POITOU, FRANCE – “China’s got a big advantage,” began a friend after dinner. “It doesn’t have elections every four years.

“In America, every four years, the governing party tries to guarantee reelection by stimulating the economy. That’s why Trump needs to make a deal with China.

“But China doesn’t have to worry about an election. It can pursue long-term policy goals. America can’t.”

Tricking the Public

In the U.S., the prevailing myth is that elections give “the people” a way to correct the mistakes they made in previous elections.

In practice, the important decisions are made by an elite that never faces an election and whose main policy goal – getting more power and money for itself – never changes.

But there are different factions in the Deep State.

They compete for power in elections and try to improve their chances of winning by tricking the public with fake money and cheap credit.

That’s why Mr. Trump is pushing the Federal Reserve to cut rates by 100 basis points.

“And now, the Chinese have got Mr. Trump’s number,” our companion continued. “Behind all the threats and bluster, he’s got an election to win. And I don’t think they’re going to help him win it.”

Fearful Empire

Former President Jimmy Carter sent a letter to Mr. Trump.

He pointed out another structural strength of the Chinese system: They don’t waste their money on military boondoggles…

How many miles of high-speed railroads do we have in this country? China has around 18,000 miles (29,000 km) of high-speed rail lines while the US has wasted, I think, $3 trillion on military spending; it’s more than you can imagine. China has not wasted a single penny on war, and that’s why they’re ahead of us.

I think the difference is if you take $3 trillion and put it in American infrastructure, you’d probably have $2 trillion leftover; we’d have high-speed railroads that are maintained properly. Our education system would be as good as that of, say, South Korea or Hong Kong.

The old power looks backward. The new one looks ahead. An aging, fearful empire depletes its wealth trying to hold on to its power… and protect its position as the world’s leading economy.

Its rivals stick to business. China, Russia, Germany – all must face as many “enemies” as the U.S. But none spend more than a fraction of what the U.S. squanders on its military.

Epic Lows

Meanwhile, the bubble in bonds gets bigger as yields continue to sink to epic lows. John Authers, senior editor at Bloomberg, tweets:

This is getting surreal. As of now, the dividend yield on the S&P 500 exceeds the 30-year Treasury yield. Last and only time that happened in the last 40 years was during the crisis. So, buy stocks for the dividends???

The U.S. 10-year yield, the most stable “risk-free” credit in the entire world, has been cut in half in the last 10 months. It has fallen from 3.2% to just 1.6%.

The whole earth trembles. Something big is afoot. Surely, some revelation is at hand…

Some rough beast slouches toward Bethlehem. But what?

In these pages, we have seen how the flower of U.S. capitalism – the Dow 30 stocks – is worth less than half (in gold terms) what it was worth 20 years ago.

That, and a myriad of other indicators, suggests that America’s long walk on the sunny side of the street ended when the 21st century began.

Our collaborator, Dan Denning, who is visiting us in France, believes the bond market, too, is telling us that the U.S. has crossed the street:

Historically, a bond bubble [low yields, high prices] marks the transfer of power from one nation to the next. Power follows money; money follows power.

The dominant country imposes its money. As it grows wealthier and more powerful, its debt and its currency become more important to the regional economy.

Often, this seems to lead to overpricing of its bonds… resulting in a bubble. When the bubble bursts, the lead shifts to a rising power.

The last bond bubble of this size came when Venice declined and Spain took the lead. Power went from Venice to Spain to the Netherlands to England to America. That’s just the way it works.

(Dan will spell out a more complete analysis in the latest issue of our joint newsletter, The Bonner-Denning Letter, this evening.)

Wasted Capital

Back in the ’60s, economists were misled by the gross poundage of steel and million kilowatts of electricity produced by the Soviet Union.

They were signs of “growth,” or so the economists thought.

But while central planning can imitate economic growth, it rarely produces real progress.

And today, the Chinese infrastructure that delights Jimmy Carter is more likely an artifact of wasted capital than of real economic growth.

And, today, China does not seem ready to take the lead dog role. Its economy is hardly the super pooch it appears to be.

While some of its investments – such as the high-speed railways – may pay off, most will not.

Inglorious Collapse

As we pointed out yesterday, governments are much more likely to destroy capital than create it.

But major shifts in economic power take decades.

It appears that the U.S. began to decline after 1999. Most likely, the next crisis will speed up the slide.

And perhaps in the meantime, China will suffer an inglorious economic collapse, too… but learn from its mistakes… and then be prepared to take its place as the world’s leading economy.

Or, perhaps it will learn nothing… and still dominate in a world of even dumber socialist/central-planning governments.

As always, nobody knows anything.

Regards,

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Bill