"Evil and Stupid"
America's two party system,
and the predictable crisis to which it leads...
by Bill Bonner
“We have two parties here, and only two. One is the evil party, and the other is the stupid party…I’m very proud to be a member of the stupid party…Occasionally, the two parties get together to do something that’s both evil and stupid. That’s called bipartisanship.”
- M.S. Evans
Youghal, Ireland - "No new dots today. So, let’s make sure we see how the old ones connect. Friday, we looked at how stocks have become very expensive. We live in an Age of Bubbles. 1999, 2008, 2021…and now, just three years later…a new bubble – this time, concentrated in the Magnificent 7, big tech stocks. But some things always happen. Bubbles always pop. And it probably won’t be long before the AI bubble pops. Then, people who were hoping to get rich quick, thanks to the spiffy new technology, will get poorer, in a hurry, thanks to the very old boom-bust cycle.
And here’s something else that always happens: when the cost of credit goes up, bankruptcies go up too. This year, with interest rates substantially higher than they were a few years ago, bankruptcy lawyers are back in high clover. Here’s the Financial Times: "Debt defaults at highest rate since global financial crisis, S&P reveals. "This year’s tally of corporate defaults stands at 29 – the highest year-to-date count since the 36 recorded during the same period in 2009, according to the rating agency."
Bubble, Bubble: In the financial crisis of ’09, the Bernanke Fed stepped in, pushed interest rates down, saved many big debtors – including some of the biggest banks on Wall Street – and trimmed billings for the bankruptcy bar. That didn’t have to happen. It was a mistake; Bernanke panicked and set the stage for an even bigger crisis later. The lowest interest rates in history encouraged almost everyone to go deeper into debt. And no one went farther down that rathole than the US government – adding $25 trillion in new debt since 2009.
And now, the Federal government itself is in over its head…and the Fed is in no position to rescue borrowers or stock market investors with more debt. This is new. And important. In 2000, and again in 2008, the Fed boosted stocks by lowering its key lending rate by 500 basis points…and ‘printing’ up the money to cover deficits. But that was before the inflation bogeyman was on the loose. Today, the Fed can’t get away with that kind of stunt. Bond buyers will see more inflation coming; they’ll sell bonds…forcing up interest rates, making it even more expensive for the feds to borrow.
When you are already $35 trillion in debt…and counting on adding another $16 trillion over the next 10 years…higher interest rates are not what you want to read about in the morning news. Even at 5%, the interest cost could be $2.5 trillion per year. That, in turn, would force the feds to borrow (and print) even more to cover the interest expense. That is when we’d see another thing that always happens. When you have to borrow more and more money, just to keep up with the interest payments on previous debt…you are doomed. The Fed will be very reluctant to get into that situation. It will not want to ‘print’ more money just to keep stock prices or a few high profile businesses from going bust.
A Predictable Crisis: So far, it hasn’t had to take action. Inflation rates seem to be moderating and interest rates are coming down. The vigilantes (who are supposed to punish federal borrowing by demanding higher interest rates) have been on a long break too. They “‘snooze, as Treasury bonds shrug off vast borrowing,” says the Financial Times.
But the feds are set to borrow an amount equal to more than 5% of GDP every year for the next 10 years. That is not something that has to happen; but it is something that will happen. And even those numbers depend on clear sailing, with no troublesome storms. In the event of a recession (almost guaranteed), the feds will borrow and spend more.
Yes, dear reader, the US faces ‘the most predictable crisis ever,’ as debt increases faster than GDP. You can see it coming from a mile away. The obvious thing to do is to avoid the disaster by bringing the rate of debt growth down. And the obvious way to do that is to balance the federal budget. But this is one thing that the evil party and the stupid party agree on: nothing can be allowed to interfere with America’s rendezvous with bankruptcy.
You might wonder: how come the richest country in the world…near the peak of its power and wealth…can’t pay its own bills? Why does it have to pass the cost along to future generations…who have no say in the matter? We’ll save that question for tomorrow. For now, we connect two important dots. The quantity of US Treasury debt is soaring. The demand for it depends on the interest rate. And somewhere along the line, the bond vigilantes are likely to hear an alarm go off. Torsten Slok at Apollo Global Management: “…a really weak auction could wake [them] up.” Who knows what will happen; but real interest rates will probably go up."
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