Deficit Spending

The insanity that has gripped policymakers all over the world really is a sight to see. There was a time when central bankers were extremely careful not to do anything that might endanger the currency's value too much – in other words, they were intent on boiling the frog slowly. And why wouldn't they? After all, the amount by which the citizenry is plucked via depreciation of the currency every year is compounding, so that the men behind the curtain extract more than enough over time. The latest example for the growing chutzpa of these snake-oil sellers is provided by Lord Adair Turner in the UK (as it faces its triple-dip recession) - who sees the current policy is evidently failing, so he naturally concludes that there should not only be more of it, but it should become more brazen by veering off into the 'Weimaresque'.

There are no limits on Central State and financial Aristocracy exploitation, but there are limits on what debt-serfs can pay. Since we can't print money, there are limits for us debt-serfs. There are also limits on how much we can extract from a neocolonial/neofeudal system as wages. This neocolonial/neofeudal financialization model will implode under its own weight, and that will be the crisis.

On the surface, it may seem innocuous for Germany to move some pallets of gold closer to home. But most economists can't see the bigger implications and frequently miss the forest for the trees. What your friendly government economist doesn't reveal and the mainstream journalist doesn't report (or doesn't understand) is that in the event of a US bankruptcy, euro implosion, or similar financial catastrophe, access to gold would almost certainly be limited. If other countries follow Germany's path or the mistrust between central bankers grows, the next logical step would be to clamp down on gold exports. It would be the beginning of the kind of stringent capital controls Doug Casey and a few others have warned about for years. Think about it: is it really so far-fetched to think politicians wouldn't somehow restrict the movement of gold if their currencies and/or economies were failing? Remember, India keeps tinkering with ideas like this already.

The Keynesian belief that the government can print/ borrow and spend enough money to trigger self-sustaining prosperity is a nonsensical, magical-thinking Cargo Cult. The following charts show why it will continue to fail, with eventually catastrophic results: the returns on this unprecedented borrow-spend policy are diminishing to near-zero or negative. As long as the interest rate on debt is low, the path of least resistance is to keep borrowing to support politically untouchable fiefdoms, cartels and constituencies. Eventually, the cost of servicing the debt overwhelms the diminishing returns on the debt-based spending.

Cannot be resolved by decapitating the yen

According to “Economics 101”, quantitative easing, on the heroic scale we have witnessed thus far, should already have led to rampant if not hyper inflation. That it hasn’t is down to the continuing decline in the velocity of circulation of money. In simple terms the banks aren’t lending (compared with the amount of money available to them), but instead are punting on financial assets, which is where “inflation” is ending up and benefitting their balance sheets. Markets generally front run the economy, but if, as many folk believe, including our commentator above, that quantitative easing has been a failure from the start, then why are equity markets indicating an upturn in economic activity? At the end of the day, if the central banks continue to believe they have no other option than money printing and you can put up with the volatility, it’s all aboard the equity train. Bond yields won’t rise much either; if at all. The gold price should give some indication of whether this strategy is working or not, but that is a market that is far easier to rig than sovereign debt – the Germans seem to think so as they contemplate repatriating some of their bullion held by other central banks.

Keynesian stimulus policies (deficit spending and low-interest easy money) create speculative credit bubbles. The U.S. economy is a neofeudal debt-serf wasteland with few opportunities for organic (non-Central Planning) expansion. The velocity of money is in free-fall, and borrowing, squandering and printing trillions of dollars to prop up a diminishing-return Status Quo won't reverse that historic collapse. Put another way: we've run out of speculative credit bubbles to exploit.

Keynesian policy requires an expansionist Central State and Bank bent on imposing central planning on every level of the economy. Keynesians are natural partners with the neofeudal financial Aristocracy which benefits so enormously from Keynesian print-borrow-blow policies. The standard Keynesian cargo-cult analysis of our economic woes: 1. The problem is a lack of aggregate demand, i.e. people buying stuff and services; 2. As a result, the economy is running below capacity, i.e. economic output is below potential; 3. The solution is fiscal and monetary stimulus, i.e. the Central State borrowing and spending trillions on politically directed programs and the Federal Reserve printing and injecting trillions of "free money" dollars into the financial sector to boost borrowing and lending. The cargo-cult program has failed for a number of fundamental reasons. Let's illuminate these reasons with a few thought experiments.

Earlier today, in what can only be summarized as an epic meltdown, NJ governor Chris Christie proceeded with an even more epic rant against House speaker John Boehner, in narrow terms, and House Republicans in broader, for killing the $60 billion Sandy Assistance bill, whose funding would have offset one full year of the just legislated tax hikes on the rich which would add $62 billion annually to the Treasury (or alternatively would have been unfundable for the next 2 months while the US struggles to pay its mandatory bills courtesy of having breached the debt ceiling). Alternatively, all Americans could just agree to accept less welfare and entitlement benefits to show their solidarity for New Jersey and fund the recovery of the Tristate area by a "shared sacrifice" instead of going the default route and demanding even more deficit spending - something that would naturally saddle the next generation with even more pain, not the current, far more entitled one - but in this country that is an absolutely ludicrous proposition. Below is a clip of the entire Christie performance which is a must see for sheer indignation entertainment value alone.

The problem with democracy. 

To understand this endgame, we need to start with the financial and political basics of wealth and power in the U.S. Put these nine structural dynamics together and the endgame becomes clearly visible: Politically, a Tyranny of the Majority comprised of those who draw direct transfers/benefits from the Federal government, is ruled by the top half-of-1% financial aristocracy who own the majority of income-generating assets.  The minority, who pay most of the taxes (the 24.5% between the majority and aristocracy), will see their taxes rise as the aristocracy buys loopholes and exclusions while the bottom 50% pay no income tax. Financially, the Federal government’s spending has outrun the tax revenues being collected.  Structurally, Federal expenditures for entitlements (Medicare, Medicaid, Social Security, Veterans Administration, etc.) will rise as Baby Boomers retire en masse over the next 15 years, while tax revenues will stagnate along with earned income. There is no way to square these circles. What few dare admit, much less state publicly, is that the Constitutional limits on the financial Aristocracy and the Tyranny of the Majority have failed.

An abysmal indicator for Europe

Okay, the Fed's recent decision to boost its monetary stimulus (a.k.a. "money printing," "quantitative easing," or simply "QE") by another $45 billion a month to a combined $85 billion per month demonstrates an almost complete departure from what a normal person might consider sensible.

To borrow a phrase from Joel Salatin: Folks, this ain't normal.  To this I will add ...and it will end badly.

• Our markets are now truly broken; they don't send accurate price signals anymore
  
• Markets are now just a giant and rigged casino, where a relative handful of big firms and other tightly coupled players are gaming their orders to take advantage of this flood of money
  
• Expect the Fed balance sheet to quickly expand by an additional $3-4 trillion, resulting in runaway inflation and a possible currency crisis

US leaders see that this strategy has worked for EU leaders (those who went along with it are still in office, those who didn’t have been kicked out). And so they are now adopting a similar strategy with discussions on the fiscal cliff.

Behold the fund-tastic four: Ireland, Greece, Spain and... the US? These are the four countries that in the past four years have accumulated the greatest deficit as a % of GDP (and yes, at just under 50%, the US is worse than Spain whose cumulative deficit has been over 40% of GDP), which in turn they have had to fund with what else: new debt.