Tending Towards Maximum Perversity

According to Finagle’s corollary to Murphy’s law, “Anything that can go wrong, will — at the worst possible moment.”  Taken a degree further, per O’Toole’s corollary of Finagle’s law, and the second law of thermodynamics, “The perversity of the Universe tends towards a maximum.”

 

Murphy’s law in action… not even Murphy himself was safe from it. [PT]

 

No doubt, the perverse effect of central planning on the economy is tending towards a maximum.  This tendency can be traced back well over a century, with the advent of the Fed and the federal income tax in 1913. Our purpose today, however, is to look back a mere decade. This offers an adequate sampling of O’Toole’s corollary of Finagle’s law in action.

For example, on June 1, 2009, General Motors filed for Chapter 11 bankruptcy protection; the fourth largest bankruptcy in U.S. history.  Of course, GM didn’t vanish from the face of the earth. Instead, Washington took 60 percent ownership and nationalized the company with a $50 billion taxpayer bailout.  President Obama remarked at the time:

 

“We are acting as reluctant shareholders because that is the only way to help GM succeed.”

 

In other words, we must destroy capitalism to save it.

 

At this juncture GM discovered it would need a bailout… [PT]

 

The truth is, real free market capitalism disappeared from American shores long before the GM bailout. Nonetheless, this event marked a significant milestone in America’s transformation to a more centrally planned economy. The last 10 years have borne out the consequences.

You see, June 1, 2009, also marked another significant economic event. At the precise moment GM was filing for bankruptcy, America was commencing a record economic expansion. Now, at 121+ months, it is the longest period of uninterrupted growth of the post-WWII era.

But what type of expansion is this, really?  After a decade of growth, shouldn’t the rising wealth tide have lifted all boats? That is typically how an economic expansion works.

Over the last decade, however, only the luxury yachts were lifted by the rising tide of cheap credit. The sloops, schooners, and practically every other boat, slipped beneath the surface. But that’s not all…

 

A Big Fat Goose Egg

The typical working stiff has seen the workplace become inordinately intolerable over the last decade.  At a time of supposed record unemployment, employees commonly perform multiple job functions. All the while, their pay has stagnated.

There is also little remaining workplace stability or job security. And because of the connectivity of email and smartphones, the workday never ends. It follows workers home and invades their private lives at the family dinner table. Calls, emails, text messages; the expectation is that you’re wired in at all hours.

Without question, the longest economic expansion in modern U.S. history has been a big fat goose egg. A decade of extreme fiscal intervention through massive deficits year in and year out and heavy handed monetary policy did little to benefit anyone but the crème de la crème.  For everyone else, they have little to show for their labors.

Central planning, like the GM bailout and the big bank bailouts via AIG, are what got us into this mess to start with. But that does not mean the President, the Fed, and the Treasury won’t try to keep the bogus expansion going with more of the same failed policies. Not when the alternative is to let an avalanche of debt cascade down in final destruction.

Over the last two weeks, the Fed has telegraphed it will cut rates at the FOMC meeting on July 30-31. Financial markets have already run ahead based on the rumor.  Clearly, money and markets have gone insane.

The difference between now and September 2007, the last time the Fed started a rate cutting cycle, is the Fed will be easing from a place that is already highly accommodative.

 

Assets held by the Fed and the Federal Funds rate, then and now. The Fed finds itself at a very different starting point compared to 2007, when the previous business cycle ended. Given the vast expansion of credit market debt since then, we should expect even more massive central bank intervention when the current bubble bursts (yes, when, not if). [PT]

 

Remember, for the 15 months leading up to  September 2007, the federal funds rate was 5.25 percent and the Fed’s balance sheet was at $900 billion. Still, zero interest rate policy (ZIRP) and quantitative easing (QE) didn’t prevent the S&P 500 from getting lopped in half.

Now the federal funds rate is close to 2.5 percent and Fed’s balance sheet is about $3.8 trillion. Heading into the next recession, the Fed has much less room to maneuver. A future QE program could take the Fed’s balance sheet to $10 trillion or more. Plus, with the federal funds rate at just 2.5 percent, the Fed will likely have to push rates below zero – into negative territory – to bail out financial markets.

 

Tending Towards Maximum Perversity

Massive monetary stimulus injections of QE and negative interest rate policy (NIRP) will take an economy and financial markets that are already grossly distorted and will disfigure them beyond all recognition. But that is just the half of it. The central planners at the U.S. Treasury are also behind the eight ball.

U.S. Treasury Secretary Steven Mnuchin – a Goldman guy – is running out of time to broker a debt ceiling budget deal with House Speaker Nancy Pelosi and her cohorts in Congress. If an agreement isn’t reached by next week, House Representatives will be AWOL until September 9.  By then, without a debt ceiling increase, Mnuchin will have run out of the fake money he needs to keep the nation’s lights on.

 

Lettuce not dwell on the nation’s debt too much… that will only be prone to invite ulcers, and who needs an ulcer? [PT]

 

Most likely, after a great big hubbub, an 11th hour deal will be made.  The House may be full of morons.  But they know who their employer is.  And why stop now?

At $22.5 trillion, the national debt is well past the point of no return. There is no way to repay it outright. Thus, an implied default through currency debasement is bound to be the government’s preferred option.

However, to keep up with exploding debt levels, new and extreme methods of currency debasement will need to be employed. After QE and NIRP fail to do the trick, the promise of Modern Monetary Theory (MMT) will be put to the acid test.

Per the tenets of MMT, U.S. government debt is not debt at all. Rather, it is money the government has spent that hasn’t yet been used to pay taxes. Therefore, the U.S. government can print all the money it needs to amplify the economy without care nor worry about debts and deficits.

 

The federal debtberg in all its terrible glory. MMT (a.k.a. warmed-over Chartalism) suggests that there is no limit to the growth of this pile that could possibly invite untoward consequences. This is precisely what the board of the German Reichsbank under Rudolf von Havenstein thought as well as it proceeded to monetize both treasury bills and commercial paper by the wagon-load after WW I. The eventual outcome of this policy was rather less salubrious than had been hoped. This excellent example of the triumph of hope over experience ultimately left the entire nation in abject poverty and wretched misery (of course modern-day MMT proponents will know how to “do it better”). [PT]

 

Should such overt dollar debasement lead to price inflation, MMT has just the solution. Raise taxes and issue bonds to remove the excess money from circulation. Taxes, you see, are not for funding government spending. They are for throttling back the money supply to attain the magical balance of growth and inflation.

If this sounds like maximum perversity to you, it’s because it is. What a delight to be tending towards it more and more each and every day.

 

Charts by St. Louis Fed

 

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

   
 

One Response to “Tending Towards Maximum Perversity”

  • utopiacowboy:

    What dollar debasement? Every day this week the USD has powered upwards. It is close to a two year high. Trump may hate it’s strength but everything he does causes it to go up in value. King Dollar!

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Sovereign Bonds – Stretched to the Limit
    Anti-Vigilantes We dimly remember when Japanese government debt traded at a negative yield to maturity for the very first time. This happened at some point in the late 1990s or early 2000ds in secondary market trading (it was probably a shorter maturity than the 10-year JGB) and was considered quite a curiosity. If memory serves, it happened on just one brief occasion and it was widely held at the time that the absurd situation of a bond buyer accepting a certain loss if the bonds were...
  • Writing on the Wall
    Not Adding Up One of the more disagreeable discrepancies of American life in the 21st century is the world according to Washington’s economic bureaus and the world as it actually is.  In short, things don’t add up.  What’s more, the propaganda is so far off the mark, it is downright insulting.   Coming down from the mountain with the latest data tablet... [PT]   The Bureau of Labor Statistics (BLS) reports an unemployment rate of just 3.7 percent.  The BLS also...
  • Global Stock Markets: Danger Lies Directly Ahead
      A Global Pattern You are no doubt aware of the saying “sell in May and go away”. It is one of the best-known and oldest stock market truisms.   Mark Twain's famous saying about stock market speculation (the other one was “There are two times in a man's life when he should not speculate – when he cannot afford it, and when he can”).  From a seasonal perspective he was definitely right about September and October. [PT]   The saying is in fact justified...
  • Bond Yields in the Netherworld - Precious Metals Supply and Demand
      A Record Amount of Bonds with Negative Yields to Maturity Last week the price of gold went up $22, while the price of silver dropped ¢17. The big news last week was that the yield on all German government bond maturities is now negative. They are also all negative in Switzerland. And in Denmark, all maturities out to 20 years are negative. Interest rates are dropping rapidly in the US as well.   More than $14 trillion in bonds now trade at negative yields to maturity –...
  • Rising Stock Market Volatility – Another Warning Sign
      Bad Hair Days Are Back We recently discussed the many divergences between major US indexes, which led us to expect that a downturn in the stock market was close (see The Calm Before the Storm for details). Here is an update of the comparison chart we showed at the time:   The divergences between various indexes seem to be resolving as expected.   The next chart shows analogous divergences between the S&P 500 Index and two major foreign stock markets:   US...
  • Retail Holders Sell Their Gold - Precious Metals Supply and Demand
      A Myriad of Reasons to Buy Gold – But Small Holders are Selling Big moves occurred in the prices of the metals last week, with that of gold up $57 and silver $0.77. We have now reached a price of gold (if not silver) not seen since 2013, when it was on the way down. What is causing this sudden spike in price and renewed interest in gold?   A well-known depiction of investor emotions over a complete market cycle. Interestingly, it appears as though many retail gold holders...
  • Bitcoin – From Greed to Fear
      A Noteworthy Sentiment Change Bitcoin and other cryptocurrencies have declined quite sharply in recent days. Here is an overnight snapshot of the daily chart:   Bitcoin corrects again...   It is difficult to gauge sentiment on BTC objectively, but there is a service that tries to do just that. According to its greed & fear barometer, the recent decline seems to have triggered quite a bit of apprehension:   The BTC sentiment measure of alternative.me has...
  • Getting to a Special State of Ugly
    Suspicious Phrases There are certain phrases – like “trust me” or “I got this” – that should immediately provoke one’s suspicion.  When your slippery contractor tells you, “trust me, your kitchen renovation will be done before Christmas,” you should be wary.  There is no way it will be done before late spring.   USD-CNH (offshore yuan) exchange rate – the support/resistance level at 7 finally breaks amid escalating trade war rhetoric. [PT]   Or...
  • Interest Rate Watch and Bond Market Curiosities
    Things To Keep An Eye On Below is an overview of important US interest rates and yield curve spreads. In view of the sharp increase in stock market volatility, yields on government debt have continued to decline in a hurry. However, the flat to inverted yield curve has not yet begun to steep – which usually happens shortly before recessions and the associated bear markets begin.   2-year note yield, 3-month t-bill yield, 10-year note yield, 10-year/2-year yield spread,...
  • Tumbling Interest Rates - Precious Metals Supply and Demand
      An Era of Low Time Preference Last week the price of gold moved up another $16, and the price of silver was up $0.14.   10-year treasury note yield since 1999 – it is almost back at the multi-decade low of 2016. The only other time in history when US treasury yields were this low was in 1944-1945, when the Fed was actively suppressing yields in order to provide cheap financing for the war effort. One year later (from mid 1946 to mid 1947) the CPI jumped to more than 17%...
  • A Bubble in Complacency - Incrementum Advisory Board Discussion
      Incrementum Advisory Board Meeting of 31 July 2019 At the end of July the Advisory Board of the Incrementum Fund held its quarterly meeting (a full transcript is available for download at the end of this post). The board was joined by special guest Simon Mikhailovich, a financial market veteran who inter alia co-founded the Toqueville Bullion Reserve. The title of the transcript and this post was inspired by his remarks.   Special guest Simon Mikhailovich   We...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

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!