Why Deficits ‘Don’t Matter’


Bitcoin is making itself useful. Bloomberg is on the case:

‘Bolívar to Bitcoin Market Hits Record $1 Million Per Day’

‘The Venezuelan bolívar to bitcoin market reached a record on Tuesday, as the dollar-starved nation increasingly seeks the digital token in exchange for its nearly worthless currency.’

Venezuela is a disaster. Inflation is expected to hit 13,000% this year.

But disaster isn’t sedentary. It’s nomadic. And our guess is that it is headed our way.

Doom index

First, let’s turn to the research department to find out how close it might be…

What’s up with the Doom Index?

As you recall, our researchers — led by the indefatigable Joe Withrow — came up with a way to tell when a crash was likely to happen. We call it the Doom Index.

No guarantees, because these things are unpredictable. But a measure based on a broad group of indicators should be more reliable than your editor’s hunches, right?

Well, who knows.

Here’s an update from yesterday:

‘The Doom Index spiked up to 7 — our extreme warning level — back in January…and it will remain at 7 for at least another three months based on first-quarter numbers.

‘But it is not signalling the crash alert flag…yet.

‘What has kept the crash alert flag in storage — and perhaps what will keep the markets chugging along for another quarter — is an uptick in credit growth. After falling to 1.6% last quarter, credit growth increased to 2.4% during Q1 2018.

‘Remember, we are leaning on economist Richard Duncan’s analysis here. Duncan says that the modern economy requires at least 2% credit growth to avoid recession. So 2.4% is just enough to avoid a Doom Point.

‘On the flip side, there was a sharp drop in non-farm payrolls. Non-farm payrolls steadily increased for 29 consecutive quarters — that takes us back to 2010. But they plunged 1.2% during Q1 2018. 1.2% sounds like a small move, but that’s the biggest drop in non-farm payrolls since the start of 2009.

‘So we saw an uptick in credit growth, but a fall in wages this past quarter. Perhaps those two moves are related…I don’t know…But we find ourselves right back where we were in January.’

Okay. ‘Extreme warning’. But no crash yet.

Got that? 

Real catastrophe

And while the data is giving us an ‘extreme warning’, so are the fundamentals — which is why a catastrophe may be headed towards us…and why there may be no way to avoid it.

Markets go up and down all the time — sometimes sharply.

People never know what things are worth. They discover prices by bidding against one another. And human beings tend to overdo it.

They get overly optimistic or overly pessimistic…driving prices too high or too low…causing mini-booms and panics.

Between the end of the War Between the States and the Great Depression, there was the Panic of 1873, the Panic of 1884, the Panic of 1893, the Panic of 1901, the Panic of 1907, and the Depression of 1920–21.

The pain and damage done by these setbacks varied. But generally, they came and went. Markets quickly adjusted. Prices fell. Companies went broke. Entrepreneurs and speculators picked up the pieces…and got back to work.

Anyone can make a mistake. But if you want a real catastrophe, you need the government. The feds began to ‘do something’ about these periodic overshoots following the crash of ’29. The result was the Great Depression.

Then, the Federal Reserve got in on the action.

Taking away the punchbowl

The Fed was set up in 1913. At first, its job was modest: to protect the currency and make sure the big banks made money.

This it did cautiously, at first, by ‘taking away the punchbowl’, as former Fed chief William McChesney Martin described it, when the party started to get out of hand.

It wasn’t until the 1980s that the Fed became the life of the party itself. By then, the US had a new currency (the ever-stretchy, post-gold-backed dollar)…and the politicians had realised that ‘deficits don’t matter’.

They didn’t seem to matter because beginning in the late-’80s, the Fed was no longer restraining excess spending…it was enabling it.

Deficits used to draw down the nation’s savings. That’s because the feds had to borrow to fill in the hole. And when you borrowed, you borrowed what someone else had saved.

No more. The new dollar and the Fed’s low interest rates made real savings irrelevant. The Fed dropped interest rates to make saving unattractive…and covered the deficits with fake savings — credit it invented ‘out of thin air’; it bought US Treasury bonds itself.

Back when the feds had to borrow real savings to close the gap between outlays and tax receipts, there was a natural limit on what they could spend.

If they borrowed too much, they ‘crowded out’ private borrowers. Interest rates rose. Savings increased. The economy cooled down. And tax receipts fell.

Every lawmaker knew that the federal government had to manage its finances responsibly. Neither party wanted to get a reputation for incompetence with money.

But now, all that has changed. The illusion of abundance — provided by the Fed’s EZ-money policies — has bamboozled them all.

More to come…


Bill Bonner,

For Markets & Money

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money