December 18, 2020 | The U.S. Government’s Handouts Create Consumption, Not Production

WEST RIVER, MARYLAND – As expected, red and blue have come together into a deep mauve of tomfoolery.

Here’s TIME Magazine:

Senators Josh Hawley of Missouri and Bernie Sanders of Vermont share very, very little of their political DNA, but they each came to the conclusion that those stimulus checks are both politically popular and financially necessary. So the young-man-in-a-hurry conservative and the self-described democratic socialist have joined forces on perhaps their lone spot of agreement, becoming 2020’s oddest Washington couple.

Don’t confuse their potential success with bipartisanship. Hawley and Sanders come at the stimulus checks from completely different camps, but recognize their shared goal matters more than their ideological footholds.

Keeping the jig up is the name of the game, for Democrats as well as Republicans.

And it doesn’t matter how much it costs… or how much damage it does.

But wait… Newsweek reports that not everyone is on board.

Congresswoman Ayanna Pressley said it would be an “insult” to send Americans $600 stimulus checks after they were forced to wait months for Congress to reach a deal on a second COVID-19 relief bill.

For what it is worth, we are with Ms. Pressley. It is an “insult” to give people money they haven’t earned, treating them as if they were beggars, derelicts, or bums.

Besides, it will only make them poorer.

Bonner’s Law

This week, we have been exploring Bonner’s Law. It describes something that is not a misdemeanor, but a capital crime – a massacre of real wealth.

The gist of it is simple. Real savings are hard to come by. Fake savings are cheap and easy. But a seller can’t tell one from the other.

Bought with fake savings, real wealth is consumed by households… misallocated and wasted by businesses… and squandered by the government.

It is one thing to say that “stimulus” doesn’t work. That is easily shown.

The U.S. economy grew by 3% to 5% during the pre-stimulus years, up until the end of the 1980s. Thereafter, the feds provided stimulus up the wazoo… increasing the Federal Reserve’s balance sheet almost eight times faster than the GDP growth rate.

If stimulus really worked, “growth” should have gone off the charts.

Instead, it sank… decade after decade…

And during the Trump administration, it reached its lowest level since the end of World War II, with an estimated average annual GDP growth rate of less than 1%.

And in 2020, despite the biggest “stimulus” effort ever, tax receipts for November are still down 13% from 2019.

Killing Capital

We saw yesterday that the Soviets and the Chinese applied “scientific,” Marxist principles to their economies. It is worth taking a moment to look more carefully.

They took raw materials – iron ore, oil, etc. – and worked them into finished products. But on the world market, their products were worth less than the value of the raw materials!

That is, they reduced the natural wealth of the resources themselves. Scientific management created a “value subtracting” economy, wasting their capital… and their wealth.

The Difference Is Capital

But to understand what is going on, we have to turn not to Marx, but to Jean-Baptiste Say. The classical French economist showed that “you buy products with products,” not with money.

There was nothing especially wrong with the Soviet Union’s currency. The notes were nicely rendered, with drawings of head of state Vladimir Lenin on the 1-, 5-, and 10-ruble notes.

But industries were owned by the government. They enjoyed monopolies… and were run by government-appointed functionaries.

With no incentive to improve them, their products were often shoddy and obsolete. If consumers had a choice, they preferred the products of Western Europe or America.

The currency barely mattered; the Soviets had no products with which to buy products. They got poorer and poorer.

We have the same number of hours in a day as the Soviet worker… or the most primitive tribesman in Borneo. We also have access to about the same amount of “raw materials” – wood, sun, minerals, water.

The difference is capital, the means of production – tractors, trucks, factories, knowhow, customs, and fuel – that allow us to produce more from the same resources. That is what gave us material riches on a scale that the hunter/gatherer cannot even imagine.

Wealth Destroyer

Money is neither wealth nor capital. It is what we use to measure them.

It is also a convenient way to store them. You work all year writing a book. You sell it to a publisher. The money you get represents the year’s worth of work. If the money is honest – like gold – you can store that wealth for generations.

Paper currency, if properly backed by gold – where you can trade your paper for gold at a fixed rate – can be decent money, too.

But if a government simply “prints” money, as if it were real capital, it cheats people, weakens the economy, and makes us poorer.

In an honest money system, a $20 bill would be proof that someone, somewhere, sometime earned it… by creating $20 worth of real wealth. You could then spend the $20, happy in the knowledge that between the consumption and the production, the world came out even.

Not so with the counterfeit $20. That is consumption with no offsetting production. It drains away wealth; it doesn’t add any. It takes, but it doesn’t give. It is a wealth destroyer.

Fake Savings

We saw yesterday, too, that by giving away money, the U.S. encourages consumption, but not production.

Real savings represent real increases in goods and services, distilled into “money.”

Fake savings – “printed” promiscuously by the feds – represent nothing.

Say’s Law – and common sense – tells us that you get richer by producing more, not by consuming more. And you produce more by taking your savings and innovating, inventing, building factories and railroads – making capital investments that lift output.

Instead, people take their relief checks… and spend them. No new products are created. They are simply consumed.

And it is not just households that consume wealth. The fake-money giveaways also encourage businesses and governments to do the same.

Real savings are lent – by buying bonds – to industries who have to make sales and profits so they can repay the loan. They have to increase output or they can’t borrow.

But the Fed’s fake savings create a whole different financial ecosystem.

First, the Fed introduces its fake savings by buying bonds, thus depressing interest rates and discouraging savings. (Why bother to save, if you have to pay someone to borrow your money?)

Today, worldwide, there is about $18 trillion in negative-yielding bonds. A negative yield means that the capital itself is steadily eaten away, like a steel bridge attacked by rust.

Then, businesses are perverted, corrupted, and undermined by the fake capital lent at fake rates. The real interest rate on U.S. 10-year Treasury bonds has been negative for almost all of the last 10 years. Blue chip companies found they could borrow at rates barely above inflation. Naturally, they borrowed heavily.

Killing Growth

And what did they do with the borrowed money? Did they build new factories? Did they train new workers? Did they produce more goods and services?

You know the answer as well as we do.

No… They returned the money to their shareholders and managers.

The managers were encouraged to use the “free” money to do mergers and acquisitions… or simply to buy their own company’s shares. They earned bonuses, not based on how much new innovation and output they added, but on the basis of how much of the cheap money they were able to divert to themselves and their shareholders.

Over the last 20 years, the S&P 500 companies alone have sunk some $20 trillion down these rabbit holes.

In other words, the fake money, given out to boost “demand,” is not just worthless… it is corrosive. It doesn’t merely fail to reward real capital growth; it kills it.

Wasteful Spending

Government spending is inherently wasteful. It produces goods and services that few people would willingly pay for. (If that were not the case, there would be no need for government… Private industries could compete to provide these goods and services more efficiently.)

In an honest economy, government spending is limited by the ability and willingness of the taxpayers and lenders.

But along come the feds, with their fake savings and zero interest rates. They can now fund projects – say, the War on Terror… bailouts… boondoggles… diversity training… lockdowns – and throw away trillions of dollars’ worth of real capital and real wealth (machines… brains… time… fuel… factory output…).

This year alone, the feds will flush some $3 trillion down the drain – above and beyond tax receipts.

Glorious Future

But wait, the worst is still ahead.

Janet Yellen, our soon-to-be Secretary of the Treasury, has proposed using the Fed’s fake money to buy stocks. The stock market is, of course, where America’s leading capital companies are traded. How long will it be before Josh Hawley and Bernie Sanders get together on that, too?

Then, American industry – like Soviet industries before them – will be bought up with the government’s ersatz savings… and operated on a more “scientific” basis.

Oh… what a glorious future lies ahead – its face ghostly, its crooked finger beckoning!

The voters will overcome their pride, bury their residual dignity, and accept whatever paltry checks the elite offers them. Businesses will be lent money at negative rates; and they will take their bailout money as if they had a right to it.

And the feds – flush with fake capital and fake do-goodism – will print as much new money as they want. They will toss it around like party favors… bribing their friends… bludgeoning their enemies… and buying up America’s leading capital enterprises.

Full Control

And then, finally, paradise will be achieved…

The experts will be in full control – of households, businesses, and the government… of Wall Street and Main Street… of universities and the press – all of whom will depend on the fake money just to keep going.

And we will all shuffle around like zombies…

…until the whole system blows sky high.

Regards,

Bill

Bill Bonner December 18th, 2020

Posted In: Bill Bonner's Diary

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