[4 min read] Dear Reader, At one point yesterday it looked like President Trump would win re-election. Then the US went to bed. He was ahead in the key swing state of Michigan and Wisconsin. But when the country woke up, he was marginally behind. What happened? The Federalist reports: ‘Then, something strange happened in the dead of the night. In both Michigan and Wisconsin, vote dumps early Wednesday morning showed 100 percent of the votes going for Biden and zero percent—that’s zero, so not even one vote—for Trump. ‘In Michigan, Biden somehow got 138,339 votes and Trump got none, zero, in an overnight vote-dump. ‘When my Federalist colleague Sean Davis noted this, Twitter was quick to censor his tweet, even though all he had done was compare two sets of vote totals on the New York Times website. And he wasn’t the only one who noticed—although on Wednesday it appeared that anyone who noted the Biden vote dump in Michigan was getting censored by Twitter.’ Something fishy is going on, folks. You simply don’t find 140,000 votes to zero in a swing state. Or any state for that matter. We won’t know the outcome of this election for a while. Not that the market seems to care. The major US indices surged overnight, with the NASDAQ up just over 4%. Go figure! But as I said yesterday, this election is just short-term noise. It won’t change the longer-term economic trajectory of the country. So let’s continue with our investigation into why this is the case. This is especially relevant given the market’s desperation for more fiscal stimulus in the US. If you missed part one from yesterday, click here. *** Why fiscal stimulus will only deliver a short-term economic boost, and leave the economy in a deeper hole when it washes through the system You’ve probably noticed that QE and central banks are getting less attention these days outside of periods of acute crisis. The ball is now in fiscal policy’s court. To give you some sense of the widespread nature of this, have a look at the chart below. It shows the fiscal stimulus packages in response to the ‘rona virus as a percentage of GDP. It’s massive… Surely you’d think this amount of spending will kick-start the global economy and generate solid growth? Not quite. Let me introduce you to Lacy Hunt. He has been managing a Treasury-only bond fund at Hoisington Asset Management for 40 years. The longevity of the fund and its performance, and Lacy himself, are legendary in the world of finance. Lacy is one of the best monetary economists in the world. His training and research credentials are impeccable. The following excerpt from Hoisington’s recent third-quarter investment update explains why you shouldn’t get too excited about all this fiscal stimulus: ‘Debt financed fiscal policy can provide a short-term lift to the economy that lasts one to two quarters. This was the case with the debt financed stimulus packages of 2009, 2018 and 2019. However, the benefit of these actions in 2009, 2018 and 2019, even when the amount of the funds borrowed and spent were substantial, proved to be very fleeting and the deleterious effects of the higher debt remain. Substantial econometric evidence indicates that government debt as a percent of GDP in all of the major economies are well above the levels where these detrimental effects occur. The multi-trillion dollars borrowed for pandemic relief in the second quarter encouraged the beginnings of a “V” shaped recovery, but this additional debt will serve as a persistent restraint on growth going forward. When government debt as a percent of GDP rises above 65% economic growth is severely impacted and becomes very acute at 90%.’ Hunt points out that all the world’s major economies, the US, Japan, Europe, the UK and China are all heavily indebted. In Australia’s case, we have relatively low government debt-to-GDP, but we are amongst the highest in the world when it comes to household debt-to-GDP levels. That’s a concern when it comes to considering the marginal productivity of debt. As Hunt writes (in relation to the US): ‘Total public and private debt jumped from 167.2% of GDP in 1980 to 364.0% in 2019, with an estimated record 405% at the end of this year. Gross government debt as a percent of GDP accelerated from 32.6% in 1980 to 106.9% in 2019 to an estimated 127% by the end of this calendar year. ‘As proof of this connection, each additional dollar of debt in 1980 generated a rise in GDP of 60 cents, up from 54 cents in 1940. The 1980’s [sic] was the last decade for the productivity of debt to rise. Since then this ratio has dropped sharply, from 42 cents in 1989 to 27 cents in 2019.’ So every dollar of new debt created in the US only creates 27 cents of economic output (or income). According to Hunt, these diminishing returns all but guarantee lower future interest rates (emphasis added): ‘Diminishing returns occur when a factor of production, such as debt capital is overused. This observation is confirmed by the decline in the marginal revenue product of debt. Economic theory demonstrates than when the MRP of a factor declines, the price received for that factor also declines. If, for example, labor is overused to the extent that its MRP declines, so do wages, the price of labor. Thus, the decrease in MRP of debt due to its overuse, indicates that interest rates, the price of debt, should fall. This is exactly what is happening in all the major economies of the world that are suffering from a debt overhang. Thus, considering decreasing interest rates as an inducement for governments to spend more borrowed funds will add to the severity of the debt spiral. If policy makers are incentivized to borrow more because interest rates are low, then the MRP of debt will fall, leading to even weaker growth.’ So fiscal stimulus in highly indebted economies due to the declining productivity of each additional dollar of debt will only have a short-term impact on economic growth. In Australia’s case, the recently announced fiscal measures are likely to result in relatively good growth for up to two quarters, or perhaps a little longer. Our debt levels are smaller than other nations and a good chunk of the stimulus promotes private sector spending (income tax cuts and tax breaks on investment), rather than direct government spending. Still, Australia is highly dependent on trade and unless there are more stimulus measures announced soon, you’ll see the global slowdown that was underway before the virus hit resume in 2021. To sum up then, expect the recovery to be over soon after it began. *** I’ll have part three for you tomorrow, which includes crucial analysis of the ‘shadow banking system’. The above perhaps explains why the market surged overnight. The market is betting on a Biden victory. The Democrats will approve a massive stimulus bill. It will work in the short term. And right now, that’s all the market cares about. But as I just explained. It will wash through the system and leave the economy in even worse shape… Regards, Greg Canavan, Editor, The Rum Rebellion ..............................Advertisement..............................How to spot stocks with ‘COVID immunity’ As you might know, small-caps as a whole have been outperforming larger stocks by some margin on the ASX this year. And micro-caps have been doing even better. The star attraction of small-caps is, if you find the right ones, you can make great gains even if the economy is getting shellacked...and if the wider market is falling. Both are the case for Australia this year. But there are small-caps out there with ‘COVID immunity’. You just need to seek them out. Click here for more. | ..........................................................................
The National Nightmare Begins By Bill Bonner [2 min read] ‘Well, the people have spoken…the bastards.’ Dick Tuck, candidate for California Senate, 1966 Yippee! A third of the nation is on the edge of joy. Another third is on the edge of a high window — ready to leap. And the other third — the smartest of the lot — doesn’t give a damn. Here’s the bad news: Like it or not, someone will be named the winner in yesterday’s presidential election. As of this morning, we still don’t know who. Either way…the national nightmare begins. That’s why the Dow rose 552 points yesterday. Investors figured that after the election — no matter which way it went — the coast would be clear for more bipartisan giveaways. More fake money, in other words, with more fake ‘growth’…more fake stock market gains…and more fake wealth. More debt And they’re probably right. Democrats are eager to put their man in office so they can wreck the economy with more federal spending and more debt. But they hardly need to bother. Donald Trump is doing a swell job already. Federal spending increased at a rate of $9 billion per month during the Obama years. Donald Trump increased it to $65 billion per month. And not even counting the first half of 2020 — in which COVID-19 caused a huge increase in government borrowing — federal debt rose at an average of $90 billion per month under Trump, compared to $76 billion per month under Obama. And once the election issue is resolved, one way or the other, debt will surely go up even faster. Well-worn template Here at the Diary, we are sanguine. Zen. Que sera, sera. There is nothing we can do about it. The country is run by an elite of politicians, economists, grifters, poseurs, bureaucrats, deep state apparatchiks, swamp scum, academics, media influencers, and Wall Street insiders, who have become predatory. They get their power and wealth by counterfeiting money and giving most of it — besides the pittance to voters — to their friends, their clients, and themselves. The counterfeit money then destroys the real economy, which the vast majority of people in the country depend on, leading to many long faces and short tempers. This road is well travelled…and well paved, with good intentions and bad. The deciders are corrupted by power and money…they spend too much…they print money to cover their excess spending…the economy goes to hell…the natives get restless. One generation learns; the next forgets. Empires rise and fall. And life goes on. Extended slump And since there’s nothing we can do to stop it, we have to find a way to enjoy it. But that won’t be easy. Coming down the pike is one of the roughest, most dangerous periods in US history. First, stocks will crash…when investors realise that the economy is in an extended slump. Then, the feds will fight the downturn with the only thing they have — more fake money. That is, they will inflate the money supply to make us all feel richer. Once underway, that train goes only in one direction — towards more and more money printing, which eventually leads to rising consumer prices. Already, in the 49 years since the pure paper dollar was invented, it has lost 96% of its value, measured in gold. The rest is bound to go, too…in the years ahead. Inflation, stagnation, depression — the elite will get richer as the Federal Reserve pumps up the stock market…and Zoom towns will become boom towns as those who can get away move as far away as possible from the danger zones. Deep resentment The rest — the 90% who are left — will scrounge for jobs…for income…and for a little justice in a collapsing society. This will lead to a deep feeling of resentment…that the ‘social contract’ has been broken…and a belief that violence is justified — either to set things right…or to keep them from changing. Already, many people feel that looting is protected by the First Amendment…others feel they are ‘owed’ because of an injustice committed more than 150 years ago. Many think that climate change…COVID-19…racism…and transgender rights…are no-compromise issues. They’re ready to overturn the Constitution to get what they want. What comes next? We have no way of knowing what will happen. But even a casual reading of history suggests that when the great unwashed masses of a nation begin to feel they’ve been cheated…the result is not very nice. And of course, they’re right. The counterfeit money system cheats them. It’s cheated them for the last 30 years…or more. But they don’t understand how it works. So instead, they blame the Mexicans. Or the Democrats. Or the Blue State governors. Or China. Or greedy capitalists. Or Donald Trump. And it’s going to get worse over the next four years. What can you do? How do you protect your money and your family? By tomorrow, we’ll have the election results…and we’ll look at what to do next. Regards, Bill Bonner, For The Rum Rebellion ..............................Sponsored..............................Breaking news on ‘Reset 2021’ The elites are planning to ‘reset’ the global monetary system. They’ve done it before in times of great global upheaval. According to Jim Rickards, it’s about to happen again. He’s been warning you about this all year. Then, in June, the World Economic Forum came out in the open with it. They’re even calling their next Davos meeting…wait for it…the ‘Great Reset’. According to Jim, this is going to be huge. And you need to prepare now for the fallout. But there’s yet ANOTHER intriguing twist to this tale… Find out what it is here. | .......................................................................... |