Epilogue
The One And Only Way Out?
“In many important ways, the financial crash of 2008 never ended. It was a long crash that crippled the economy for years…This fragile financial system was wrecked by the pandemic and in response the Fed created yet more new money, amplifying the earlier distortions.” Christopher Leonard, “The Lords of Easy Money” (2022).
While this book has been largely focused on how the U.S. has come off the rails from an economic standpoint, clearly something has changed in America’s political calculus. Could that something be the loss of electoral equilibrium, the right-left balancing act that has served us so well, for so long?
Regarding economic stewardship, there’s little doubt that three intense bouts of viral speculation cum insanity – fed by the Fed’s ever more radical monetary interventions – have been powerful factors behind our nation’s decline. Throughout these pages I’ve done my best to explain how and why this has been the case. I’ve also tried to point out how the demise of each of the prior bubbles has led to the blowing of the next.
All three of these cycles have left in their wake more debt, more wealth disparity, more systemic fragility, and more despair. Unquestionably, in my view, all three of the great bubbles of the last quarter century, including the one (dozens?) we’re in now, were inextricably linked. As I’ve tried to articulate, Bubble 3.0 has been the overarching event but within it have been a long series of other smaller, asset class specific, bubbles. The catalyst for all of these instances of speculative excess has been the Fed’s endless supply of ersatz money, “pseudough” as I sometimes refer to it.
For those who think America’s decline has been greatly exaggerated, please consider this one telling statistic, again courtesy of Vincent Deluard: The average American male’s life expectancy has contracted over the past twenty years. As he points out, this tragic situation wasn’t seen even in the wake of the Soviet Union’s collapse, at least on such a persistent basis.[i] That is sad enough but what makes it far worse is that the U.S. also spends about 5% of GDP, or over one trillion dollars, MORE than our rich country peers on healthcare.
On the political polarity issue — the supposed spectrum that extends from the far left to the extreme right – one of my typically quirky personal beliefs is that it’s not actually a continuum; rather, it’s a circle. As you go far enough left, you eventually connect to the other side, like a snake trying to swallow its own tail… which is actually a decent metaphor for what has happened again and again over the past century.
Was there really much difference between Hitler and Stalin? Are communism and fascism truly that dissimilar? It seems to me that what these “isms”, and their inevitable tyrants, have in common is the elevation of the State to demigod status, the destruction of property rights, the abrogation of personal liberties, the gradual suppression of free speech, and, ultimately, the kind of utter economic devastation seen in Venezuela today.
Let me say this as eloquently as I can: Socialism sucks! Communism sucks even more and so does Fascism! If this offends you, I’m not sorry. You shouldn’t have kept reading this long!
However, you’ve got to hand it to the Marxist/Socialist propaganda machine. Despite a century of overwhelming evidence that their policies lead to mutually assured destitution, their dogma continues to attract hundreds of millions, if not billions, to its cause. The current fascination with socialism among such a large cross-section of America’s younger voters, and its personification in politicians such as Bernie Sanders and AOC, is unambiguous evidence that somehow democracy and the free enterprise system are losing the PR wars.
To this point, Francis Maier observed in an intriguing Op-Ed in the January 7th, 2022, edition of The Wall Street Journal: “Marxist theory may have failed, but its afterlife of bitter activism drags on in our current grievance movements.” (For more on this excellent article, please see the Epilogue Appendix.) However, while it’s reasonable to blame much of America’s dangerously relaxed attitude toward socialism and Marxism on our country’s increasingly appalling lack of historical knowledge, there’s more to it than that. Of course, consistent with the driving theme of this book, that would be Fed policies.
Once again quoting Vincent Deluard: “QE’s consequences, soaring asset prices and a sense that trillions are spent without democratic accountability, feed populism, which further weakens governments. Economic stagnation and deflation[ii] also mechanically increase the weight of the government sector, whose expenses keep rising due to retirement and healthcare programs. As a result, more asset purchases (my note: QEs) and negative rates are required to service the public Leviathan’s mounting debts. The ever-growing government sector reduces the economy’s dynamism…”
Accordingly, young people wonder if they’ll ever be able to afford a home. They also reasonably suspect their future taxes must rise to crushing levels to pay for the unfunded entitlements their parents’ myopic politicians have allowed to accumulate to immense proportions. As a result, they are not exactly enthralled with capitalism — at least, not with its 21st century bastardized version. More and more, they feel like the deck is stacked against them…and they’re right.
What even my parents’ generation called social insecurity, assuming it would run out before they retired, is a classic case in point. Despite its most untrusty trust fund, brimming with nothing more than U.S. government IOUs, it has continued to be a font of inflation-indexed largesse, contrary to the old presuppositions of its early exhaustion. Since 1975, Social Security payouts have surged by almost 400%. This is in contrast to the minimum wage which has increased by a mere 68% in the same timeframe. Social Security recipients just received almost a 6% pay increase, impacting tens of millions of beneficiaries. Nice for them but, of course, that just makes the future solvency of Social Security even bleaker for the millennials.[iii]
“Mature” Americans healthcare costs are already exploding, a trend that shows no signs of reversing anytime soon. In reality, society’s healthcare tab, almost all directed toward the elderly, is likely to maintain an upward slope, one that may even steepen.
The indenturing of young Americans to pay for ridiculously inflated higher education costs is another dead-weight on them, as if they need more. While there’s likely to be massive student loan forgiveness, it’s reasonable to ask where that money is going to come from — along with the other 100 plus trillions needed to pay entitlements to America’s rapidly growing retired population.
Further, and to the heart of this book, does the Federal government spending trillions it doesn’t have, funded with a Banana Republic-type monetary policy, achieve positive economic and societal outcomes? The Fed and the Treasury have been at this for well over a decade and, thus far, the answer increasingly appears to be a resounding no.
Consequently, it’s hard to dispute the reality that the Boomers, my age cohort, have done a reprehensible job of managing America’s resources and its future. We’ve voted in political prostitutes who have instituted unaffordable spending programs to win elections. Then, we’ve relied on the Fed to conjure up enough of its magic wand money to allegedly pay for all of it, sowing the seeds for soaring consumer prices.
Initially, this inflation manifested primarily in asset prices but now that monetary incontinence has been joined by equally reckless fiscal policies it is producing a shocking surge in the cost of living. As a result of inflation pushing almost everyone into higher tax brackets — which are not CPI-adjusted – government revenues are vaulting to record levels. Yet, deficits are still enormous, as we saw in Chapter 15. And this leads to the most likely path forward…
As I’ve indicated earlier, some kind of debt “jubilee” or restructuring is inevitable for America, or at least our government. (Ironically, consumers, in aggregate, are in excellent financial shape though tens millions have little in the way of savings). Our reserve currency status and the fact that we owe trillions to overseas investors in dollars means we don’t actually need to say “Sorry, no can pay!” as so many other countries have done. In those cases, foreign bondholders were forced to accept huge markdowns, like 50% to 70%, on the value of their debt holdings in the particular dead-beat country.
However, at least for now, with the dollar still the world’s reserve currency, we can definitely follow the post-WWII model of keeping interest rates below inflation and letting the latter run hot for several years. But here’s a serious caveat: IF, the bond market plays along. Frankly, that is the uber-risk with this stratagem. Should there be a buyer’s strike regarding U.S. treasury debt at a time when the Fed is, first, halting its latest QE binge-print, and, second, actually letting its portfolio of government bonds contract, the situation could get coyote-ugly very quickly.
Fortunately for the Fed’s gambit, the investment community is, as of early 2022, still swallowing its transitory inflation narrative. This is despite the fact that the Fed itself has abandoned the term and that inflation is accelerating into the new year. The below image makes clear how unperturbed the majority of investors are about inflation despite mounting evidence of its stickiness. (show DB/Jim Reid chart from the Michelle email)
The Fed may catch another break soon. This may be a function of how scorching the inflation numbers were in the first quarter of 2021. Thus, due to comparing to very elevated readings back then, we might see a dramatic drop in the year-over-year rate of change. You can rest assured the Fed, and the many vocal disinflationists in the financial industry, will be all over this, confidently proclaiming “peak inflation”. One should never underestimate America’s central bank’s ability to pull the wool over investors’ eyes.
However, I’m convinced there will be another second wave of inflationary pressures, as I’ve argued several times in this book. Simplistically, you can attribute that to REW: Rents, Energy, and Wages. (It’s my belief investors will eventually rue the day they fell for the Fed’s con job.) All three appear poised to continue ratcheting higher for the assortment of reasons I’ve previously articulated. As you may have ascertained, I believe what I call Greenflation will be the most powerful and persistent inflationary forcing. Ironically, that will help the Fed in its stealth default gambit. Therefore, you could see the US debt-to-GDP ratio improve materially again this year, as it did in 2021 when, as noted previously, it came down by 12%. That’s a significant improvement in one year but the Fed needs about four more of those to call it good.
But what if the bond market riots before the Fed gets to the Promised Land? That’s a great and tough question. My suspicion is that it will then resort to some accounting gimmick like the Trillion-Dollar Coin which might need to be more like the $5 trillion coin. The idea with this is that the Treasury issues a platinum coin — or maybe a palladium coin, since that metal is worth twice as much — to the Fed in return for cancelling an equivalent amount of the government bonds it holds. Is that mere optics? Of course, but it might work… at least for a while.
(Like to hyperlink to this site? Trillion-Dollar Coin Definition (investopedia.com) – Perhaps provide an accompanying image, as well) Good idea!
It could also just quietly let the bonds sit on its books once it completes what is almost certain to be a half-hearted shrinkage of its balance sheet, similar to what happened in 2017 and 2018. Ergo, no formal announcement, just a discreet handshake deal between the Fed and the Treasury. As you may have noticed, they seem to be joined at the hip these days. This is another reality with significant long-run inflationary implications.
Should the stock market continue to crack, as it is in early 2022, the Fed will almost certainly be forced to execute another one of its clever plunge-protection maneuvers. In this case, I believe it will use some of the maturing bonds from its monstrous QE-acquired portfolio to buy stocks. There will be a dramatic announcement of this, of course, causing private investors to charge back into equities. The rally this should produce is likely to be similar in speed and magnitude to what happened with corporate bonds in the spring of 2020. If you think this is just another exquisite can-can, kick-kick, worthy of the folles bergère, you’re absolutely right. Further, it will do nothing to reduce the enormous inflationary risk of all the trillions the Fed has synthetically created.
It’s highly likely to be through a clever continuation of its “pretend and extend” tactics that the Fed will desperately attempt to use inflation to provide the least disruptive way out of our current debt trap. As noted earlier, since early 2020 it’s been working. It’s a massive confidence game but the Fed has repeatedly shown its skill at executing these.
If it sounds like I think all roads lead to inflation, one way or the other, that’s because I do; I simply see no other plausible outcome. This is why I’m convinced the rather unorthodox real purchasing power preservation strategies I outlined in Chapter 17 are absolutely essential. Somebody—actually, a lot of somebodies—are going to lose vast amounts of money and I don’t want either you or me to be among them. As I’ve argued in several chapters, long-term bond holders are likely to be the ultimate bag holders.
Helping others avoid this stealth wealth confiscation--as well as growing the number of my newsletter’s recipients, so I can communicate future warnings to them--are why I wrote this book. It’s my fervent hope that you feel it was worth your time.
(For those who are interested in a more personal and philosophical examination of America’s present wrenching malaise by this author, please see the Appendix for this chapter. Warning: don’t go there if you are a fan of the conflation of socialism and secularism, or, actually either one. Below is a summary of the 12 Step Program for America that is a key part of that addendum.)
1. Personal income and corporate tax reform.
2. Estate tax reform
3. Freeze spending (where possible)
4. Save Social Security and Medicare.
5. Regulatory reform
6. Support bipartisan politicians (the No Labels organization)
7. Make CEO pay more accountable to shareholders.
8. Restrict share buybacks
9. Normalize interest rates
10. Restore trust in government
11. Follow the NFL model
12. Make it clear that we, the American people, are fed up with the Fed.
[i] Life expectancies fell faster during the initial collapse of the former USSR, due to the extreme economic distress during the most chaotic phase of that regime’s demise. However, they were rebounding by the late 1990s. Thus, the longevity decline was due to a brief shock as opposed to America’s extended slide.
[ii] When Vincent mentions deflation above he’s mostly referring to Southern Europe. Falling consumer prices have also been an off and on occurrence in Japan. In the U.S., the only actual deflation has been of an asset variety like commodities, real estate, and stocks, during bear market episodes. For the most part, America has experienced the supposedly acceptable inflation rate of 2%, until recently.
[iii] To reiterate one of this book’s strongest criticisms, the fact that there are no real assets in our nation’s primary retirement program may have been the greatest economic policymaking error in the post-WWII era. As we all know, there is intense competition for that designation. Further, this blunder goes back into the 1980s when the social security trust fund first began to run large and growing surpluses that could have financed the acquisition of what would now be a multi-trillion-dollar portfolio, almost certainly dwarfing those such as CalPERS*. In fact, it would likely be the largest pool of assets the world has ever seen amassed if it has merely been invested 50% in a S&P 500 index fund and 50% in a corporate bond equivalent.