candidates who would reign in spending, and for Democrats and RINOs who would increase it.
The problem for you is: If we were helpless before these forces up till now, why aren’t we helpless before them going forward? Why are we suddenly empowered to take control of our fate when last year we were hopeless victims?
I think we are empowered now because we were empowered yesterday. We were never the helpless victims you suppose. By facing up to our failure as a people to hold government accountable, we let this happen. But we don’t have to keep letting it happen.