Friday, February 10, 2017

The Economy: "Ripped Off by Your Own Money"

"Ripped Off by Your Own Money"
by Bill Bonner

"In our recent meeting in Baltimore with former Fed chief Alan Greenspan, the wily old fox tossed a grenade. The discussion had arrived at the biggest topic in finance: WWDD? What would Donald do? Then the bomb exploded: ‘Tax cut? A tax hike is more like it…’

Divided readers: Mr Greenspan was explaining why President Trump’s program won’t work.  No tax cut, no Main Street boom. Readers ask why we are suddenly writing so much about politics generally…and Donald J. Trump specifically. We’ve been writing a daily column since the Clinton years. But rarely did we focus on government. And only twice have we gotten so much negative feedback from readers.

The first time was at the end of the 1990s when readers did not appreciate our view of the dotcom boom. ‘It’s a fantasy,’ we said. Then, after President George W. Bush invaded Iraq, they thought it was unpatriotic of us to say that it was most likely going to be a disaster. It turned out to be an even bigger disaster than we had imagined. Now President Trump has divided readers- one from another and us from many of them, too.

Unprecedented power: ‘Now, you need to pay attention to politics,’ says Ray Dalio, the manager of the world’s largest hedge fund. Understanding politics is now crucial to making investment decisions. Never before have we had a president with so much power (given to him by gutless courts and congresses over the last five decades). And never before have we had a president so ready to use it.

President Trump’s economic plan centers on cutting taxes and regulation while boosting government spending on infrastructure. The combination is supposed to double GDP growth rates, taking them back to where they were when America really was great. If this seems likely to you, you may want to keep your money in dollar-based assets and profit from the boom you see coming. If not, sell your stocks and bonds. They’ve had a marvellous 35-year run; time to get out. As to the regulations, we have no doubt our new president is on the right track. Regulations are win-lose deals. They impose restrictions, costs and requirements that get in the way of voluntary win-win deals. 

Remember, there’s no magic or mystery to our formula: S = rv (w-w – w-l)The net satisfaction in a society equals the real value of the win-win deals minus the cost of the win-lose deals. To make it super simple: The fewer deals in which someone is forced to do something he doesn’t want to do (win-lose), the better off we all are.

Three winners: The biggest win-lose deals in America fit into three major categories with three major winners– all of them swamp critters:
• The military-industrial-security complex at a rate of about $1 trillion a year, including the estimated $7 trillion bill for the Iraq debacle.
• The Wall Street-Fed complex, with its control of the fake-money system.
• The medical-pharmaceutical-zombie complex.

To ‘drain the swamp’, Mr Trump must take them on. Not just symbolically…not individually by calling out single companies and persons…and not by tweet. Instead, he has to slash their budgets, clip their crony deals and curb their power. He will have to limit their ‘wins’ so that the average American feels his burden lightening and his yoke loosening. And he can’t do it using any of the Fed’s trickery.

It is no use cutting taxes if government spending isn’t also cut. And there’s no use pretending to ‘stimulate’ growth by lowering borrowing costs. It won’t work. Central banks in the US, Japan and Europe have been at it for years, including the last seven years of near-zero interest rates. We’ve seen what happens. The rich get richer; the poor and middle classes lose ground.

Ultra-low interest rates mislead people. This causes misallocations of capital…and mistakes. The losers, in the real Main Street economy, stoop under the burden. The winners are flush as the funny-money funds Wall Street, the empire…and the welfare state.

Toxic excess: The best thing about this fake-money system- at least from the insiders’ point of view- is that the masses don’t know what is going on. Not one person in 10,000 understands how he is ripped off by his own money. And who knows how much military spending is enough? ‘You can’t be too safe,’ people say to one another.

Wrong! Everything is subject to the law of declining marginal utility. The more you have of something, the less each additional increment is worth to you. And as we explored in our book, "Hormegeddon: How Too Much of a Good Thing Leads to Disaster", the excess often becomes toxic.

One dessert is great. By the time you’ve eaten your fifth, you’re ready to throw up. Excess military spending is worse- it leads to meddling and reckless adventurism. As President Eisenhower warned in his farewell address, eventually, the military you pay to protect you becomes a danger- to you. Muddling into pointless wars and destabilizing foreign governments makes you less safe. And by the time you figure it out, and try to bring the spooks and soldiers under control, it’s too late. They have the guns, after all.

Butting heads with the deep state: We've described the three zombie-crony zones where no politician wants to go: entitlements, Wall Street and the Pentagon. The entitlees provide the votes. Wall Street provides the fake money. The Pentagon provides the fake enemies and the illusion of security. A friend wrote to suggest a fourth candidate: ‘I would nominate a fourth big deal in the win-lose category: the K–12/university-industrial complex. Run by the employees, for the employees. Consumes more than ten percent of GDP.’

Together, all these public-private complexes, with their win-lose deals forced onto the American people, cost the Main Street economy trillions of dollars per year. How do we know they’re win-lose deals? Because you have to pay for them whether you want them or not.

So if Donald Trump is to keep his promises, he must bring these programs under control, where he will butt heads with the biggest Deep State players. We discussed two of them: the military/security industry and Wall Street. We noted how hard it would be to cut off their funding in any serious way. Without spending reductions, tax cuts are meaningless and futile. They would lead to bigger deficits, which would have to be covered with more fake money. That would lead to more distortions…more mistakes…and end up leaving the average American even worse off.

Alan Greenspan said as much (or more!) when he met with our group last month: ‘I maintained for quite a while that our entitlements, which were legally mandated, are rising at such a pace that the data show unequivocally, going back to 1965, that the sum of gross domestic savings plus entitlements as a percent of gross domestic product [GDP] has been a constant. It wiggles a little bit (I shouldn’t say it’s a constant) but has no trend. That means, assuming that the driving force is entitlements– which it’s got to be because it’s mandated– every dollar increase in entitlements decreases the gross amount, the amount of gross domestic savings, by $1.

‘Since we can borrow from abroad and have now built up a debt of $8 trillion because our current account balance continued to erode, we’re now in a position where we can no longer keep gross domestic investment at a higher level in gross domestic savings or, in fact, even close. So we’re going to be in a position now where gross domestic investment, because it’s not being funded, will start to decline as a percent of GDP. If that happens, productivity growth will slow from where it is even now. And that means that GDP per capita is going to rise hardly at all.’ Using fewer words, Dr Greenspan’s point was…the more a government spends, the less an economy grows.

Scoundrels and chumps: We focus now on the crony-zombie complex that is expanding fastest and probably has the widest public support: entitlements. Since 2000, the economy has doubled. Federal spending on medical care has gone up five times.

Rare is the voter who minds a win-lose deal if he thinks he is on the winning side. And he’s happy to vote for the politician who gives it to him. This makes spending on medical care, drugs and pensions particularly difficult to stop. In the swamp itself, the cronies fight hard to protect it. And many voters, too, want it to continue.

Drug makers, hip replacers, hospitals- they all lobby for more ‘public support’ from the feds. Already in Japan, more adult diapers are sold than baby diapers. As the US population ages, too, the nappy makers are looking forward to fat years. The customers, too, want more of other people’s money. Old people want fat pensions and thin medical care bills. And old people vote. As the medical/pharmaceutical industry rolls out new drugs and new treatments, how can the geezers say no? Someone else is picking up the tab.

Entitlements- like insults- are easy to throw out and hard to take back. In the past, politicians could bribe older voters with ‘social welfare’ spending. As long as the economy grew fast enough, there was no problem. Yesterday’s promises could be covered with today’s revenues. But now, the economy is growing only about half as fast as it did when America really was great- in the 50s and 60s.

The number of young people paying taxes is going down…and they earn no more than their parents. So, projected federal revenues need to be marked down, too. Many retirees think they already ‘paid for’ their benefits. Maybe they did. But the feds spent the money on other crony-zombie projects. So, the only way they can make good on their promises is to squeeze younger citizens. And when that blood runs out, they have to borrow…which means squeezing the money out of an even younger group, some of whom haven’t even been born yet.

Old people win. Young people lose. This makes scoundrels out of us and chumps out of the young. But the scoundrels like it and the young don’t vote.”

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