The Nasty Habits of Reality

BALTIMORE – People never intend to bring disasters upon themselves. But they sometimes put themselves in situations in which disaster is the only way out.

The War Between the States was supposed to be quick and decisive. The glorious histories of the war were already written – at least in the minds of the combatants – by the time of the First Battle of Bull Run.


General Thomas “Stonewall” Jackson inspects the action at the First Battle of Bull Run. Confederate observers were suitably impressed. We’ve got this in the bag, they said to themselves. Let’s start writing the history books!


There would be a few heroic charges; Napoleon’s Marshal Ney would have nothing on the dashing Confederate generals in their gray and red tunics.

Mounted on their fine Tennessee horses, waving their swords and shouting encouragement to their cavalry, they would sweep the enemy from the field…  send him fleeing back across the Potomac… and the war would be over.

But even authors often don’t know how their stories will turn out. Events and personalities take over. Between the first chapter and the final one, there are twists and turns that few expect.

The hero turns out to have a fatal flaw. Circumstances weren’t what they thought. The enemy had surprises. And then, at the end, the great victory turns into a nightmare defeat.


Surrender Isn’t For Us – Only Full Frontal Assault Will Do

Once war is underway, the warriors stop thinking about peace. Instead, they focus on winning the war. Then they can’t stop.

The coming disaster is financial and economic. The authorities are determined to win a war: a war against markets. With $35 trillion in excess debt in the U.S. alone, they figure they can’t afford to lose. They’re right. But they can’t win, either.

The big monetary guns blast away. Janet Yellen threatens to make peace with the credit markets. But it is just an idle war rumor. She can’t make peace; she can only surrender. Unconditionally

And if the feds abandon their artificially low interest rates, it will be impossible to finance so much debt. The war will be lost.

And now, the people turn their lonely eyes to Field Marshal Trump and turn their hopes to fiscal stimulus – deficit spending, in other words.


Meet our glorious Field Marshal Trump! Will he spend us to Nirvana?

Image via


Monetary stimulus works by lowering the cost of the fake money. In a free market economy, borrowers compete for scarce savings and discover honest interest rates. In a Fed-managed economy, at war with free markets, central-bank Ph.D.s set interest rates by committee, offering ersatz savings at artificially low prices.

People don’t know the new money is phony. They don’t care that no one earned it and no one saved it,  and that there is nothing behind it other than swamp gas. It looks like the real thing. It acts like the real thing.

But if monetary policy is a kind of precision bombing, fiscal stimulus is more like a full frontal assault.

Money enters the economy like Sherman’s cavalry entering Atlanta. Fiscal stimulus goes more directly into the hands of the people. So, it tends to raise consumer prices more than monetary stimulus, which hangs around Wall Street, raising only financial asset prices.

But the underlying aim for each is the same: Put more fake money into the system. And so is the purpose: Prevent the market from correcting the distortions from the fake money the feds put into the system the last time.


More Money, More Debt

That’s how a credit money system works: More money means more debt. As the debt builds up, the system needs more money, a.k.a. more debt – just to keep it from losing the war. But in order to add more money, someone has to be able to go further into debt.


US total public debt to GDP ratio – lettuce make the pie higher, as GW Shrub once put it – click to enlarge.


Households and businesses are tapped out. They are already at “peak debt,” with little collateral and little capacity to borrow more or use the borrowed funds effectively.

That leaves only the feds. They are the only ones who can still borrow substantial sums of money. No one has to worry about not being paid back by the government; after all, the feds have a printing press.

So, the feds are preparing a major offensive. And investors are writing their books. All with happy endings.

In January, their hero, Donald J. Trump, will present a program of tax cuts and spending increases. Commentators will tell us how the tax cuts may “pay for themselves” as they spur additional economic activity.

They will say the increased infrastructure “investments” will make the economy more productive. They will mention that we need more inflation as a way to fight our growing debt load!

Higher federal spending will put people to work in the shipyards and malls. It will cause prices to go up, reducing the weight of debt. People will spend more and owe less! But wait… what could go wrong?

Stay tuned.


Chart by: St. Louis Federal Reserve Research


Chart and image captions by PT


The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.



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One Response to “No Surrender in the Fed’s “War on the Markets””

  • woodsbp:

    But, but …but …There are no Markets! These are just the virtual output of a sustained and successful propaganda campaign.

    Would you characterize the many casinos in Las Vegas as an aggregate, Market for Gamblers? Or simply as a collection of individual gambling dens – aka: Wall Street or the City of London, or Frankfurt, or wherever multinational finance institutions are located?

    Might just as well blame Hurricane Sandy for the rise and rise of DT. How do you chastise a hurricane? Gaius Caligula had his legionnaires attack the waves of the English Channel. Very successful that was. What will DT do?

    But hey! We have the War on Drugs (a heroic and successful failure). The War on Poverty and Homelessness (ditto). So, what the hell, lets have a War on Markets!

    Now, someone like to remind me how much all this ‘warring’ will cost the taxpayer and their dependents? And the likely collateral economic harm?

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