Panem et Circenses

The transfer of wealth from workers and savers to governments and big banks continued this week with Swiss-like precision. The process is both mechanical and subtle. Here in the USA the automated elegance of this ongoing operation receives little attention.


Give them bread and circuses and they will never revolt… so said Juvenal, reportedly [PT]


NFL football. EBT card acceptance at Del Taco. Adam Schiff’s impeachment extravaganza. You name it. Bread and circuses like these – and many others – offer the American populace countless opportunities for chasing the wild goose.

All the while, and with little fanfare, debts pile up like deadwood in Sequoia National Forest.  These debts, both public and private, stand little chance of ever being honestly repaid. According to the IMF, global debt –  both public and private – has reached an all-time high of $188 trillion (excluding financial debt). That comes to about 230 percent of world output.


Including financial debt, total global credit market debt outstanding is closing in on $255 trillion; to quote Ludwig von Mises: “It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract” [PT]


Certainly, some of the private debt will be defaulted on during the next credit crisis and depression. But when it comes to the public debt, governments do everything they can to prevent an outright default. Central banks crank up the printing press and attempt to inflate it away.


US broad true money supply TMS-2 – note the recent acceleration: TMS-2 has expanded by $255 billion in October alone and is in the meantime close to crossing the $14 trillion mark. Since the last interim low in February 2019, $621 billion have been added to the US money supply. [PT]


After Nixon temporarily suspended the Bretton Woods Agreement in 1971, the money supply could be expanded without technical limitations. This includes issuing new debt to pay for government spending above and beyond tax receipts.  Hence, since 1971, government directed money supply inflation has been the standard operating procedure in the U.S. and much of the world.


Downright Disgraceful

Expanding the money supply has the effect of dissipating wealth from the currency.  The process allows governments, which are first in line to spend this newly created money, a back door into your bank account. Without levying taxes, they get access to your wealth and future earnings and leave you with money of diminished value.

As the money diminishes in value the price of goods and services appear to increase. This rise in prices, however, is a function of the currency devaluation.  This devaluation is primarily achieved via deficit spending.

Of course, when deficits are financed by central bank money printing something downright disgraceful is going on.  Alas, in the U.S., as in much of the world, this disgraceful undertaking is a matter of policy. This is the world we live in.

If you recall, the Fed recently recommenced QE (though it’s not calling it that).  Under this current iteration, the Fed’s buying Treasury bills of up to $60 billion a month through at least the second quarter 2020.  At that pace, the Fed’s on track to swell its balance sheet to a new all-time high over $4.5 trillion.

By this, the Fed is buying tens of billions of dollars in government debt every month. They pay for it with newly created dollars. These dollars are then used by the sellers (primary dealers/big commercial banks) to buy more debt from the Treasury. The government then does something remarkable with this money that was created from nothing: It spends it!


US treasury and agency securities held by commercial banks have reached a new all time high of $3 trillion [PT]


What’s more, as money is debased, the process of earning, saving, and building wealth is also debased. Before long, it degenerates into gambling and speculation.  Yet, at the same time, many caught up in the gambling game don’t recognize it for what it is…


Every Bubble Eventually Finds its Pin

Passive investors had plenty to be grateful for when they sat down to their Thanksgiving feast last week. S&P 500 ETFs were up 27 percent year-to-date.  Plus, a Santa Claus rally is almost guaranteed to bring good cheer through the end of the year. Another year or two like this and these shrewd indexers will be able to retire a decade early.

Burgeoning paper wealth has provided an attractive cover for increasing risk and fragility.  Gambling on the market, and extrapolating current trends to determine one’s exact retirement date, is much more rewarding than sacrificing short term gains to protect against large, portfolio-destroying losses. Why worry when the “Powell put” is firmly in place should the market stumble?


S&P 500 Index, monthly since 1980 – so far the index has come back rapidly from every setback to streak to new highs. This has helped shape expectations: despite the enormous rally since the 2009 low and a rarely seen expansion in valuations coupled with non-confirmations, signs of internal weakness and softening leading economic indicators, there doesn’t seem to be much concern. To be sure, the extreme euphoria that accompanied the peak of early 2000 is currently not detectable, presumably because retail participation is far more subdued these days. At the same time it appears as though almost no-one believes a serious downturn could be in the cards anytime soon. When exactly the turning point will be reached is not knowable; at best one can gauge probabilities and ponder the risk-reward proposition the market offers. Per experience, when the peak is finally reached, the vast majority of investors will not recognize it. Not that it matters much – the class of investors as a whole cannot escape the losses of the eventual bear market anyway. After all, every stock is owned by someone at all times. [PT]


After a decade long bull market run, U.S. investors have grown complacent. A quick gander at a price chart of the S&P 500 over the last 40 years provides ample evidence that stocks always go up over the long term.  And there is no shortage of popular – and mindless – reasons why the good times won’t continue…

The stock market is not a bubble, you see, it is merely climbing a wall of worry.  Or, bull markets don’t die of old age.  And, don’t forget, the bull market is not over before the last bear capitulates.

But what if the stock market is not climbing a wall of worry after all? What if it is a massive bubble that indexers are fully invested in?  What will come along and pop it?

Ultimately, it doesn’t really matter what pops it. Every bubble eventually finds its pin.  When this bubble pops as all bubbles do, the remaining wealth of workers and savers, goaded into the market by Washington’s policies of mass dollar debasement, will die a painful death.

No doubt, traversing the final crack-up is apt to be a harrowing endeavor.


Charts by US Global Investors, 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.




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3 Responses to “Every Bubble Eventually Finds its Pin”

  • prattner:

    I think Mr. Gordon illustrates the current situation convincingly, but it is the pin popping that I’m not too sure about. If the Fed is actually supporting both government spending and the stock market with a limitless supply of funny money, what makes you think they will let it fall?

    They don’t have to, you know. They can stand in the way and buy stocks as they drop until the sellers are exhausted and everyone gets the idea that they are not going to let it drop. And congress hasn’t had a serious budget fight in a very long time, since there’s always more money to borrow.

    I have yet to see anyone prove to me they can’t or won’t do this. They certainly WANT to do it, because the alternative is the end of (their) world. They are also joined by the EU and Japan acting similarly in concert. All of them are eager to destroy their own currencies and do it together, so it takes longer for the frog to notice the boiling water.

    I suspect a different endgame: An unstoppable, rising stock market that never seriously drops, like Venezuela’s. This will go on until eggs are a thousand bucks each and Los Angeles is home to a million+ homeless.

    Nothing can make them stop so they ain’t gonna stop. Buy gold now.

    • utopiacowboy:

      I agree with you. There is nothing to stop them from continuing down the same path printing money to buy the government debt as well as propping up the stock market. As Bill Bonner likes to say, it’s inflate or die!

  • utopiacowboy:

    The key word is “eventually”. Ten years from now? Twenty years from now? The Japanese have piled on more debt than anyone could imagine yet they have not succeeded in debasing their currency. Life goes on.

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