BALTIMORE, MARYLAND – In our new book,
A Modest Theory of Civilization: Win-Win or Lose,
we argue that human history is largely a story of the long march from
violence to cooperation. We learned the lesson thousands of years ago.
Win-win pays; force does not.
We probably didn’t give the old win-lose enough credit. It never goes
away… and as Dan details below, it is now making a dramatic comeback.
This is partly just a normal cyclical change of direction. And it is
partly the consequence of deliberately falsifying the money system…
Money Culture
Money is what we use to keep track of where we stand. One owes; the
other is owed. One can buy the other’s time; the other must sell his
time in order to pay his bills. One is rich; one is poor.
In the natural world, order is established by force. The herbivores
eat the plants… and the carnivores eat the herbivores. The lion does not
lie down with the lamb; he devours him. And he doesn’t bother himself
about whether it is the “right” thing to do. He just does it.
But the agricultural revolution in the Neolithic age brought a new
way of surviving and of establishing status. Cultivated plants and
domesticated animals left people with food surpluses that could be
traded, which created a need for a medium of exchange – money. Instead
of killing, enslaving, and stealing, you could simply buy another’s
time… or his output.
Since then, a whole money culture has developed with win-win
exchanges as its central, guiding principle. Wall Street, with all its
debentures, exchange-traded funds (ETFs), and butterfly straddles is
merely an elaboration of the basic deal.
But the march of win-win progress is neither smooth, nor continuous.
Instead, we stumble, trip, and backslide. One generation learns; the
next forgets. One saves; the next spends. One increases its wealth; the
next goes broke.
Nutcases and Stick-Up Men
Below, Dan shows us how even the richest, most advanced, and most win-win country in history is now backsliding.
Its people still claim to be for free enterprise. They say they
respect the Constitution… and, of course, they’re all in favor of honest
money and paying for what they get.
But politics is beguiling… the promise of “free money” is fetching… and the ability to bully others is irresistible.
A few years ago, a candidate who proposed to add $97 trillion to
America’s debt would have been a joke; now, he’s a vote-getter. And as
the financial system becomes more and more complicated, it is easier for
the voters to imagine that the money might just grow on trees after
all.
As we explored in the
Diary this week, even leading
economists claim there is a ‘magic money tree’ (aka Modern Monetary
Theory) that will allow us to enjoy wealth we never earned.
But the “funny” money is used like a handgun. One group is robbed.
Another is rewarded. Status becomes more suspect… Most people still have
to earn it. But many get it by colluding with the feds.
Running for president on the democrat side, as Dan surveys the pack,
are a bunch of nutcases and stick-up men, candidates who promise to pay
for huge new programs with other peoples’ money.
As Dan shows, politics has taken over. It dominates our news cycles.
Our attentions. And our economy. It is insidious… and expensive; it
shifts energy and resources from creating wealth… to taking it away.
And now, year after year, the U.S. becomes less free market (win-win)
and more political (win-lose). And the gods must laugh; the president
who has moved the nation furthest towards politics is the one who
pledged to take it in the other direction – Donald J. Trump.
Begging the Feds
Alas, once you get going down that road, you tend to pick up speed… as well as a lot of fellow travelers and hangers-on.
The Trump team attacked China, for example. China retaliated, leaving
farmers with less income.
Seeking reelection, Team Trump offered to
make up some of the lost income with taxpayer money.
The state that gets the most is Iowa, which also happens to be where they hold the early, influential caucuses.
Tariffs on steel, meanwhile, leave steel users feeling like someone
has cut in line ahead of them. What can they do but wade into the swamp
themselves… hire lobbyists, and beg the feds for an exemption?
By July of this year, reports
The Wall Street Journal, 836 U.S. manufacturers had submitted 62,797 requests for exemptions. About half of them were approved.
Then, the steel manufacturers – who had hoped to sell their produce
to these manufacturers at higher prices (protected by the tariffs) –
filed 22,210 objections. All together, these protests involved 154
million metric tons of steel. But U.S. output is only 87 million.
In other words, the manufacturers must import steel in order to stay
in business. The tariffs, along with the associated paperwork,
lobbyists, and lawyers, simply add to the price… and slow down the
process.
Invitation to Disaster
America learned in the Smoot Hawley fandango of the ‘30s that
win-lose tariff wars are easy to lose and almost impossible to win. But
everyone who learned that lesson is now in his grave.
We learned in the 18th century… and re-learned countless times since…
that fake, “fiat” money, with no fixed backing in gold, was an
invitation to a financial disaster.
And we will, no doubt, sooner or later learn, once again, that win-lose doesn’t work very well.
In the meantime, strap on your seatbelts; the ride is going to get a little bumpy. Read on…
Bill Bonner
Chairman, Bonner & Partners
The Inflated States of America: How the
triumph of politics over markets will lead to a stock market crash, the
destruction of the middle class, and soaring inflation (especially in
gold)
By Dan Denning, Coauthor, The Bonner-Denning Letter
In the United States, the future of financial
failure is now… It might be unwise to forget the French Revolution.
Breaking the social compact between government and its citizens…could
cause irreparable damage.
– William Goetzman, Money Changes Everything
It is often forgotten that money creates a unique
link between citizens and their government, which holds the exclusive
right to print money. The blatant abuse of this powerful right by many
governments accompanies the story of many inflations throughout
history...
– Bernd Widdig, Culture and Inflation in Weimar Germany
Sometime before the year 2025, America will pass
through a great gate in history, commensurate with the American
Revolution, Civil War, and twin emergencies of the Great Depression and
World War II. The risk of catastrophe will be very high. The nation
could erupt into insurrection or civil violence, crack up
geographically, or succumb to authoritarian rule...
– William Strauss and Neil Howe, The Fourth Turning: What the Cycles of History Tell Us About America’s Next Rendezvous with History
Something isn’t right.
We’ve known that for a while now. But it’s worth reminding you as
markets make new highs. Intervention from the Fed, plus the growth of
automation in daily trading has removed price discovery in the markets.
For investors and retirees, the danger of a big crash isn’t diminished
one iota.
What about politics? Is there a sea change taking place in American
society, one that will usher in an era of European-style socialism? An
era of bigger deficits, a $40 trillion debt, and a world where you can’t
eat meat, can’t drive a car that burns gas, or use a plastic straw?
By the time you read this, it will be around 340 days before the 2020
presidential election. Our long national nightmare will be over, or
just beginning, depending on your political point of view. Between now
and then, though, you’ll have to suffer through an endless number of
debates, primaries, and speculations about what it all means.
We’re going to save you that trouble and tell you exactly what it
means this month. But here’s a trigger warning for those of you who take
politics seriously:
we think it’s a joke. A bad joke.
However politics IS dangerous, mainly because the nation seems to be
in the mood for a more powerful and invasive central government. This
trend toward a more authoritarian America is bi-partisan. And we believe
it’s driven by the huge distortions in the real economy caused by our
fake money system. But we’ll get back to that later.
For now, please keep in mind what Bill has written in his new book,
Win-Win or Lose, A Modest Theory of Civilization (which you can read
here as a
Bonner-Denning Letter subscriber).
There are only two ways to get what you want in the world: force or
persuasion. Markets encourage persuasion through specialization and
voluntary and mutually beneficial trade. Politics are all about force
(violence).
The triumph of politics in American life is a disaster for markets
and liberty. As the journalist H.L. Mencken once wrote, elections are an
advance auction of stolen goods. Politics is the essence of win-lose
deals. Because government produces nothing, all it can do is take,
redistribute, and punish.
There’s a whole lot of stealing and punishing coming up for the
American people. And that’s regardless of who wins a year from now. But
take a look at this chart…
A lot can change between now and next November. Do you think it’s a
coincidence that markets have rallied at the same time Massachusetts
Senator Elizabeth Warren appears to have peaked in the tracking polls?
And what will happen now that Nanny State New York billionaire
Michael Bloomberg has entered in the race? Will America fall in love
with the kind of soft socialism he brought to New York City? Or have we
had enough of billionaires from the Big Apple in the Oval Office?
Time will tell. In a moment, we’ll take a look at the main four
candidates at the moment: Warren, Vermont grumpy old man socialist
Bernie Sanders, creepy Joe Biden, and Mayor Pete Buttigieg from Indiana.
What would each mean for America and the stock market? And what will it mean for you?
Our job at
The Bonner-Denning Letter is to “connect the
dots,” as Bill would say. That means identifying the big changes coming
down the line, revealing how they will affect your wealth and your
liberty, and showing you ways to prepare for them.
Our first dot this month is at the Eccles Building in Washington,
D.C. – the heart of the Federal Reserve’s operation to destroy price
discovery in the stock market and lure investors into a trap…
Another Month, Another High
Another month, another high in the stock markets. The Dow is over 28,000 as I write, and the S&P 500 finally broke 3,000.
The Fed has added at least $300 billion to its balance sheet since
the “repo” crisis first began. (We covered the repo crisis in more
detail in the
September issue.) That balance sheet is now back over $4 trillion.
What happens when you pump in liquidity to financial markets? Prices
rise! In response to the spike in overnight lending rates in September,
the Fed committed to buying $60 billion worth of T-Bills (short-term
government bonds) through the spring of 2020. Since then, it’s conducted
over $300 billion worth of repos.
Not coincidentally, both the Dow and the S&P 500 have added on
nearly 10% in that time. The Fed clarified its intentions to keep the
taps open in a
statement released on October 11.
Since then, the S&P 500 is up 7% and the Dow 6.5%. But remember,
this isn’t quantitative easing (QE) according to the Fed. Why not?
The original QE programs (1, 2, and 3) were designed to keep
long-term borrowing costs low. They did this by buying longer-term
bonds. That pushed interest rates down (and stocks up). And it also had
the added benefit of keeping borrowing costs low for the U.S. government
(financial repression), which is now borrowing billions of dollars each
week to finance $1 trillion annual deficits.
Which brings us back to the problem in the plumbing of the global
financial system that we wrote about in September. The plumbing is
broken. It’s why the Fed had to step into the “repo” market to buy U.S.
bonds that banks can’t or won’t buy. What’s more, those banks are back
in 2008 mode, distrusting one another and hoarding cash. Think I’m
exaggerating?
Just before I sent this letter off to the home office, we learned
that the Fed offered a 42-day repo facility to banks. That number
matters (not because it’s the secret to life, the universe, and
everything) but because it’s not the number one. When markets function
normally and liquidity and trust are abundant, the “repo” market is an
overnight market. It’s a one-day facility.
A 42-day “repo” facility allows financial firms to cash up through
the rest of 2019 and to get through the end of the year safely. This
ensures there will be no inconvenient financial crisis to discuss over
your Thanksgiving or Christmas dinner.
But even extending the facility out to six weeks wasn’t enough for
Wall Street. The Fed offered $25 billion in cash for the 42-day facility
and received $49 billion worth of bids.
As I say, something isn’t quite right. Whatever’s broken has not been
fixed. You know that, and we know that. But the Fed has stabilized the
repo market enough to divert investors’ attention to other subjects…
like politics.
Which brings us back to the main task of this month’s letter: who
will win the Democratic nomination for the presidency? The main four
candidates at the moment are: Warren, Vermont grumpy old man socialist
Bernie Sanders, creepy Joe Biden, and Mayor Pete Buttigieg from Indiana.
What would each mean for America and the stock market?
Sen Elizabeth Warren (D-MA)
There’s a lot to dislike about Warren. Let’s start with her tax plan.
She wants to tax wealth rather than income or capital gains. That
itself reveals the greedy and covetous nature of most big government
spenders (Democrats AND Republicans). But she’s slippery too. How?
When Warren first unveiled her “wealth tax” it was as follows: 2% on
net worth between $50 million and $1 billion and 3% on net worth above
$1 billion. Later, she upped the top wealth rate to 6%. If you’re
reading this and you’re not a billionaire (or even a millionaire) you
may think it doesn’t matter it to you. You’re wrong (I’m sorry to be so
blunt but I’ll explain why).
By raising the top rate to six percent she proved an important point:
once
you establish the principle that it’s okay to tax a person’s net worth,
lowering the threshold where it kicks in is just a matter of time.
The tax may not apply to you now. But when the federal government has
a $40 trillion debt and entitlement spending soars, and the Feds get
desperate, it would be easy enough to apply the wealth tax to anyone who
has “too much money.” Remember, the income tax was designed to be
temporary.
These taxes are nearly impossible to kill once they put roots
down under your skin.
Warren has a host of other policies that are anathema to anyone who
favors limited government, low taxes, the rule of law, and sound money.
But then, she recently unveiled a proposal to
“fundamentally transform our government.” The proposal was specifically about corruption at the federal level. But it also captures the essential nature of Warren.
On the outside she looks and sounds like a “do-gooder.” But the
intellectual heart of her argument about how government should work is
based on win-lose. They win. You lose. Join “them” – especially in how
you think – or be a loser.
It’s fruitless to predict how the country would change or where the
stock market would go with Warren in charge. Higher taxes would lead to
lower growth – but growth is low already (lower than Trump predicted
when he ran for office). And if the corporate tax is raised, you’d
expect lower earnings on Wall Street, too. Bigger government is bearish
for markets.
But if there’s one point you can take away from this month’s letter it’s that
it doesn’t really matter who wins next year.
Whoever sits in the Oval Office is going to preside over a country in
deep trouble. A country where the Deep State really runs things (and
tries to bring you down with a coup or impeachment if you don’t tow the
line). A country where voters want more handouts and wars, not less.
In that situation, it doesn’t really matter who the president is. The
dollar will eventually lose its status as the global reserve currency.
All paper money around the world will devalue relative to real money
(gold and silver). And the tremendous debt that’s kept markets afloat
since 2008 will sink them like a stone. Financial markets will deflate
and in response, fiscal and monetary police will unleash a holy hell of
inflation.
Senator Bernie Sanders (I-VT)
Last month I mentioned “the Overton window.” It’s a political theory
about how once unthinkable and radical ideas become public policy. You
have to get an idea into the public’s imagination first. You “normalize”
it through debate and research issued by think-tanks. And eventually,
some version of the idea becomes public policy.
Bernie Sanders has shifted the entire Democratic party to the far
left with his socialist vision of the United States. By his own
admission (and fuzzy math) his spending plans would add $97 trillion to
the federal debt over the next 10 years. Medicare for All alone would
add $30 to $40 trillion. But he wouldn’t stop there.
Sanders wants to spend $16.3 trillion in the war on climate change
(the sun must be stopped!). His mandatory nationwide $15 minimum wage
would cost $15 trillion and have nearly half of all employed Americans
working for Uncle Sam (the ultimate in dependency). He’d spend $3
trillion forgiving student loan debt (sure to be popular with college
kids who have paid inflated tuition prices to learn nothing, or worse,
come out of four years of studying knowing nothing about the real world
and LESS than they started with). He also has several trillions for
infrastructure and low-cost housing.
The national debt is now $23 trillion – Sanders would more than triple it
It’s all a pipe dream worthy of a world-class opium eater. If you’re
going to dream, dream big. And if money is no object, why not? In a
Sanders presidency, total government spending in America (federal,
state, and local) would be 70% of GDP. That’s before such policies would
crash GDP, of course. But even in European-style socialism – as
measured by the international think tank OECD – the average size of
government spending is 43% of GDP. Sanders would nearly double that.
This kind of blow-out in spending, with annual deficits equal to 30%
of GDP, is only possible by “normalizing” something like Modern Monetary
Theory (MMT). In theory, there’s no limit to the amount of government
bonds the Federal Reserve can buy. Crank up the presses and finance the
deficits!
But to get the kind of America Sanders wants, you have to
fundamentally transform the monetary system. You have to give the man
credit. By suggesting things no one in America has seriously thought
about doing, he’s encouraged a lot of very stupid people to take those
ideas seriously. That’s how the Overton window works.
America is not ready to jump off the socialist cliff yet, we think.
But some version of Sanders-lite may be what the Democrats eventually
offer up on their platform. If Sanders manages to do well in Iowa and
win New Hampshire early next year, markets will certainly “feel the
Bern.”
Mayor Pete Buttigieg (D-IN)
This is a name (pronounced Boot-edge-edge) I didn’t expect to be
writing about, mostly because the fresh-faced former solider and Mayor
of South Bend, Indiana is just 37 years old
– barely
old enough to run, according to Article II, Section 1, Clause 5 of the
Constitution. But that may be part of his appeal: he’s not an old
Washington retread (Biden is 77, Sanders 78, Warren 70 and Trump 73).
By the way, this is not an “ageist” argument. With age comes
experience, even if that experience is a legacy of fiscal failure and
warmongering. And also, career Washington politicians who’ve been in the
Swamp for one decade (Warren), two (Sanders), or even four (Biden) are
hypocrites for blaming the current president for the country’s woes.
Donald Trump didn’t spend the last 40 years in Washington running huge
deficits and starting wars. He was in New York building skyscrapers and
going bankrupt. Sad!
But back to Buttigieg. Like Warren, he’s also slippery. He’s a
self-professed Christian, which I didn’t think was allowed in the
Democratic party anymore. But he supports abortion and he’s gay. This
may be just the right mix of social liberalism and conservatism to
appeal to “centrists” and “independents” who think Warren and Sanders
are too radical.
Fiscally, Mayor Pete is anything but conservative. He’s proposed
raising the top income tax rate to 49.9% (because 50 is nearly half)! He
wants to end new oil and gas drilling on all federal lands. And he’d
also abolish the Electoral College. (He hasn’t said how, however. And,
not surprisingly, the Constitution does not allow the executive branch
to unilaterally change a provision which determines how the president is
elected.)
Buttigieg’s rise in the polls is the Overton window in action.
Sanders and Biden dominated the early stages of the campaign with their
wacky ideas about fundamentally transforming America. By comparison,
Mayor Pete sounds sensible. If he wins in Iowa he may at least knock
candidates like Corey Booker and Kamala Harris out of the race. But if
young former Navy man and Catholic John F. Kennedy had trouble with
voters south of the Mason Dixon line, so will Mayor Pete.
Joe Biden (D-DE)
Why do we still call Joe Biden the vice president? Why do any former
presidents and vice presidents get called that after they’ve left
office? One of the greatest things President Trump has done for the
country is reduce the public’s respect for elected officials. He’s done
it mostly by example. But it’s a real accomplishment.
In a perfect world, Vice President Biden would just be “Creepy Uncle
Joe” – a moniker he’s earned for his weird penchant of touching women in
photo ops. But I digress. Back to politics.
There’s no doubting Biden’s Deep State credentials. He was elected to
the United States Senate at the tender age of 31 in 1973. He’s been a
committed Swamp Creature ever since, chairing the Judiciary and Foreign
Relations committees in the Senate and, of course, serving as wingman to
Barrack Obama for eight years as vice president.
If you were to pick a poster-boy for all that is wrong with careerist
Washington insider types, it would be Biden. With his fake teeth and
botoxed forehead, he’s primed and ready for at least another four years
besmirching the national stage. (Yes, it’s mean-spirited, but none of
these people deserve our respect or admiration.)
Still, despite all his obvious flaws (cosmetic AND substantial), what
Biden has going for him is that he’s not Sanders, Warren, or Trump. To
the extent that mainstream baby boomers determine the outcome of this
election, they might be the most comfortable voting for Biden. He’s a
known and relatively likeable commodity, if buffoonish and increasingly
inept on stage. If he can survive the primaries (literally and in terms
of performance), he’s got a chance.
Like the rest, though, Biden would be captain of a sinking ship. He’d
probably relish the chance to announce that America was reneging on
debt owed to foreigners (take that, China!). And he may be exactly the
man the country needs to do the inane things demanded by the people at
this stage in our history. Cometh the moment, cometh the man.
The Most Significant Election in American History?
If you’re a Republican or a Democrat, it’s likely I’ve offended you
with my comments above. Good! Don’t get caught picking sides and looking
for a political solution to America’s problems. Politics IS the
problem.
It’s not noble or patriotic to “get behind” a lying psychopath and
put him/her in charge of the country’s nuclear codes. No one is on your
side but you. And the only way to “save” the country is to start by
saving yourself, your family, and your wealth.
When has a politician NOT said that this is the most important
election of your lifetime? They say it every four years. Because when
the government gets bigger and we get more wars and spending, politics
becomes more deeply entrenched in our private lives.
I want to live in America where elections don’t matter and no one is
asking for “unity.” And in an America that doesn’t spend $6.4 trillion
on endless foreign wars. (You can see the $6.4 trillion breakdown for
yourself in the nearby table.)
Summary of War-Related Spending, Fiscal Year 2001-2020 (Rounded to the nearest $billion)
|
Billions of Current Dollars |
| Overseas Contingency Operations (OCO) Appropriations |
|
| Department of Defense |
1,959 |
| State Department/USAID |
131 |
| Estimated Interest on Borrowing for DOD and State Dept OCO Spending |
925 |
| War-related Spending in the DOD Base Budget |
|
| Estimated Increass to DOD Base Budget Due to Pos-9-11 Wars |
803 |
| "OCO for Base" a new category of spending in FY2019 and FY2020 |
100 |
| Medical and Disability Care for Post-9/11 Veterans |
437 |
| Homeland Security Spending for Prevention and Response to Terrorism |
1,054 |
| Total War Appropriations and War-Related Spending through FY 2020 |
$5,409 |
| Estimated Future Obligations for Veterans Medical and Disability FY2020-FY2059 |
>1,000 |
| Total War-Related Spending through FY202 and Obligations for Veterans |
$6,409 |
Source: The Watson Institute for International and Public Affairs at Brown University
All that said, there is, indeed, a transition in the balance of power
in American politics. It is tempting to see that change as purely
generational. (You can see the generational breakdown in the below
graphic, “American Voters by Age Group.”)
As the boomers age and retire, the millennials rise, take control of
Congress, and “fundamentally transform” the country into a socialist
shithole full of fake meat, fake cars (Tesla’s Cybertruck), and fake
money.
But I would suggest that something larger and more historical is at
work. Boomers, Gen Xers, and millennials don’t have different DNA. They
don’t have different political values purely based on their ages.
As always, it comes down to their relationship with money and the
impact the money system has on the economy and society. Let’s take a
closer look at that relationship.
The Financial Crisis Before the Political Revolution
You could argue that the financial crisis of 2008 has never really
gone away. In fact, the response by Washington and Wall Street to the
crisis – to bail out bankers with taxpayer money and then rig the stock
market – is what threw the Overton window wide open for socialism in
America. I’ll say more about what that means for the future of the
country in a moment.
But what happens next? And what should you do with your money in
2020? What will the changing generational composition of Congress mean
for the stock market and your retirement?
These are all questions we’re going to have to follow in the coming
months. You already know our “big-picture” analysis. We believe the
stock market will eventually revert to the mean. Whether that’s a fast
crash or a slow-motion one, we don’t know.
We believe you’ll see deflation in financial assets and that in
response to huge government deficits, you’ll see massive money-printing
by the Fed and/or MMT from a radical Congress that unleashes inflation
in consumer prices and real assets. All of this should be good for gold.
Next month, we’ll reveal our “10 Predictions for the Next 10 Years.”
And along with it, “10 Things to Do Before the Bubble Pops” (these are
things you won’t be able to do anymore in America once the money system
has changed – such as places you should visit or experiences you should
have).
Of course, it’s foolish to predict anything. Much less 10 years out.
But in our ongoing effort to connect the dots and stay one step ahead,
we have to try! Here’s a sneak peek with three of our predictions now:
- Boomers and millennials make common cause in Congress. Defying
predictions of generational warfare (at least for now), the 117th
Congress unites to embark on massive federal deficits to fund
infrastructure spending, student debt forgiveness, and some version of
Medicare for All.
This new spending is “paid for” with a rash of
new taxes including: a higher payroll tax, a federal value-added tax
(VAT), wealth taxes, a financial transactions tax, and other forms of
financial repression that target asset owners, retirees, and what’s left
of the middle class.
- MMT goes mainstream. MMT is, in fact, a form of
fiscal policy. It means control over the nation’s money – including the
creation of it – shifts from the Fed and commercial banks to Congress
and the Treasury (the executive branch).
The Fed will expand
its balance sheet (crank up the printing press, in other words) as much
as necessary to finance U.S. deficits in 2020. But in the long term, for
the nation to pay for the kinds of things Republicans and Democrats
want, you’re going to have to change the money system. MMT does that.
- Texas goes blue. There are 538 votes in the
electoral college. You need 270 of them to become president. Did you
know you can secure 171 votes (or 63% of the required total) by winning
just five states? California has 55 votes, Texas 38, New York and
Florida 29, and Pennsylvania 20. Win those fives states, and all you
have to do is find 99 votes in the remaining 45 states.
Even
with former Texas congressman Robert (“Beto”) O’Rourke out of the race,
we predict Texas – on the strength of urban, minority, and youth votes,
plus normal corruption and vote-rigging – goes blue in 2020.
That third point brings us back to what’s at stake in the 2020
elections. Trump – assuming he neither resigns nor is impeached – could
still win even if he loses Texas. But he’d have to win every state he
won in 2016 (holding Wisconsin, Pennsylvania, Florida, and Ohio
especially) AND then flip enough states to get back those 38 votes. It
seems unlikely. But then, so did his entire candidacy and eventual
victory in 2016.
Before then, we have the Iowa caucuses on February 3, New Hampshire
on February 11, Nevada on February 22, South Carolina on February 29,
and then “Super Tuesday” on March 3, where voters go to the polls in
Alabama, Arkansas, California, Colorado, Maine, Massachusetts,
Minnesota, North Carolina, Oklahoma, Tennessee, Texas, Utah, Vermont,
and Virginia.
By then, you’ll have a pretty good idea of who the Democratic nominee
is and who their pick is for vice president. If the greatest stock
market in American history has crashed (or begun correcting) by then, it
will make the general election even more interesting. Trump is certain
to produce great theater in the presidential debates.
But in the big picture, we don’t think anyone can alter the
trajectory of the country politically and economically. We’re too far
down the rabbit hole. The people have learned how to vote themselves
politicians who have found new ways to spend money.
Take the recent debate about the Electoral College, for example. Many
of the Democrats have called for it to be abolished. The fact that
someone (a loser like Hillary Clinton) can win the popular vote
nationwide but lose in the Electoral College seems unfair and
undemocratic.
Well, yes. That’s exactly the point. If you read Federalist No. 68,
Alexander Hamilton argues precisely against the popular election of the
president. The founders knew the public couldn’t be trusted, or could be
easily manipulated by a lying, deceptive press. That’s why they made
the election of the president and, at the time, senators, dependent on
smaller groups of representatives who would be better informed and
exercise better judgement than the public.
You can argue about whether the members of the Electoral College are
better informed. They probably aren’t. But that is beyond the scope of
this month’s newsletter.
Politicians are talking about getting rid of the Electoral College
right now because it’s an obstacle to more control and centralization of
power and money in Washington. If they can just shut up the over
represented rubes in “flyover country,” they can get on with the project
of turning America into a European country, or in Sanders’ case, the
USSA.
No matter who wins, how they win, or what they promise to do, we
believe that expansion of U.S. debt and deficits (by QE or MMT) is
bearish for stocks, government bonds, and ultimately the U.S. dollar.
Fed balance sheet expansion may be pumping up markets now. But while
gold is resting below $1,500 an ounce, now would be a good time to add
more.
The Godless Times of Inflation
But what if we’re wrong? What about Japan? It’s had low nominal GDP
growth and inflation for years now, despite low (and negative) interest
rates and huge government deficits. Why are we so confident inflation
will show up in the U.S. when it hasn’t (infamously) in Japan? The
quality of life in Japan – low crime, clean streets, respectful people –
seems very high.
And while we’re at it, let’s be consistent and remember history.
Predicting inflation now goes against the 800 years of lower real
interest rates
I wrote about in August.
In fact, despite a notable episode in the former Habsburg Empire (which
included Germany, Austria, and Hungary), the historical trend has been
toward lower rates. The episode in the 1970s in the U.S. – where we had
low growth AND inflation – was the other exception.
But it’s what the two exceptions had in common that makes them
relevant right now. I hope you’ll bear with me here, because it’s
probably the key point Bill and I write about it. It explains why we’re
so worried about inflation. (And, if you read Tom Dyson’s
Postcards From the Fringe e-letter,
you know Tom is also worried about it.) It gets to the heart of our
understanding of how money influences values, culture, the economy, and
politics. Money changes everything!
The two exceptions to the historical trend of lower interest rates were both fundamental monetary regime changes:
The first – the blowup of the multilingual, multiethnic Habsburg
Empire – was directly linked to Germany’s defeat in World War One. In
that case, the resulting inflation created the political conditions for
the rise of Nazism.
The second – the de-linking of the dollar to gold in 1971 – kicked
off the inflation of the 1970s and the rise of oil and gold (most real
assets rising in dollar terms). But it was more than just an
inflationary episode. It was the culmination of years of debasement of
the currency.
The creation of the Fed in 1913, Roosevelt’s Executive Order 6102 in
1933 (which outlawed the ownership of gold by American citizens), and
then Nixon’s 1971 closing of the gold window… these were all deliberate
attacks on sound money in America. To what end?
To break the link between sound money and small government. To attack
individual liberty and promote centralization and state control. To
replace the checks and balances of the Constitution with a Deep State
committed to warfare abroad and political and financial repression at
home. And where are we now?
We are on the verge of a regime change in the global order.
Financially, asset inflation will turn into asset deflation. Consumer
price inflation will come roaring back with massive government deficits.
The social and political stability created by that inflation – which
has in fact been brewing since asset prices began inflating in 2008 –
will “fundamentally transform” America as you know it.
Don’t take my word for it. Here is none other than John Maynard Keynes in
The Economic Consequences of the Peace.
Keynes was writing after the war and between monetary regimes. He
understood well the consequences of distorting the value of money. He
wrote (emphasis added is mine):
Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency
.
By a continuing process of inflation, governments can confiscate,
secretly and unobserved, an important part of the wealth of their
citizens. By this method they not only confiscate, but they confiscate
arbitrarily; and, while the process impoverishes many, it actually enriches some.
The sight of this arbitrary rearrangement of riches strikes not only at security, but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and
even beyond their expectations or desires, become “profiteers,” who are
the object of the hatred of the bourgeoisie, whom the inflationism has
impoverished, not less than of the proletariat. As the inflation
proceeds and the real value of the currency fluctuates wildly from month
to month, all permanent relations between debtors and creditors, which
form the ultimate foundation of capitalism, become so utterly disordered
as to be almost meaningless; and the process of wealth-getting
degenerates into a gamble and a lottery.
Lenin was certainly right.
There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.
The process engages all the hidden forces of economic law on the side
of destruction, and does it in a manner which not one man in a million
is able to diagnose.
At the risk of sounding arrogant, we believe we HAVE diagnosed the
existence of deadly inflation in the United States. If you have as well,
you are that one man in a million.
The trick Wall Street pulled off in 2008 was making the confiscation
and transfer of wealth from the public to the insiders nonarbitrary.
Instead of accidentally blowing a bubble in tech stocks (2000) or in the
housing market (2007), they made sure they knew where the money was
going this time so they could get there first. They changed the laws,
monkeyed with the money and tax code, and engineered an inflation in the
place where most of the public would notice it but not benefit from it:
the stock market.
But in so doing, they’ve unleashed disastrous consequences. First,
their distortions in the market mean that prices no longer communicate
accurate information. This has given investors a false sense of security
about the stock market and future expected returns. Because the
computers are doing all the thinking and buying on Wall Street, the vast
majority of the investing public is blind to the risk of both a ‘flash
crash’ (or ‘flash depression’) or ten years of flat returns in the stock
market.
The second consequence is even more damaging. And it’s why we focus
on inflation so much. By breaking the money system and rigging it to
work for an elite group of thieves and con artists, they’ve broken the
relationships between citizens and government. This is why people now
openly talk about another Civil War in America.
The even bigger danger is that the entire country will slide into the
open arms of an authoritarian ruler who promises revenge against those
responsible for gutting the middle class and destroying the American
dream. (I’m assuming that’s not what already happened in 2016, but it
may have.)
Next to language, money is the most important medium of communication
in modern society. When you get deliberate dilution and debasement in
the value of legal tender money, you eventually get social disorder,
rebellion, or even revolution. When you worship money for its own sake,
you get godless inflation.
The more degraded the money gets, the more degraded the people feel.
And the more degraded they feel, the more degraded they’ll behave. This
explains the rising use (and tolerance) of drugs and alcohol in America.
It’s a way to medicate the depression that has set in from living in a
world in which there are two sets of rules: one for the very rich and
powerful and one for the rest of us.
The common belief is that the Weimar inflation planted the psychic
seeds for the rise of the Nazis and Adolf Hitler. In America today, the
financial asset inflation since 2008 has planted those seeds. When asset
prices crash and consumer prices soar, those seeds will bloom and it
will be a bitter fruit indeed.
Dan Denning
Coauthor,
The Bonner-Denning Letter
P.S.
The goal of this month’s letter was not to depress you right before
your Thanksgiving dinner with family. In fact, let me take a moment to
thank YOU for your support of the work Bill and I do in the letter each
month and to wish you and your family a happy Thanksgiving.
Our goal here at the letter is to help you improve your quality of
life by giving you better information and analysis about what’s really
going on in America and the world. (Tom Dyson will be bringing you his
own take on that next year, once he settles down from his 18-month trip
around the world.) We can’t cook you a turkey. But we might be able to
help you avoid a big financial loss.
But to do that means that sometimes we have to tell hard truths. Or
at least try to. This was one of those months where the truth about the
utter avarice and greed that dominate American politics needed to be
repeated. Politics will not solve the problems you face in the coming
years. We believe your best defense against them is financial
independence.
And you can only acquire or keep your financial independence if
you’re armed with the right information at the right time. That
independence will give you the freedom and mobility to protect yourself
and your family no matter who wins the White House in 2020 or what
policies they pursue. If you want to save the country or your family,
you need to save yourself first.
P.P.S.
We tried to be as bipartisan in our contempt of the political
establishment as possible this month. Luckily, they helped us out. Just a
few days ago, the Senate passed a bill funding the government through
December 20. It was yet another “temporary” spending bill that makes the
deficit and debt larger, and kicks the can down the road for future
generations (your grandchildren) to deal with. But it gets worse!
Buried in the spending bill was a reauthorization of the Patriot Act
for three months, including a key provision which allows for the mass
surveillance of Americans’ phone calls by the National Security Agency
(NSA). Section 215 of the Patriot Act, which permits that bulk
collection, was set to expire on December 15. The House approved the
bill by a vote of 231-192. The Senate vote went 74-20.
There you have it in a nutshell. A complete abdication of fiscal responsibility by both parties. And
buried
in a spending bill is the bipartisan approval of a program of mass
surveillance on Americans by an unaccountable spy agency. If
you think there’s a politician who can sit in the Oval Office and
challenge the status quo, then you live in a state where smoking pot is
legal. Or you’re breaking the law.
P.P.P.S.
Edward Snowden revealed the extent of the NSA’s attack on civil
liberties when he blew the whistle on them in 2013. Unlike whoever the
whistleblower is regarding Trump’s call with Ukraine’s President,
Snowden has been deemed a traitor to his country for exposing an illegal
program of mass surveillance.
He ought to be celebrated as an American hero. And if you’re looking for Christmas gifts, I strongly recommend his book
Permanent Record. In it, he wrote the following:
The freedom of a country can only be measured by its respect for the
rights of its citizens, and it's my conviction that these rights are in
fact limitations of state power that define exactly where and when a
government may not infringe into that domain of personal and individual
freedoms that during the American Revolution was called ‘liberty’ and
during the Internet Revolution is called ‘privacy.’
Your liberty and your privacy are under attack in today’s America, by
both parties and a vastly entrenched public service we call the Deep
State.
Protecting your wealth and your freedom from these threats is our
goal in 2020 and beyond. Next month, I’ll have more to say about how you
can avoid mass surveillance (both digital and physical), and how it
could be coupled with digital money and financial repression to control
your life, plus what you have to do now to stay free.
