There are several things on our plate this morning — some of them unpalatable.
But let us begin with the question we promised to answer. A dear reader wrote in with a suggestion:
‘Bill, you’re right about how capitalism is supposed to work. But you don’t work that way. You don’t give your customers what they want. You give them what you think they should have. As many of my fellow readers have pointed out, you’d make a lot more money if you got on the Donald Trump bandwagon and stopped annoying us by criticising him.’
As we will see, the answer will take us on a brief ‘tour des catastrophes’ — from desperate Venezuela to plummy London…and from the past into the future.
No more normalising
Venezuela was once a rich country. Its present affliction was self-induced…and predictable.
It’s what happens when you mix bad politics (forcing win-lose deals on people) with bad money (forcing people to use fake, win-lose currency).
Put the cronies in charge of business. Let the loyal apparatchiks control prices. Then, print money to cover your deficits. What could go wrong with that programme?!
But once you start down that road, it is hard to turn around. There are no wide shoulders. No parking lots where you can stop to think it over. No exits that allow you to make a smooth departure.
Even slowing down is out of the question.
That is the real meaning of Jerome Powell’s Fed’s policy statements. It was supposed to back up and ‘normalise’ both its interest rates and its holdings.
But when it saw the crashes piling up in the fall of 2018, it panicked. No more normalising! Instead, its next move is likely to be another interest rate cut, not a rate hike.
Grand larceny is a hard habit to stop — for Europeans as well as Americans. From The Wall Street Journal:
‘For five years, European nations have been trying to jump-start their ailing economies with what was supposed to be a radical, short-term remedy — negative interest rates.
‘Instead, central banks haven’t been able to wean their economies off them. Increasingly, they appear to be a permanent feature of the landscape. No major bank that introduced negative rates during Europe’s debt crisis has turned main policy rates positive again.’
The baker doesn’t stop baking. The plumber doesn’t stop plumbing. And the thief doesn’t stop thieving. They need the money!
Which is how we get from the biggest disaster of the 21st century — Venezuela — to an even bigger disaster. And it’s how we get back to London…and to our first question.
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Cost of over-reaching
You’ve read this before; it’s not the first time we’ve mentioned it. But people come to think what they need to think when they need to think it. Markets make opinions, as the old-timers say.
In geopolitical terms, the hegemonic power sees itself as master of the world. Its people — especially its leaders — come to think that they should be masters of fishes and fowl…of forest and field…of everything and everyone. Even over how their allies get their natural gas…and what their own people pay for dishwashers and TV sets.
Thus, do they over-reach…until they are smacked in the mouth by an indifferent and unforgiving Nature.
Over-reaching costs money. The cost of keeping US forces garrisoned in 140 different countries, for example, is approaching $1 trillion per year — about the same as the US annual deficit.
And in a popular democracy, the masters of the master nation must bribe the servants to stay in power. Free education. Free pills. Tax cuts. Hey…let our children pay for them!
And not just that. The masses want protection from a world that has grown hostile. Protection from terrorists abroad…from Toyotas and Huawei in our midst…and from drugs and devils sneaking across the border.
All of that costs money, too. Blocking trade (a tax on consumers) raises costs and reduces output.
Giving some people something for nothing means that other people will have to give up something in exchange for nothing. They lose motivation. GDP goes down.
The feds’ heavy, win-lose foot grows heavier on the gas pedal…as the road ahead narrows and the potholes grow deeper. London races ahead, juiced by the rich credit flow, while distant parishes and precincts, and the old, industrial heartland, can barely keep up.
All on board
It should be obvious that spending more than your income — with no plausible plan for bringing the two numbers into balance — will eventually cause bad things to happen. But the longer they don’t happen, the more people permit themselves to think they will never happen.
Over time, everybody gets on board. Republicans used to preach balanced budgets; now, they are happy with the biggest deficits in peacetime history.
They used to preach free trade, too; now, they support the highest tariffs since Smoot-Hawley…nearly the highest in the developed world.
Even hypocrisy goes out the window. Instead of claiming to support free market capitalism, billionaires and conservatives now say it needs to be ‘reformed’ and ‘controlled’ — as if you could teach the wind not to blow so hard or stretch the days to give you more time to enjoy your evening beer.
Which is why we are not on the Trump bandwagon.
Details to follow…
Regards,
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.