Bubbles
Since my previous blog “Bubble Economy” on 11/13/19, that bubble has grown even more ominous as we are soon to exceed $30T in our national debt. Does any rational person believe that the US will ever be able to repay such an egregious debt?
US Bonds, which used to be held in high regard by other sovereign states, principally Japan and China who at one time held 18% of US debt, are selling off by the billions. Fear that they would be holding the bag in the event of default is rising; it is not an irrational fear. To counter that lack of confidence the Federal Reserve bought huge amounts of US bonds with equally huge amounts of newly printed money from the UST; more air in that bubble.
With bonds, as interest rates fall prices rise, so with the lowest rates in history better to dump at a high since the yield is so pathetic. But then where to go for yield? Try the stock market, fed by such easy credit its valuations are pushing up prices beyond fundamental levels. However, given that the easy credit is fed by debt, where will that lead?
Well, we’ve seen that movie before; it will lead to where it did in 1929, 2007 and….well hard to say, but sooner than anyone will want. It may start on headline news, an algorithm gone wrong (or right), increased defaults and bankruptcies, all the above; inevitably such outsized debt, annually now larger than our GNP, will be called in and that will be ugly.
So why haven’t we as a nation learned from the past? Why do we make the same mistakes over and over again? An interesting comment of such behavior I recently read was from Thomas King, an American Indian writing about failed US policies regarding the native peoples of America, who wrote that “For an individual, one of the definitions of insanity is doing the same thing over and over again in the same way and expecting different results. For a government, such behavior is called policy.”
Bangles
Alexis de Tocqueville was a French political philosopher who wrote “On Democracy in America” after touring the country in 1831. His observations influenced much of written American history and political science in this country, and were comparatively critical of French democracy. He found that the republican structure and constitution of the US was a reason for its success. However, he was critical of much of its social structure like slavery, religious zealotry, the social suppression of free expression, and the political tendencies to affect the outcome of elections legislatively; on this last item he wrote “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”
Well it didn’t take long for that to happen; stimulus anyone? Like any bangle or trinket, such as the $24 worth of glass beads that bought Manhattan, it’s meant to allure us into thinking it’s actually something of value that will improve our lives, while actually buying them, defended as a means to protect us from ourselves by waving the pandemic flag in our face. It’s a way for us to willingly sell ourselves out to the very crooks that locked us down for our own good and destroyed our means of livelihood.
Like an opioid, it has dulled common sense to the point that we actually have a situation where the US government now represents 70% of our GNP; but there is no product involved, unless you call debt a product. Yet, that is exactly what is being sold to the American electorate by both presidential candidates. In fact, despite resistance in his own party, Trump actually supports another stimulus in excess of what Biden proposes. Remember, this is the guy that has lived off other people’s money his whole life so this should not surprise anyone.
What has become obvious is that this election is on the auction block, will go to the highest bidder, and the account will be drawn from the pockets of the American people.
Boondoggles
Interesting word, first coined by a boy scout in 1927 to describe a uniform decoration; it later came to mean something of no value. It was often ascribed to government programs during the New Deal era wasteful or pointless but carried on anyway due to policy or political motivations. We have this today in so many government programs too numerous to cover. Let’s just take something we have all participated in, whether we like it or not; I’m talking about Social Security.
There are many misconceptions about the original law establishing Social Security, like it was initially voluntary; it was discussed as a voluntary annuity, but enacted as mandatory. It is true that benefits were not to be taxed, but that was amended in 1983. FICA deductions were supposed to be limited to the first $3K of income at 1%, but the limit and rate were constantly increased.
But why should there be a mandatory investment in an annuity that has no guarantee of return on investment like common annuities you can get from any financial institution, which have a guaranteed benefit and fixed rate? Answer is there shouldn’t be, but again this is defended as a means to protect us from ourselves, the panacea of all tyrannies.
Per the Trustees Report of last year, the Social Security Trust would go bankrupt by 2035. However, as it is a legislated entitlement, it must be funded, but with what? I once read an article in Forbes about the Madoff scandal wherein they gave a pretty good idea of exactly what a Ponzi Scheme is: “A Ponzi Scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned through legitimate sources.”
Now consider the plight of those “new investors”; they are anyone who is subject to FICA withholdings and who will not be 62, the earliest age you can claim benefits, by 2035. Essentially, if you were born after 1973, you are paying into a soon to be bankrupt annuity. Would you voluntarily do that? The same goes for Medicare and Medicaid, both funded by FICA withholdings and deductions from Social Security benefits.
Again, it is a legislated entitlement, so it must be funded. However, it is no longer a sustainable trust as its liabilities exceed its revenues, so that means more taxes, more debt, or a combination of both. The Ponzi scheme collapsed and the angel investors to the rescue are….well you.
Now consider the ACA; it too was at first mandatory, but that mandate was deemed illegal, and its survival all together is likely to depend on Supreme Court review. If it were simply a network to provide information to acquire insurance it would at least have a viable legitimacy, but again, as with Social Security, voluntary is not how governments are prone to act. Choice is not an option when seeking the greater good.
End Game
While history has taught us innumerable times that you can’t spend your way out of debt, it is a lesson ignored. The most famous of those who proposed such madness was John Maynard Keynes. When Keynes was confronted with the failure of his ideas of endless spending and consumption as unsustainable in the long run and that they would prevent the markets from functioning properly, especially in recoveries, he cynically quipped that “In the long run, we will all be dead.”
When Trump was given a brief on America’s growing debt crisis in 2017 by the few remaining fiscally responsible members of his own party, his response was “Yeah, but I won’t be here.” The fact that this puts the futures of our children and grandchildren in jeopardy is irrelevant to narcissistic sociopaths like Trump and Keynes. The immediate need of those in power is to keep that power, and the means includes bribing the public with the public’s money.
Welcome to the United States of Debt.
Libera Voce 