This week, we’ve been exploring the age-old question: Who pays unpayable debt?

The borrower?

The lender?

Someone else?

Never normal

To make a long story short, when it comes to government debt, the borrower never pays; the feds have no money. The lenders — big banks, investment funds, well-heeled insiders — don’t want to pay.

Generally, they collude with the feds to make sure the real cost is put on innocent third parties — taxpayers and consumers.

That was the meaning of the Fed’s announcement on Wednesday. There will be no rate hikes this year.

Still, it was shocking that Powell & Co would cave in so fast. At least, Greenspan, Bernanke, and Yellen had enough sense of shame to wait for a crisis.

But here we are…at the tail end of a business expansion…with stocks near an all-time high and unemployment near an all-time low — and yet, the Fed’s key lending rate is barely above zero. Where’s the emergency? The Fed didn’t want to find out.

MarketWatch:

‘Even for a bond market bracing for an accommodative Federal Reserve, policy makers’ moves on Wednesday were a stunner, raising the specter of recession.

‘In particular, analysts said bond investors were taken aback by the sharp reduction of interest-rate-hike projections by the Federal Open Market Committee…the Fed announced plans to end the runoff of its $4 trillion balance sheet in September and downgraded expectations for gross domestic product in 2019 to 2.1% from 2.3%.’

Now, Fed governors have given up even the pretence of normalising…or any sort of prudent monetary policy. They’re just making up as they go along — desperately trying to protect their pals on Wall Street.

There’s a long, bumpy road ahead. You can’t anticipate the twists and turns along the way. But at least, we think we know where we’ll end up.

So, if you are wondering who gets stuck with the feds’ enormous debts, here is your answer: You do. And today, we look at the most likely way you’ll pay the bill.

Genius and a saint

The ranch’s ex-foreman — now retired — came to visit yesterday. Jorge grew up in a house with a dirt floor and never went beyond the eighth grade in school. But compared to PhDs at the Fed, US congressmen, and White House denizens of all grades, he’s both a genius and a saint.

‘What’s it like to live with 100% inflation,’ we asked.

‘Not so good,’ began the reply. ‘We go to the store as soon as we get our check. We can’t afford to wait.

‘They adjust the amount for inflation. But it is always the last inflation reading. So, they might increase the check by 2%, for example, because that was their official reading last month. But by the time I get the money, prices have gone up by 3%.’

Jorge worked from the time he was 14 years old until he retired at 65. The government promised a pension. But what happened to it? Where did it go?

‘When I was growing up on the ranch, there were no machines, no electricity, no telephones…Nothing. We started working as soon as we could walk…herding the goats and pulling weeds out of the garden. We pulled weeds all day. I remember when I was 6 years old, my hands would bleed every day.’

Jorge’s family traded potatoes for wheat, bringing its produce down to market on burros. There were no roads to the ranch. And, the money economy had not yet reached the valley.

But now, Jorge relies on the peso. And it is as shifty as a Fed governor.

Officially, prices are now rising by more than 3% per month. But inflation is a wily thing. Typically, the statisticians develop tricks and techniques which they believe help capture what is going on…but the results are often far removed from the experience of ordinary people.

The previous government — run by Cristina Fernández de Kirchner — simply lied about it. It claimed inflation was under 10%…when everyone knew prices were rising by 20% or 30% per year.

The new government vowed to provide honest figures. But tortured numbers provide unreliable information. Officially, the rate is 50% per year. As we reported yesterday, the real rate may be twice that high.

And so, the real cost of government debt falls on the heads of the common people.

Going backwards

‘What’s happening now is a disaster,’ continued our retired foreman.

‘Nobody can keep up. I fall behind every month. So does everyone. Businesses can’t keep up either. They lay off their employees. And then, you’ve got all these people in the city with no way to buy food.

‘That’s why some of these young men are here at the ranch. Like Natalio’s boys — Rodrigo, Guillermo, and Carlos. They used to work on construction projects in the city. But the building has pretty much stopped. So, they come up here…back to the ranch.

‘You can’t live high on the hog here in the country,’ said Jorge with a grin, ‘but you can always eat the hog.’

‘We used to eat only what we grew ourselves — mostly corn…potatoes. And of course, we always had meat. And cheese, from the goats. Not much variety. But it wasn’t bad.

‘Funny how it works. But now, we seem to be going backwards. These kids hoped to escape the hard work of the farm by going to the city. And when things were booming, they could work…get paid…and they had money to go out, buy cell phones, and so forth.

‘But now, they can’t get work. And they don’t have any money. So, they’re coming back. And they’re taking care of the goats…and planting potatoes and corn…

‘At least, in the country, they survive…’

 

Regards,

Bill Bonner