Every Bubble Eventually Finds its Pin

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by MN Gordon, Acting Man:

Panem et Circenses

The transfer of wealth from workers and savers to governments and big banks continued this week with Swiss-like precision. The process is both mechanical and subtle. Here in the USA the automated elegance of this ongoing operation receives little attention.

NFL football. EBT card acceptance at Del Taco. Adam Schiff’s impeachment extravaganza. You name it. Bread and circuses like these – and many others – offer the American populace countless opportunities for chasing the wild goose.

All the while, and with little fanfare, debts pile up like deadwood in Sequoia National Forest.  These debts, both public and private, stand little chance of ever being honestly repaid. According to the IMF, global debt –  both public and private – has reached an all-time high of $188 trillion (excluding financial debt). That comes to about 230 percent of world output.

Including financial debt, total global credit market debt outstanding is closing in on $255 trillion; to quote Ludwig von Mises: “It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract” [PT]

Certainly, some of the private debt will be defaulted on during the next credit crisis and depression. But when it comes to the public debt, governments do everything they can to prevent an outright default. Central banks crank up the printing press and attempt to inflate it away.

US broad true money supply TMS-2 – note the recent acceleration: TMS-2 has expanded by $255 billion in October alone and is in the meantime close to crossing the $14 trillion mark. Since the last interim low in February 2019, $621 billion have been added to the US money supply. [PT]

After Nixon temporarily suspended the Bretton Woods Agreement in 1971, the money supply could be expanded without technical limitations. This includes issuing new debt to pay for government spending above and beyond tax receipts.  Hence, since 1971, government directed money supply inflation has been the standard operating procedure in the U.S. and much of the world.

Downright Disgraceful

Expanding the money supply has the effect of dissipating wealth from the currency.  The process allows governments, which are first in line to spend this newly created money, a back door into your bank account. Without levying taxes, they get access to your wealth and future earnings and leave you with money of diminished value.

As the money diminishes in value the price of goods and services appear to increase. This rise in prices, however, is a function of the currency devaluation.  This devaluation is primarily achieved via deficit spending.

Of course, when deficits are financed by central bank money printing something downright disgraceful is going on.  Alas, in the U.S., as in much of the world, this disgraceful undertaking is a matter of policy. This is the world we live in.

If you recall, the Fed recently recommenced QE (though it’s not calling it that).  Under this current iteration, the Fed’s buying Treasury bills of up to $60 billion a month through at least the second quarter 2020.  At that pace, the Fed’s on track to swell its balance sheet to a new all-time high over $4.5 trillion.

By this, the Fed is buying tens of billions of dollars in government debt every month. They pay for it with newly created dollars. These dollars are then used by the sellers (primary dealers/big commercial banks) to buy more debt from the Treasury. The government then does something remarkable with this money that was created from nothing: It spends it!

 

US treasury and agency securities held by commercial banks have reached a new all time high of $3 trillion [PT]

What’s more, as money is debased, the process of earning, saving, and building wealth is also debased. Before long, it degenerates into gambling and speculation.  Yet, at the same time, many caught up in the gambling game don’t recognize it for what it is…

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