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December 13, 2018 | What We Said to a Group of D.C. Elite

Is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and author of the daily financial column, Diary of a Rogue Economist.

DELRAY BEACH, FLORIDA – First, Bloomberg reports that:

U.S. government debt is on track this year to rise at the fastest pace since 2012, as a stronger economy fails to keep pace with the wave of red ink that’s rising under the Trump administration.

Total public debt outstanding has jumped by $1.36 trillion, or 6.6 percent, since the start of 2018, and by $1.9 trillion since President Donald Trump took office, according to the latest Treasury Department figures. The latter figure is roughly the size of Brazil’s gross domestic product.

Still, the Dow rose yesterday, as the papers reported “hints of progress” in the China/U.S. trade war.

But wars are easier to start than to stop. Stuff happens that neither party anticipated… which leads to other stuff… which, typically, leads to regrettable conclusions.

In the present case, we expect the Trump team is looking for a way to quietly drop the war and turn to other headline-making spats.

But now, with a high-level Chinese technology executive behind bars, China’s hackles are up… and it is likely looking for ways to retaliate, while keeping its merchandise flowing to the U.S.

 

 

Shutdown War

Meanwhile, Republicans are looking for a way to drop the “shutdown” war with the Democrats. They’re afraid a real shutdown would hurt them worse than their adversaries.

But who can back down without looking like a chump? And as we’ve seen over the last few days, nobody wants to look like a chump even if it is the best thing to do; chumps have fewer mating opportunities.

For our part, here at the Diary, we would encourage the president to stick with his shutdown plan. Not because we’d like to see the wall go up – it is a waste of money – but simply because we’d like to see the government shut down.

It would be a good reminder to people that they can’t trust the feds or depend on them for their support. And it would be a good rehearsal for when the feds finally run out of money and can’t keep the jig up any longer.

We were describing this grim future to a group in Washington on Monday night. “Tax cuts can give you a short-term boost,” we explained. “But the deficits are almost permanent. And they get worse as more people retire… and the wars continue. And now, mathematically and politically, there is no way to turn around. The election of Donald J. Trump was probably the nation’s last chance to avoid disaster.”

“Well then… how will this all end up?” came the softball question.

It was a meeting with a group of insiders… the D.C. elite… only two blocks from the White House.

We had given them our view – without much time to explain it in detail – that the money was fake,the interest rates were fake, the news was fake, the statistics were fake… and the boom, too, was largely fake.

We have a bubble economy, not an economy on a solid footing of rising wages, productivity, sales, and profits.

This was a Washington crowd, however. They guffawed and protested; they couldn’t imagine a problem that couldn’t be solved by federal “policy.” They couldn’t conceive of a disaster that couldn’t be averted by the smart people in the nation’s capitol. And they couldn’t believe that there was any facet of life that couldn’t be bent to suit them.

“Government built the interstate highway system,” they said, holding out Eisenhower’s program from 50 years ago – perhaps the last successful U.S. infrastructure program – as proof that the feds know what they are doing.

They proposed another big infrastructure “investment” to get the economy back on track, in case of another crisis.

We ignored their protests.

Instead, we answered their question.

 

How It Will End

“I’ll tell you how it will end,” we began. “The last crisis never corrected the mistakes of the previous boom; it wasn’t allowed to. Instead, the feds cut it off with their TARP program and ZIRP (zero interest rate policy).

“They poured about $5 trillion – fiscal and monetary stimulus – into the economy. Of course, they didn’t have $5 trillion, so they had to borrow the money. Or invent it out of thin air.

“The super-low interest rates they pushed onto the economy encouraged everyone to borrow rather than save. And so now, the debt problem is worse than ever.

“So the end will begin with another debt crisis. Most likely, businesses won’t be able to refinance their loans. The stock market will fall about 50% or more.

“Bonds will go up… in the short run… as investors try to save themselves from stocks. Real estate and other assets will fall.

“We know what will happen next. Donald Trump and the Fed will panic. Both will react to a downturn by trying to restore the bubble economy.

“The Fed will cut rates. But it only has 225 basis points worth of rates to cut. So, in order to make a cut equal to the last one it made in 2008-2009, it will have to go about 2.5% into negative territory. And it will buy stocks as well as bonds – just like the Japanese have done.

“And the Trump team won’t sit idly by, either. That’s when you’ll get your big infrastructure program. We’ll see a trillion-dollar boondoggle. And then the deficits will really explode.”

“And then what?” asked one of the group, skeptically.

“Then, we enter the gates of Hell. Merry Christmas.”

We do not expect to be invited back.

Regards,

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Bill

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December 13th, 2018

Posted In: Bill Bonner's Diary

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