BUENOS AIRES, ARGENTINA – First, a news update.
The Washington Post:
The Republican Party has largely abandoned its platform of fiscal restraint, pivoting sharply in a way that could add trillions of dollars in federal debt over the next decade.
Cutting spending to balance the budget was almost religion to the Republican Party for much of the past eight years. But all year long, despite their control of the White House and Congress, Republicans have not taken steps to balance the budget, to overhaul entitlement programs such as Medicare and Medicaid, or to arrest the growth of the country’s $20 trillion in debt.
Off the Rails
No kidding! Here’s the short version of what will happen…
Neither Republicans nor Democrats will show any interest in fiscal restraint; deficit spending will increase; the Deep State wants it.
The Fed won’t force restraint; instead, it will facilitate more deficit spending; the Deep State needs it.
This train is going to be running wide open until it flies off the rails; the Deep State deserves it.
Which brings us to… the “Warsh Call Option.”
Our speech in London described how Team Trump had failed to slow win-lose deals both at home and abroad… and why debt will continue to expand until the bubble pops.
Win-lose deals proliferate because the insiders who control government – aka the Deep State – want them to continue.
These insiders aren’t going to raise taxes on themselves… nor are they going to cut their privileges and benefits. This leaves them dependent on cheap credit from the Fed.
But why can’t it just go on, as it has for the last 30 years?
Real money – gold – survives market crashes and depressions. Because it represents real wealth.
But this system runs on credit money, not real money.
It’s like the difference between owning a stock outright… and owning a stock “on margin” (with funds borrowed from your broker).
You still own the former, even after a crash. But the latter can get “called away” from you.
So, too, is credit money called back home when the cycle turns down. From nothing it came; to nothing it returns. Hallelujah!
Real money deservedly takes its place on the right side of the balance sheet. It is an asset. It represents goods and services. Real wealth.
But credit-based money should be on the left side of the balance sheet, the sinister side.
It is a liability. It represents a claim on work that has not been done, products that have not been produced, wages that have not been earned, and profits that have not been booked.
Hell to Pay
“The real problem,” we tried to explain in the Q&A after our talk in London, “is that today’s debt and obligations depend on growth – future output – that is not going to happen.
“Looked at over the long term, economic growth rates are going down, not up. There are more old people to support. Technology is not improving productivity, as promised. And debt can’t increase forever.
“At some point, people realize that the money they have… and the promises of money in the future… are not as good as they thought.”
Interest rates have been going down, more or less, for the last 37 years.
The debt burden has been going up. When interest rates start to go up, it will be a whole new ball game.
Credit money ebbs and it flows. And unless the feds have found some way to stop the tides of credit… there will be Hell to pay the next time it ebbs.
We have said many times that the Fed would never willingly let this happen. But it might unwittingly cause it to happen.
It has already begun a tightening cycle. Last week, the first $10 billion of bonds rolled off its balance sheet.
By this time next year, the Fed is supposed to be reducing its balance sheet – and the world’s monetary footing – by $600 billion a year.
And at the head of the Fed is likely to be Kevin Warsh, a former Wall Street lawyer and President G.W. Bush’s appointee to the Fed’s Board of Governors.
He’s the front-runner to replace Janet Yellen next year as Fed chair when her term expires.
And from the reports we’ve read, he’s more “hawkish” than the last three Fed chiefs.
Dead Man’s Curve
Warsh – who resigned as Fed governor in 2011 – says he’d like to get the Fed in position to fight the next downturn… by raising rates now.
He’d also like to get the Fed out of the business of propping up stock prices.
Warsh says the Fed has become a “slave to the S&P 500.” He’ll break the chains by unwinding QE and raising interest rates.
Instead of having investors’ backs… ready to buy assets when markets turn down… under Warsh, the Fed may become investors’ worst enemy.
For the next four years, it is supposed to be selling bonds, not buying them. The Greenspan… Bernanke… Yellen “put” will become the Warsh “call.”
We doubt that Warsh or anyone else has the toughness to keep at it after stocks crash. But the Fed has the knife in its hand. It is aimed at investors’ backs.
It might just use it.
No runaway train ever survives the dead man’s curve. And no fake-money, credit-driven boom ever survives a bust.
Market Insight: Investors Bet on Rising Rates
BY CHRIS LOWE, EDITOR AT LARGE, Bonner & partners
It’s not just Bill who sees interest rates rising…
Investors in America’s biggest banks also see higher rates ahead.
Banks’ profits go up when interest rates rise.
That’s because higher rates increases the difference – or “spread” – between the rates banks charge customers for loans… and how much they pay in interest on deposits.
Today’s chart tracks share prices for JPMorgan Chase, Bank of America, and Citigroup.
As you can see, shares in all three big banks have hit new highs for the year.
– Chris Lowe
Plenty of Work, Not Enough Pay
According to official figures, unemployment is hovering near record lows. But as Bill has often pointed out, the average worker is woefully underpaid. Here are a few possible reasons why.
Amazon Could Issue Your Next Loan
Amazon.com has profoundly changed commerce in the United States. But the company hasn’t stopped there. It’s expanding into new industries. Its newest endeavor: banking.
How to Profit From America’s Pension Crisis
After years of financial mismanagement, states like Illinois are experiencing a full-blown pension crisis. Colleague Nick Giambruno shows two ways to profit as states turn to unconventional sources for revenue.
Today, discussion on American taxes continues to dominate the mailbag.
There has been much discussion about “tax cuts” or “tax reform,” mostly with a negative slant. I posit the following as fact: The current tax code with its Byzantine complexity and corrupt carve-outs for the connected is a total and complete affront to every citizen, wealthy, middle-class, or otherwise. I submit that it fundamentally violates the equal protection clause under the Constitution because it applies law differently to different citizens. Depending on what one earns, or on what one does manifestly determines how one is treated under the law. This is fundamentally and totally wrong.
To correct this, and remove the most corrupt mechanism that exists to rip off fellow citizens, a single-rate, uniform, flat tax plan with a single substantial personal exemption should be enacted (but never will be). In this way, all are treated the same under the law. The poor would have the standard deduction to reduce or eliminate any tax liability, and the super wealthy would have the same deduction, which would constitute a tiny fraction of their income shielded with absolutely no further deductions on the personal side. Therefore, Bill Gates, Bill Bonner, and Joe Sixpack pay the exact same rate and have the same exemption, but pay very different amounts in taxes.
In addition to fairness and complete constitutionality, the economic energy that would be redirected toward productive ends would be immeasurable. Of course, power would be ceded by the elites, and that of course will never happen because of the corrupt time we are in.
However, I am challenging you, Bill, to endorse this approach. If the dishonesty of the lack of price discovery bothers you, why not endorse it? Between now and our demise, we can at least dream a bit, can’t we? What do we have to lose?
– Dale F.
Since the rich pay 75% of the taxes gathered by the feds each year, of course any tax relief will benefit them. Frankly, I’d rather those who pay no tax at least pay something, if only to give them a measure of dignity. If they pay nothing, then they are essentially welfare beneficiaries.
– Jim R.
In Case You Missed It…
If you have $75, then you have all the capital you need to potentially earn millions of dollars in the cryptocurrency market.
That’s the message from our colleague and cryptocurrency expert Teeka Tiwari. Teeka has just put the final touches on what he calls the Bitcoin Millionaire Master Plan, a crash course on cryptos that works even for complete beginners. Here’s the entire story on the Master Plan, including how you can get started for free…