Follow The Money

By the time this is posted I will be somewhere over the Atlantic on my way to Iceland. I will then move onto Ireland where I will spend a few days with the bog monkeys. Since there is some chance I may be tricked into having an adult beverage or two and thus be rendered unable to post, the following has been pre-recorded.

–Z

One of the benefits of reading lots of history is you often see the same catalysts, causes and dynamics turning up in the story. The Roman Empire had a lot of problems toward the end, but a big one was their financial structure. Their lack of money led them to do things that made their situation worse. Similarly, the French Revolution had a “want of money” angle to it. The crown was broke and did a lot of very stupid things, as a result of being broke, that compounded the many social problems brewing in the country,

It’s tempting to wonder, for example, what would have happened if Louis XIV had been a bit more prudent or showed a bit more foresight with regards to the financial system of his country. Alternatively, what would have happened if his heirs had better advisers, who would have pushed for mild steady reform in order to slowly bring the French financial system into line with the emerging modern world. Heck, what if Louis XV had simply avoided the mistake of hiring economist John Law.

The best historians, I think, look at the men of the time and ask why were they unable or unwilling to do the necessary things to avoid catastrophe. In almost all cases, there were plenty of people advising the rulers that were making a blunder. In many cases, the rulers knew they were blundering, but events constrained them from acting. In the decades leading to the French Revolution, many smart and influential people knew reform was necessary. They just did not know how to go about it or what they were able to do, within the limits placed upon them, made things worse

Anyway, that’s the vibe I get when reading these stories about the Fed and their deliberations on the economy. Due to the sensitive and precarious nature of their positions, they tend to speak in riddles, but if you are careful, you can tease out some meaning from their public statements. They are very guarded and they reserve their more candid opinions for private conversations, but they rely on the broader financial public to put pressure on policy makers. These staged events are an esoteric form of lobbying.

The United States has a Federal debt that rivals what we had while fighting two empires in World War II. Current debt is close to 100% of GDP and that was the peak during the war years. The difference is we are not battling two empires in a shooting war. Now we are maintaining a global empire. The financiers understand this difference and they certainly recognize the danger it poses. The costs of fighting Hitler and Tojo were temporary and extraordinary. The cost of empire is permanent and ordinary, at least for a while longer.

These debt levels are only possible in the artificially low interest rate environment created by the central bankers. The trouble is they appear to have gone beyond the point of diminishing returns with interest rate policy. We are effectively in a no-growth economy now, despite historically low borrowing rates at all levels. The West is not in recession nor is it facing collapse, but it is exposed. There are no financial tools left in reserve to face the next unknown financial calamity and the bankers know this.

The trouble is the cost of reform is so frightening, no one is willing to face up to it. Interest on the Federal debt is about 6% of annual spending. If borrowing rates returns to historic norms, debt service will grow rapidly. Some estimates say it would exceed 20% of the annual budget within a decade. That’s based on the assumption the economy would not collapse, but rising rates would throttle real estate, tip over bank balance sheets and send the equity markets into free fall. All the attempts to keep the plates spinning have made artificially low borrowing rates the norm. Everything is now based on it.

The Federal government is not about to go bankrupt anytime soon. Federal outlays are about 20% of GDP right now, which is more than manageable. State and local government account for another 20% or thereabouts. Government spending in Germany is at 44% at the moment. It is 44% in Britain and 52% in France. In other words, the US has the same problems we see with all social democracies, but we’re not Zimbabwe. The US dollar is also the world’s reserve currency so that gives the US a much bigger margin for error.

Still, there is a sense you get from theses statements from central bankers is that they know these artificially low borrowing rates cannot go on forever. The longer they continue, the worse it will be when they finally return to normal. It’s just that no one knows how to fix it. The political costs of inflating our way out of debt are too high. Letting rates go up means recession and political panic. A continuation of debt monetization limits the freedom of action of central banks when the next crisis arises and there will always be another crisis.

That is what most likely worries the more sober minded bankers. A decade of 4% inflation would be unpleasant politically, but not end times bad. A slow rise in interest rates would not collapse the world economy either, but it would usher in a long recession similar to the 1870’s, where asset values tumbled for a decade as the Second Industrial Revolution came to an end. The real danger is the unknown crisis that does threaten the foundations of the system and the central banks have no tools to face it.

That’s where the West is at the moment. Things are plodding along, but there’s nothing in reserve in case of a crisis. The US economy is stagnant at the moment, but if it falls into recession, there’s nothing the Fed can do about it. Negative rates are unlikely and probably not effective anyway. The Fed balance sheet is already bloated so further monetization is going to be hard. The financial system is a citadel whose walls need rebuilding, but no one has a clue as to how to go about do it.

22 Comments
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guest
guest
4 years ago

Karl Denninger thinks healthcare will fold this house of cards: “In the most-recent Treasury Statement (which is canonically correct when it comes to government spending) this fiscal year to date Medicare and Medicaid have spent $1,034,867 (millions); that is, $1.035 trillion. The entire government spent $2,869,374, so this amounts to more than one-third of the total, 36% to be exact. Last year to the same point in the fiscal year these two programs consumed $950,861. That is, this fiscal year spending increased 8.83% on a comparable period basis. Last full fiscal year (September 2014-2015) said spending rose 9.25%. The prior… Read more »

teapartydoc
Member
Reply to  guest
4 years ago

The only way out of the healthcare mess is to abolish occupational licensing, and that is not going to happen, so hello disaster.

empty13
empty13
4 years ago

inflation is worse than is reported. unemployment is even worse. it’s the greater depression. the un-American elite just thinks (maybe hopes) it can trick the rubes some more just as well as before. it does not appear they can. yet, it will be worse most everywhere else.

Member
4 years ago

My grandfather had a more secure retirement than I will. He was an elevator operator (kids ask your teacher what that is?) and I was a Telecom Engineer. My grandparents and my mother lived through the Depression and the War very well, the Danish cousins in NH had farms, with vegetables, chickens and eggs. They drove up and stocked up with produce that they ate and sold in the neighborhood. Those farms are all condos now, faint good they are anyone now. I expect that the government will start confiscating bank and retirement accounts from the elderly before I’m gone… Read more »

RedFred
RedFred
4 years ago

I just have to disagree with Z-man’s last sentence. There’s plenty of people who know pretty much what needs to be done to reform our financial system, our tax system, our healthcare system, and our legal system. Most of these steps fall under the heading of “clean out the Augean stables” It’s time to flush out the corruption that is piled sky high and miles wide. It would be simple, not complicated to do many of these things. So, if I was king for a day, here’s what I’d decree: Taxes: Repeal the income tax and nuke the IRS. Institute… Read more »

Member
Reply to  RedFred
4 years ago

Thanks for the smile on my face RedFred. Right on the money.

teapartydoc
Member
Reply to  RedFred
4 years ago

You won’t see price competition in healthcare until the cartelized monopoly is broken up. The only way to do that is by abolishing licensing and accreditation.

Crispin
Crispin
Reply to  teapartydoc
4 years ago

well, yes but… I would be disinclined to use the services of a non-accredited heart surgeon — should the need ever arise. Indeed, how would one identify quality without some sort of standards?

tex
Member
Reply to  Crispin
4 years ago

By reputation, the same way many of us evaluate surgeon’s now, but better as we’d be more astute rather than depending to greater or lesser degree, depending upon the patient, on the License. Some docs now are known by reputation as Quacks. I’m an old guy lucky enough to have had & still have very few medical issues so don’t keep up, but some yrs ago a web site started by some concerned about a particular doc operating on wrong body parts or persons multiple times listed all doc law suits & allowed patients to post reviews. At the time… Read more »

tex
Member
Reply to  tex
4 years ago

Correction re Universities: Meant to say even if there were no accreditation not that there currently is none.

BillH
BillH
Reply to  tex
4 years ago

Besides, five’ll git ya ten the accrediting agencies have an affirmative action program.

Severian
4 years ago

Another good reason to vote for Trump — elect him, and the entire uniparty will do everything they can to torpedo him. Not only will the media be interested in abuses of federal power again, they’ll start worrying about the economy, too (funny how all those “ZOMG gas is $3 a gallon!” stories disappeared all at the same time, at about 12:01 AM on 20 January 2008). Watch how fast raising interest rates becomes the *only* policy if it will trigger a “Trump recession.”

Notsothoreau
Notsothoreau
4 years ago

Have you been following how the Germans and Japanese are responding to negative interest rates? They’ve been buying safes in record numbers. Might want to pick one up now.

I think Medicare spending will slow. The reason I think that is because it is almost impossible to find a doctor that takes Medicare patients. My husband went through the government site and called the doctors in our area that take Medicare patients. He wasn’t able to find any still in business.

Ben H
Member
4 years ago

There are two fears. The first being the one you describe, which is in their opinion less likely. The second scenario is the opposite of the first. Its low interest rates forever (for multiple decades at least). This is the situation that Japan is in. They have a humongous debt and a massive dependent elderly population which makes no interest on its massive savings. Europe also has a huge elderly population, and government bonds from governments like Germany have negative interests rates meaning that you lose money if you buy on (except if rates go lower where the value of… Read more »

Fred
Member
4 years ago

The bankers seem confused about how the glorious revolution is coming along with an impressive list of pin headed; know it all, ivory tower, super double doctorate idiots miffed over wha, wha, what to do. The bankers used to use the very polite term “Policy Headwinds” when referring to gov policy, tax rates, over regulation, etc. I don’t blame the bankers. This is solely the fault of the US Congress whose job it is to coin the money. It keeps borrowing. What is a banker going to do, not lend? The one sure way to fix it is the scariest… Read more »

Member
4 years ago

History is replete with plate-spinners.. who just want to get by one more day. We are there now, but the catch is, the rest of the industrial world is right there with us. Think about it… there is no industrial nation in better financial shape than the U.S. And that is our saving grace. The interconnected global economy is historic and so far all the plates are still spinning. The cynic says, sooner or later, something will happen and it will all fall to pieces. The grifter elite are ok with that really… they appear to just want to get… Read more »

Marina
Marina
4 years ago

I’ve been keeping fairly detailed financial records since I got married half a decade ago and the government’s inflation numbers are a fiction. The biggest expenses in our household (like most?) are housing, healthcare and food. At least in those areas, inflation is sure as hell not running at 1-2% a year. “Stuff” or consumer goods, have not experienced the same cost growth, but I don’t need new clothes or furniture or a television the way I need to eat and live somewhere. I’ve kept costs relatively flat, but only by becoming increasingly savvy and careful as a shopper. Everything… Read more »

Fred
Member
Reply to  Marina
4 years ago

Right, inflation is nil unless you have to do things like feed your family, heat your home, maintain your health, educate your children, drive, and buy or rent shelter. You know, little “discretionary” items like that. Pffft.

teapartydoc
Member
Reply to  Marina
4 years ago

Want that healthcare thing straightened out? Read Chapter nine of Capitalism and Freedom by Milton Friedman. Then talk to anyone you can about abolishing occupational licensing, because anything else is pissing on a forest fire.

james wilson
Reply to  teapartydoc
4 years ago

Yep, licensing. And the FDA. Right now we have both, plus the plague of lawyers, a great redundancy of costs. Then there is insurance, which soaks up one third of the bill. Anyone who actually wishes to understand what quality health care would cost under liberty needs only to appraise veterinary fees. Not cheap, nor should they be, but quite affordable. It’s pretty much what health care cost in 1950.

ColoComment
ColoComment
4 years ago

James Freeman has a wonderful op/ed in today’s WSJ:
http://www.wsj.com/articles/the-5-000-year-government-debt-bubble-1472685194

Al from da Nort
Al from da Nort
4 years ago

IIRC re the French Revolution, ‘everyone’ in the elite of the ancient regime knew that serious financial reforms were need and worked diligently to have some other group than theirs give up their privileges for the good of the nation. French intellectuals being French intellectuals, indignant indictments and ponderous polemics abounded against this or that (actual) abuse. But the French being the French, nobody actually was willing to give up any of their own ‘privileges and immunities’. The net result was that they all effectively/collectively agreed to kick the can down the road. This worked until it didn’t. Seems like… Read more »