Monday, October 23, 2023

"Mt. Debtmore"

"Mt. Debtmore"
On the road to inflation, bankruptcy and military humiliation...
by Bill Bonner and Joel Bowman

Youghal, Ireland - "Argentines went to the polls on Sunday. At stake was an historic question: can a democratic government ever voluntarily, peacefully reduce its own power…can the ‘political caste’ ever be brought to heel? Laws and regulations are added; seldom are they taken away. Reagan said he was ‘against Big Government.’ Trump’s ‘drain the swamp’ pledge at least suggested he might put in a drainpipe. Neither followed through. And as far as we know, it has never happened. Individual liberty has never increased in a democracy. But that’s what Javier Milei, candidate for the presidency, is promising to do. And fans say he is crazy enough to actually do it.

But Milei suffered a setback yesterday. The LA Times: "Economy Minister Sergio Massa took the lead Sunday in Argentina’s presidential election against right-wing populist Javier Milei who has pledged to drastically overhaul the state. But a runoff next month appeared probable. With 86% of the votes counted, Massa had 36.2%, and Milei 30.3%." Our correspondent, on the scene, has more below.

Mt. Debtmore: Meanwhile, the rich men north of Richmond grow richer and more powerful by the day. And deeper in debt. Distracted by two emergencies…one in the Ukraine, the other in Israel…you can’t expect them to have much time left over to consider their own situation. Debt is piling up at a terrific rate. It was only a few weeks ago that US federal debt passed the $33 trillion mark. Now it has sped past $33.5 trillion…$40 trillion can’t be too far off. Markets Insider:

"The US debt mountain is growing so fast the government could soon be spending more on interest payments than on defense The idea that interest payments could soon surpass defense spending could be a source of concern for policymakers, with President Joe Biden pledging Monday to ask Congress for over $100 billion worth of funding to support both Israel and Ukraine. Debt has emerged as a major concern for Wall Street this year, with lawmakers reaching an 11th-hour deal to raise the government borrowing limit back in May and Treasury bonds currently suffering a rout that ranks amongst the worst sell-offs in market history." Interest payments exceeding ‘defense’ spending?

Adapt or Die: Here, we would like to introduce an idea. Wars are won with firepower, not slogans and propaganda. But technology moves fast. AI and drones, for example, require new tactics and new military hardware. A smaller, younger military can adapt more quickly. Even at brute force applications, overspending on firepower can be a mistake. Firepower costs money; debt builds up. The more you spend, the less money you have left for innovation and growth. Then, you end up paying so much for past firepower (debt service…retired generals…veterans’ benefits…legacy hardware maintenance) that you have less current firepower available to throw at an enemy.

No time to worry about that now! We have a huge industry that sells firepower – not just to the US, but to foreign governments too. The weapons suppliers have so many members of Congress in their pockets, they barely have room for their car keys.

How can you ‘tighten’ a family budget when the house is full of freeloaders? And for all the talk of ‘tightening’ at the Fed, it is worth noting that monetary policy has never actually gotten very restrictive. The key, after inflation interest rate on 10-year US bonds is only 1% – the difference between 10-year yield and the CPI. That is loose, not tight. Traditionally a borrower could expect a real return on his money of 2%-4%.

Banana Republicanism: Meanwhile, the Fed is supposed to be reducing the money supply by letting its holdings of bonds expire. So far, this has taken the Fed’s balance sheet from $8.9 trillion down to $7.9 trillion. Not very impressive, and not when you consider that it was under $1 trillion just 15 years ago. Also, worth noting, the feds have switched the engine of inflation from monetary policy to fiscal policy. Interest rates have gone up…but deficits have gone up too. Since 2020, they’ve grown among the banana leaves.

This year, for example, is a year with a great economy – both Janet Yellen and Joe Biden so say. And yet, the Biden Team is asking for another $100 billion for Israel and the Ukraine. Already, the feds are running a deficit that will reach up to $2 trillion this year. That’s 4% of GDP – in year of full employment and positive GDP growth…a sh*thole country level…not a level for a responsible, mature, honest nation. The European Union, for example, specifically forbade deficits of more than 3% of GDP.

Deficits need to be financed. Currently, investors are willing to provide the money. They’re not used to getting 5% – guaranteed – on their savings. Even we are taking advantage of these short-term interest rates while we wait for the ‘other shoe’ to drop. Then, inflation rates will go back up…and investors will want an even higher rate of interest, forcing the feds to ‘print’ more money. And so… we march along…towards the classic denouement for a great empire – inflation, bankruptcy and military humiliation. Stay tuned."

Joel’s Note: “Mas Massa, por favor!” So declared the will of the people in yesterday’s general election, here in the downside-up world of Argentina. Yes, dear reader, democracy is living down to its reputation at the world’s end, proving once again that individual ignorance cannot be multiplied into collective wisdom.

The results, as noted above, saw the left-wing candidate, Sergio Massa (36%), take the lead over the libertarian candidate, Javier Milei (30%). Conservative candidate, Patricia Bullrich, came in third (23%). But as none gained the 45% necessary for an outright victory (or won by a clear, 10 point margin), the country will again head to the polls next month, with a runoff between the two top contenders.

For those readers just joining us, Sergio Massa is the current minister of the economy. You might expect, given yesterday’s result, that he must be doing a half decent job managing the nation’s finances. You would be wrong. Officially, inflation down here on the Pampas is running at an eye-watering 138% annually. That’s about 12-14%...per month. J.P. Morgan reckons it’ll hit 200% by year’s end. And Steve Hanke, professor of applied economics at Johns Hopkins University, thinks it’s already 221%, which would make it the third highest rate in the world.

With numbers this large, it’s hard to tell exactly what the rate is. But any way you measure it... except, apparently, at the voting booth... it’s a disaster. “Dollarization is the only cure for the economic destruction caused by Peronist policies,” says Professor Hanke, who helped design and implement dollarization policies in both Montenegro (1999) and Ecuador (2001).

Professor Hanke has worked closely with Emilio Ocampo, Javier Milei’s dollarization guru, to lay out a plan for how this might be achieved in Argentina. Only, Milei will have to actually win the election in order to implement such a plan. Srs. Massa and Milei have less than a month to persuade Bullrich’s voters to come over to their side. The election will be held on November 19. To Singapore or Venezuela? We shall see..."

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