Something for Nothing

The world is full of bad ideas.  Just look around.  One can hardly blink without a multitude of bad ideas coming into view.  What’s more, the worse an idea is, the more popular it becomes. Take Mickey’s Fine Malt Liquor.  It’s nearly as destructive as prescription pain killers.  Yet people chug it down with reckless abandon.

 

Looking at the expression of this Mickey’s Malt Liquor tester one might initially get the impression that he is disappointed. We assure you that is not the case – this is actually his happy face, he is probably just about to enter Nirvana. Countless taste tests prove it, see this comparison of the “entire bottom shelf” of malt liquors, or these cost-conscious routiniers. Not to forget, it comes either in cans or in shatterproof plastic bottles. [PT]

 

Or consider central banking.  Has any other single idea extracted more wealth from the lowly wage earner?  The Federal Reserve’s backdoor taxation program has snookered honest hard-working Americans for over 100 years.

Why is it that bad ideas are often received more favorably than good ideas?  Perhaps, it is because bad ideas generally promise something for nothing.  That one can live off the coerced philanthropy of one’s neighbors.  That one can get more out of one’s retirement fund than one puts in.

Promises of fruits without labors are fantastical.  They’re also the surefire way for politicians to get elected.  How can it possibly be a good idea to spend more and tax less, and fill the gap with more and more debt?  From a sound fiscal management perspective this is a terrible idea.  Certainly, a policy to spend less and tax less would be a much sounder idea.  But for a politician looking to win votes, promising something for nothing is the only way to go.

This is because people often do the exact opposite of what they say.  People may say they’re against bigger government.  But these same people will always vote in their self-interest, especially if they believe they’ll get something for nothing.  That is, they’ll always vote for promises of government handouts if they believe they won’t have to pay for them.

 

US debtbergs: total credit market debt as of Q2 2017 and total federal debt as of Q3 2017. The sustainability of these large debts is rather doubtful (economic output grows at a much slower pace). [PT]

 

Self-Cannibalization

The fact is the present American system of democratic mob rule has devolved to self-cannibalization.  By consuming itself, the nation can temporarily live beyond its means.  This dynamic is best observed by looking at the growth in federal debt since the turn of the century.

When Y2K came and went without a hitch the federal debt was about $5.6 trillion.  Today it is over $20.6 trillion.  In just 18 years the federal debt has increased by over 265 percent.  Over this same period, real U.S. gross domestic product has only increased from about $12.5 trillion to about $17 trillion – or roughly 36 percent. This, as far as we can tell, is a recipe for disaster.  Still, this isn’t the half of it…

You see, this growth in national debt relative to national income coincided with a corresponding growth in something for nothing policies.  This growth in national debt relative to national income also occurred during a period of especially cheap credit.

Cheap credit, however, can also give way to expensive credit.  And as interest rates rise, the net interest payments to service the debt also rise.  For example, net interest payments on the national debt for fiscal year 2017 were about $266 billion, while the yield on the 10-Year Treasury note was 2.8 percent.

 

30 year bond yield since 1942: the sample size under the modern fiat money system is as small as it gets, but this chart suggests that interest rates are likely subject to very long term cycles. Whether the long term downtrend is already over is not certain yet,  but if it is, the situation for the mountains of debt shown above will become quite  problematic . [PT]

 

Assuming the 10-Year Treasury note yield increases to 4 percent by fiscal year 2026, it is projected that $787 billion of the government’s budget will have to be diverted to debt service.  This would nearly double the percent of the budget allocated to paying interest from 6.5 percent to 12.2 percent.

But what if the 10-Year Treasury note yield rises to a much higher level than 4 percent?  What if it jumps to over 15 percent like it did in 1981?  That would likely mean the entire budget, and then some, would be needed just to service the debt.

This is where self-cannibalization ultimately leads.  In the meantime, something for nothing bad ideas continue to be brought forth as solutions, with varying degrees of reception…

 

The Donald Saves the Dollar

Many years ago, in an article titled Chasing the Wild Goose in Davos, we provided a detailed account of the yearly pilgrimage of the world’s best and brightest – and richest – to the World Economic Forum in Davos, Switzerland.  If you are unfamiliar with the event or need a brief refresher, we suggest you give it a read.

We mention this because the 2018 World Economic Forum took place this week.  We weren’t invited this year.  Nonetheless, from what we gather, Treasury Secretary Steven Mnuchin – a Goldman guy – dropped a turd in the swimming pool when he pitched his latest something for nothing strategy.  On Wednesday, with a smile and a straight face, he explained how a weak dollar is great boon to the American economy:

 

“Obviously a weaker dollar is good for us as it relates to trade and opportunities.

 

Treasury secretary Steven Mnuchin holding a fistful of dollars. His wife seems happy enough, but the unnamed bureaucrat in the background looks as if he’s afraid Mnuchin might make off with the freshly printed sheet (this picture definitely calls for a caption contest…) [PT]

Photo credit: Jacquelyn Martin

 

Following Mnuchin’s remarks, the dollar furthered its declining trend – sliding to its lowest value in three years as measured by the Bloomberg Dollar Index.  These remarks also put Mnuchin at great odds with his international counterparts, who outnumber him by far.  That was when the sharks began to circle…

On Thursday morning, IMF Managing Director Christine Legarde requested clarification. Then ECB President Mario Draghi expressed concern that Mnuchin was violating an international agreement not to talk down one’s currency. Hence, Mnuchin was forced to restate his position:

 

“I thought my comment on the dollar was actually quite clear yesterday.  I thought it was actually balanced and consistent with what I’ve said before, which is we’re not concerned with where the dollar is in the short term, it’s a very, very liquid market, and we believe in free currencies. And that there’s both advantages and disadvantages of where the dollar is in the short term.  Let me say, I thought that was clear.”

 

Sensing blood in the water, Bridgewater Associates Chairman Ray Dalio – a man who misconstrues his bank account with his IQ – went in for the kill with a “five point” Linkedin post titled, Mnuchin’s Comment on the Dollar.

Then, with Mnuchin gushing blood in foreign waters and encircled by hostile great whites, something remarkable happened.  Mnuchin’s boss, The Donald, also in Davos, came to his rescue:

 

“The dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar.  Our country is becoming so economically strong again and strong in other ways, too.” Trump added that he thought Mnuchin’s comments had been taken out of context.

 

At the precise moment The Donald spoke, the dollar ticked up.

 

US dollar index, daily – from a technical perspective, the dollar was already more than ripe for a bounce when Mnuchin made his remarks. Currency trends tend to be very “sticky” though and at the moment it doesn’t look like it is getting “stronger and stronger”. [PT]

 

Charts by 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.

 

 

 

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

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Stock Market Manias of the Past vs the Echo Bubble
      The Big Picture The diverging performance of major US stock market indexes which has been in place since the late January peak in DJIA and SPX has become even more extreme in recent months. In terms of duration and extent it is one of the most pronounced such divergences in history. It also happens to be accompanied by weakening market internals, some of the most extreme sentiment and positioning readings ever seen and an ever more hostile monetary backdrop.   Who's who in the zoo in...
  • All the Makings of a Major Economic Fiasco
      Mud Wrestling: Trump vs. Xi About 6,940 miles west of Washington DC, and at roughly the same latitude, sits Beijing.  Within China’s massive capital city, sits the country's paramount leader, Xi Jinping.  According to Forbes, Xi is currently the most powerful and influential person in the world.   Papa Xi, the new emperor of China. [PT]   Xi, no doubt, is one savvy fellow.  He always knows the right things to say.  He offers the citizens of his nation the...
  • How the Global Trade Contraction Begins
    Historical Evidence The world grows increasingly at odds with itself, with each passing day.  Divided special elections.  Speech censorship by Silicon Valley social media companies.  Increased shrieking from Anderson Cooper.  You name it, a great pileup is upon us.   It was probably Putin's fault (just a wild guess) [PT]   From our perch overlooking San Pedro Bay, the main port of entry for Chinese made goods into the USA, facets of the mounting economic catastrophe come...
  • TARGET-2 Revisited
      Capital Flight vs. The Effect of QE Mish recently discussed the ever increasing imbalances of the euro zone's TARGET-2 payment system again in response to a few articles which played down  their significance. He followed this up with a nice plug for us by posting a comment we made on the subject. Here is a chart of the most recent data on TARGET-2 available from the ECB; we included the four largest balances, namely those of  Germany, Italy, Spain and the ECB itself.   The...
  • When the Freaks Run Wild
      Conditioned to Absurdity The unpleasant sight of a physical absurdity is both grotesque and interesting.  Only the most disciplined individual can resist an extra peek at a three-legged hunch back with face tattoos.  The disfigurement has the odd effect of turning the stomach and twisting the mind in unison.   Francesco Lentini, the three-legged man. Born in Sicily in 1881 with “three legs, four feet, sixteen toes and two pair of functioning genitals” he made a career of...
  • Gold Sector – An Obscure Indicator Provides a Signal
    The Goldminbi In recent weeks gold apparently decided it would be a good time to masquerade as an emerging market currency and it started mirroring the Chinese yuan of all things. Since the latter is non-convertible this almost feels like an insult of sorts. As an aside to this, bitcoin seems to be frantically searching for a new position somewhere between the South African rand the Turkish lira. The bears are busy dancing on their graves.   Generally speaking bears have little to...
  • Separating Signal from Noise
      Claudio Grass in Conversation with Todd “Bubba” Horwitz Todd Horwitz is known as Bubba and is chief market strategist of  Bubba Trading.com. He is a regular contributor on Fox, CNBC, BNN, Kitco, and Bloomberg. He also hosts a daily podcast, ‘The Bubba Show.’ He is a 36-year member of the Chicago exchanges and was one of the original market makers in the SPX.   Todd “Bubba” Horwitz and Claudio Grass   Before you listen to the podcast, I would like to...
  • What Have You Done For Me Lately? Precious Metals Supply and Demand
      Aragorn's Law or the Mysterious Absence of the Mad Rush Last week the price of gold dropped $8, and that of silver 4 cents.  There is an interesting feature of our very marvel of a modern monetary system. We have written about this before. It sets up a conflict, between the perverse incentive it administers, and the desire to protect yourself in the long term.   Answer: usually when it is too late... [PT]   Consider gold. Many people know they should own it. They...
  • The Midas Touch Gold Model
      Introductory Remarks by PT Dear readers, we are hereby beginning to publish material from a new author, Florian Grummes of Midas Touch Consulting. Some of you may already know Florian from his contributions to recent issues of the annual “In Gold We Trust” report by Incrementum. He is a well-known and highly respected market analyst (particularly of gold and cryptocurrency markets) in the German-speaking parts of the world and we hope we will be able to contribute a bit to making his...
  • An Inquiry into Austrian Investing: Profits, Protection and Pitfalls
    Incrementum Advisory Board Discussion Q3 2018 with Special Guest Kevin Duffy “From a marketing perspective it pays to be overconfident, especially in the short term. The higher your conviction the easier it will be to market your investment ideas. I think the Austrian School is at a disadvantage here because it’s more difficult to be confident about your qualitative predictions and even in terms of investment advice it is particularly difficult to be confident in these times because we...
  • Climbing the Milligram Ladder - Precious Metals Supply and Demand
    FRN Muscle Flexing Shh, don’t tell the dollar-paradigm folks that the dollar went up 0.2mg gold this week. Or if that hasn’t blown your mind, the dollar went up 0.01 grams of silver. It’s less uncomfortable to say that gold went down $10, and silver fell $0.08. It doesn’t force anyone to confront their deeply-held beliefs about money. But it does have its own Medieval retrograde motion to explain.   Even the freaking leprechaun is now offering government scrip...  this really...
  • Introducing the Seasonax Web App
      Closing the Affordability Gap Up until recently, the Seasonax app was only available to users of Bloomberg or Reuters terminals, putting it out of reach of most non-institutional investors. This has now changed. A  HYPERLINK "https://app.seasonax.com/"web-based version has become available which anyone can use, and it comes at a much lower price point as well. When visiting the site where the app is hosted, this is the welcome screen:   Featured patterns at the Seasonax web app...

Support Acting Man

Item Guides

j9TJzzN

The Review Insider

Dog Blow

Austrian Theory and Investment

Archive

350x200

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!
 

Oilprice.com