Something for Nothing

The world is full of bad ideas.  Just look around.  One can hardly blink without a multitude of bad ideas coming into view.  What’s more, the worse an idea is, the more popular it becomes. Take Mickey’s Fine Malt Liquor.  It’s nearly as destructive as prescription pain killers.  Yet people chug it down with reckless abandon.

 

Looking at the expression of this Mickey’s Malt Liquor tester one might initially get the impression that he is disappointed. We assure you that is not the case – this is actually his happy face, he is probably just about to enter Nirvana. Countless taste tests prove it, see this comparison of the “entire bottom shelf” of malt liquors, or these cost-conscious routiniers. Not to forget, it comes either in cans or in shatterproof plastic bottles. [PT]

 

Or consider central banking.  Has any other single idea extracted more wealth from the lowly wage earner?  The Federal Reserve’s backdoor taxation program has snookered honest hard-working Americans for over 100 years.

Why is it that bad ideas are often received more favorably than good ideas?  Perhaps, it is because bad ideas generally promise something for nothing.  That one can live off the coerced philanthropy of one’s neighbors.  That one can get more out of one’s retirement fund than one puts in.

Promises of fruits without labors are fantastical.  They’re also the surefire way for politicians to get elected.  How can it possibly be a good idea to spend more and tax less, and fill the gap with more and more debt?  From a sound fiscal management perspective this is a terrible idea.  Certainly, a policy to spend less and tax less would be a much sounder idea.  But for a politician looking to win votes, promising something for nothing is the only way to go.

This is because people often do the exact opposite of what they say.  People may say they’re against bigger government.  But these same people will always vote in their self-interest, especially if they believe they’ll get something for nothing.  That is, they’ll always vote for promises of government handouts if they believe they won’t have to pay for them.

 

US debtbergs: total credit market debt as of Q2 2017 and total federal debt as of Q3 2017. The sustainability of these large debts is rather doubtful (economic output grows at a much slower pace). [PT]

 

Self-Cannibalization

The fact is the present American system of democratic mob rule has devolved to self-cannibalization.  By consuming itself, the nation can temporarily live beyond its means.  This dynamic is best observed by looking at the growth in federal debt since the turn of the century.

When Y2K came and went without a hitch the federal debt was about $5.6 trillion.  Today it is over $20.6 trillion.  In just 18 years the federal debt has increased by over 265 percent.  Over this same period, real U.S. gross domestic product has only increased from about $12.5 trillion to about $17 trillion – or roughly 36 percent. This, as far as we can tell, is a recipe for disaster.  Still, this isn’t the half of it…

You see, this growth in national debt relative to national income coincided with a corresponding growth in something for nothing policies.  This growth in national debt relative to national income also occurred during a period of especially cheap credit.

Cheap credit, however, can also give way to expensive credit.  And as interest rates rise, the net interest payments to service the debt also rise.  For example, net interest payments on the national debt for fiscal year 2017 were about $266 billion, while the yield on the 10-Year Treasury note was 2.8 percent.

 

30 year bond yield since 1942: the sample size under the modern fiat money system is as small as it gets, but this chart suggests that interest rates are likely subject to very long term cycles. Whether the long term downtrend is already over is not certain yet,  but if it is, the situation for the mountains of debt shown above will become quite  problematic . [PT]

 

Assuming the 10-Year Treasury note yield increases to 4 percent by fiscal year 2026, it is projected that $787 billion of the government’s budget will have to be diverted to debt service.  This would nearly double the percent of the budget allocated to paying interest from 6.5 percent to 12.2 percent.

But what if the 10-Year Treasury note yield rises to a much higher level than 4 percent?  What if it jumps to over 15 percent like it did in 1981?  That would likely mean the entire budget, and then some, would be needed just to service the debt.

This is where self-cannibalization ultimately leads.  In the meantime, something for nothing bad ideas continue to be brought forth as solutions, with varying degrees of reception…

 

The Donald Saves the Dollar

Many years ago, in an article titled Chasing the Wild Goose in Davos, we provided a detailed account of the yearly pilgrimage of the world’s best and brightest – and richest – to the World Economic Forum in Davos, Switzerland.  If you are unfamiliar with the event or need a brief refresher, we suggest you give it a read.

We mention this because the 2018 World Economic Forum took place this week.  We weren’t invited this year.  Nonetheless, from what we gather, Treasury Secretary Steven Mnuchin – a Goldman guy – dropped a turd in the swimming pool when he pitched his latest something for nothing strategy.  On Wednesday, with a smile and a straight face, he explained how a weak dollar is great boon to the American economy:

 

“Obviously a weaker dollar is good for us as it relates to trade and opportunities.

 

Treasury secretary Steven Mnuchin holding a fistful of dollars. His wife seems happy enough, but the unnamed bureaucrat in the background looks as if he’s afraid Mnuchin might make off with the freshly printed sheet (this picture definitely calls for a caption contest…) [PT]

Photo credit: Jacquelyn Martin

 

Following Mnuchin’s remarks, the dollar furthered its declining trend – sliding to its lowest value in three years as measured by the Bloomberg Dollar Index.  These remarks also put Mnuchin at great odds with his international counterparts, who outnumber him by far.  That was when the sharks began to circle…

On Thursday morning, IMF Managing Director Christine Legarde requested clarification. Then ECB President Mario Draghi expressed concern that Mnuchin was violating an international agreement not to talk down one’s currency. Hence, Mnuchin was forced to restate his position:

 

“I thought my comment on the dollar was actually quite clear yesterday.  I thought it was actually balanced and consistent with what I’ve said before, which is we’re not concerned with where the dollar is in the short term, it’s a very, very liquid market, and we believe in free currencies. And that there’s both advantages and disadvantages of where the dollar is in the short term.  Let me say, I thought that was clear.”

 

Sensing blood in the water, Bridgewater Associates Chairman Ray Dalio – a man who misconstrues his bank account with his IQ – went in for the kill with a “five point” Linkedin post titled, Mnuchin’s Comment on the Dollar.

Then, with Mnuchin gushing blood in foreign waters and encircled by hostile great whites, something remarkable happened.  Mnuchin’s boss, The Donald, also in Davos, came to his rescue:

 

“The dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar.  Our country is becoming so economically strong again and strong in other ways, too.” Trump added that he thought Mnuchin’s comments had been taken out of context.

 

At the precise moment The Donald spoke, the dollar ticked up.

 

US dollar index, daily – from a technical perspective, the dollar was already more than ripe for a bounce when Mnuchin made his remarks. Currency trends tend to be very “sticky” though and at the moment it doesn’t look like it is getting “stronger and stronger”. [PT]

 

Charts by St. Louis Fed, stockcharts

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Is the Canary in the Gold Mine Coming to Life Again?
      A Chirp from the Deep Level Mines Back in late 2015 and early 2016, we wrote about a leading indicator for gold stocks, namely the sub-sector of marginal - and hence highly leveraged to the gold price - South African gold stocks. Our example du jour at the time was Harmony Gold (HMY) (see “Marginal Producer Takes Off” and “The Canary in the Gold Mine” for the details).   Mining engineer equipped with bio-sensor Photo credit: Hulton Archive   As we write these...
  • Fed Credit and the US Money Supply – The Liquidity Drain Accelerates
      Federal Reserve Credit Contracts Further We last wrote in July about the beginning contraction in outstanding Fed credit, repatriation inflows, reverse repos, and commercial and industrial lending growth, and how the interplay between these drivers has affected the growth rate of the true broad US money supply TMS-2 (the details can be seen here: “The Liquidity Drain Becomes Serious” and “A Scramble for Capital”).   The Fed has clearly changed course under Jerome Powell...
  • The Gold Standard: Protector of Individual Liberty and Economic Prosperity
      A Piece of Paper Alone Cannot Secure Liberty The idea of a constitution and/or written legislation to secure individual rights so beloved by conservatives and among many libertarians has proven to be a myth. The US Constitution and all those that have been written and ratified in its wake throughout the world have done little to protect individual liberties or keep a check on State largesse.   Sound money vs. a piece of paper – which is the better guarantor of liberty?...
  • Fed President Kashkari Hears Voices – Are They Lying?
      Orchestrated Larceny The government continues its approach towards full meltdown. The stock market does too. But when it comes down to it, these are mere distractions from the bigger breakdown that is bearing down upon us.   Prosperity imbalance illustrated. The hoi-polloi may be getting restless. [PT]   Average working stiffs have little time or inclination to contemplate gibberish from the Fed. They are too worn out from running in place all day to make much...
  • Are Credit Spreads Still a Leading Indicator for the Stock Market?
      A Well-Established Tradition Seemingly out of the blue, equities suffered a few bad hair days recently. As regular readers know, we have long argued that one should expect corrections in the form of mini-crashes to strike with very little advance warning, due to issues related to market structure and the unique post “QE” environment. Credit spreads are traditionally a fairly reliable early warning indicator for stocks and the economy (and incidentally for gold as well). Here is a...
  • US Stocks and Bonds Get Clocked in Tandem
      A Surprise Rout in the Bond Market At the time of writing, the stock market is recovering from a fairly steep (by recent standards) intraday sell-off. We have no idea where it will close, but we would argue that even a recovery into the close won't alter the status of today's action – it is a typical warning shot. Here is what makes the sell-off unique:   30 year bond and 10-year note yields have broken out from a lengthy consolidation pattern. This has actually surprised us, as...
  • Switzerland, Model of Freedom & Wealth Moving East – Interviews with Claudio Grass
      Sarah Westall Interviews Claudio Grass Last month our friend Claudio Grass, roving Mises Institute Ambassador and a Switzerland-based investment advisor specializing in precious metals, was interviewed by Sarah Westall for her Business Game Changers channel.   Sarah Westall and Claudio Grass   There are two interviews, both of which are probably of interest to our readers. The first one focuses on Switzerland with its unique, well-developed system of  direct...
  • Choking On the Salt of Debt
      Life After ZIRP Roughly three years ago, after traversing between Los Angeles and San Francisco via the expansive San Joaquin Valley, we penned the article, Salting the Economy to Death.  At the time, the monetary order was approach peak ZIRP.   Our boy ZIRP has passed away. Mr. 2.2% effective has taken his place in the meantime. [PT]   We found the absurdity of zero bound interest rates to have parallels to the absurdity of hundreds upon hundreds of miles of...
  • Exaggerated Economic Growth of the Third World
      Exciting Visions of a Bright Future Fund Managers, economists and politicians agree on the exciting future they see in the Third World. According to them, the engine of the world’s economic growth has moved from the West to what were once the poverty-stricken societies of the Third World. They feel mushy about the rapid increase in the size of the Middle Class in the Third World, and how poverty is becoming history.   GDP of India vs. UK in 2016 – crossing...
  • How Dangerous is the Month of October?
      A Month with a Bad Reputation A certain degree of nervousness tends to suffuse global financial markets when the month of October approaches. The memories of sharp slumps that happened in this month in the past – often wiping out the profits of an entire year in a single day – are apt to induce fear. However, if one disregards outliers such as 1987 or 2008, October generally delivers an acceptable performance.   The road to October... not much happens at first - until it...
  • Yield Curve Compression - Precious Metals Supply and Demand
      Hammering the Spread The price of gold fell nine bucks last week. However, the price of silver shot up 33 cents. Our central planners of credit (i.e., the Fed) raised short-term interest rates, and threatened to do it again in December. Meanwhile, the stock market continues to act as if investors do not understand the concepts of marginal debtor, zombie corporation, and net present value.   The Federal Reserve – carefully inching forward to Bustville   People...
  • Miraculous Credit Spreads - Precious Metals Supply and Demand
      Running From “Risk-Free” to Not So Risk-Free Debt  The price of gold blipped $13 last week, while the price of silver was unchanged. Speaking of interest rates and central planning by central banks, we note that in mid-2016, a correction (counter-trend move to the main trend) began in 10-year bond yields.   10-year treasury note yield vs. 10-year German Bund yield over the past decade [PT]   It occurred at the same time in the Swiss government bond and the...

Support Acting Man

Item Guides

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com