Gualfin (“End of the Road”), Argentina
There is a specter haunting America… and all the developed nations of the world.
It is the specter of a debt revolution.
We left off yesterday talking about how the economy of the last 30 years – and especially that of the last six years – has favored the old over the young.
“Rise up, ye young’uns,” we as much as said, “you have nothing to lose but your parents’ debts.”
We showed how the value of U.S. corporate equity, mainly held by older people, had multiplied by 28 times since 1981.
That was no honest bull market in stocks; it was a market sent soaring by an explosion of credit.
But what did it do for young people whose only assets are their time and their youthful energy?
Alas, the real economy has increased by only five times over the same period.
And when you look more closely at work and wages, the specter grows grimmer and more menacing.
Average hourly wages have barely budged in the last 30 years. And average household incomes have fallen – from $57,000 to $52,000 – in the 21st century.
But as our fingers came to rest yesterday, there was one question hanging in the air, like the smoke from an exploded hand grenade: Why?
Was this huge shift – of trillions of dollars of wealth from young working people to old asset holders – an accident?
Was it just the maturing of a market economy in the electronic age?
Was it because China took the capitalist road in 1979?
Or because robots were competing with young people for jobs?
Nope… on all three counts.
First, old people, not young people, control government.
Ultra-wealthy campaign funders like Sheldon Adelman and the Koch brothers were all born in the 1930s. The big money comes from wealthy geezers like these, eager to buy candidates early in the season when they are still relatively cheap.
Old companies fund most Washington lobbyists, too.
And old people decide elections: There are a lot of them… and they vote. They know where the money is.
Second, the government – doing the bidding of old people – restricts competition, subsidizes well-entrenched industries, raises the cost of employing young people, and directs its bailouts, cheap credit, and contracts to the graybeards.
Third, the credit-based money system increases the profits and prices of existing capital. It encourages borrowing and spending. This rewards the current generation while pushing the costs into the future.
None of this was an accident. None of it would have happened without the active intervention of the old folks, using the government to get what they could never have gotten honestly.
This is not the same as saying they were completely aware of what they were doing and what consequences their actions would have.
We doubt the Nixon administration had any idea what would happen after it tore up the Bretton Woods monetary system in 1971.
It was behind the eight ball, fearing foreign governments would call away America’s gold.
Few in the White House realized they had made such a calamitous mistake when the president ended the convertibility of the dollar into gold.
And yet it created a world in which parents and grandparents could prey on their grandchildren… for the next 44 years.
And it’s still not over.
The new credit money – which could be borrowed into existence with no need for any savings or gold backing – was just what old people needed.
We have estimated that it increased spending by about $33 trillion over and above what the old, gold-backed system would have allowed.
That spending lifted the value of the geezers’ assets and increased their living standards.
Meanwhile, the average 25-year-old reporting for work in 2015 can’t expect a single dollar more in real hourly wages than his father did in 1980.
The total value of outstanding U.S. corporate bonds was 17% of GDP in 1981. Now, it’s $11.6 trillion – or 65% of GDP.
What did corporations use that money for?
Some of it went into capital investment that made companies more productive and more profitable. But much of it went where you would expect it to go: to buy back shares… to acquire other companies at inflated prices… and to pay off executives as the value of their share options went up!
Who did this benefit?
Mostly people over 50.
Government debt is even worse. Unlike most personal debt, it doesn’t go to the grave with the person who borrowed it. It sticks around to burden the next generation – who got nothing from it.
Federal debt in 1980 was less than $1 trillion. Today, it is $18 trillion. That money was used to fund federal programs – few of which provided any benefit to young people.
An accident? A mistake?
Partly. But old people must have known what they were doing.
Their lobbyists asked for the spending. Their politicians voted for it. Their companies enjoyed the revenues. And they pocketed much of the money.
When the economy threatened a correction, they demanded more credit on easier terms to keep the money flowing. And when their credit balloon popped in 2008, they whined to the feds to protect their ill-gotten gains.
Honest capitalism? Not if they could prevent it.
Creative destruction? Not on their watch.
Pay for what you get? Not if they could put the bills on the next generation.
Young people of the world, unite!
The U.S. Dollar Rolls Over
|by Chris Hunter, Editor-in-Chief, Bonner & Partners|
The U.S. dollar is rolling over…
As I wrote about in the April 6 Market Insight, the dollar’s “mega rally” was starting to look a lot like the rallies in the Dow in late 1928 and the Nasdaq in late 1999 – disconnected from fundamentals.
[W]hen people start buying simply because they think a rally will continue, it signals the beginning of the end of the move higher. Think of the Dow in late 1928 or the Nasdaq in late 1999. If history is any judge, the next phase for the dollar could be a major reversal.
As you can see from today’s chart, after surging 20% over the preceding 12 months, the U.S. Dollar Index peaked about a week later… and is down 6% since then.
That’s its lowest level since the European Central Bank started deliberately devaluing the euro by way of QE in January.
Currencies’ exchange values tend to move higher as investors start to expect higher growth – and the higher interest rates that tend to accompany it – ahead. And they tend to fall as expectations of future growth fade.
That’s because, as interest rates rise, investors earn higher yields on their bonds, bank deposits, and money market funds. Conversely, lower interest rates mean lower returns.
Right now, hopes of U.S. economic growth are fading.
U.S. GDP growth is flatlining. And yesterday, the Commerce Department reported that retail sales were flat in April, as consumers cut back on buying cars, trucks, and other big-ticket items.
That’s bad news in an economy where consumer spending makes up about 70% of GDP.