Posted December 22, 2020
By Byron King
America Burns the Furniture
When things get desperate, youll burn the furniture for heat. Ill explain more in a moment.
For now, Congress reached a deal on a $900 billion COVID spending bill.
According to MSN News, The measure will be tied to a $1.4 trillion must-pass spending bill that will fund federal agencies and programs through Sept. 30, the end of the fiscal year.1
The idea is to funnel cash to people, businesses, governments and whomever/whatever else can squeeze their name or organization into the legislation.
Add it all up and its over $2.3 trillion.
By comparison, just the $900 billion of COVID-related spending is a good deal larger than the annual defense budget.
There will be money for supplemental unemployment comp; $600 checks to individuals; money for COVID vaccines, hospitals and other medical providers; aid to states and cities; school funding (huh?); rent moratoriums; and much more.
Of course, anything can happen inside an Act of Congress. The political process conjures up the famous words of Speaker of the House Nancy Pelosi (D-CA) from an earlier time, Well have to pass the bill to see whats in it.
And who knows? Perhaps some of that money will flow your way, depending on circumstances. If so, I wish you well.
Meanwhile, stock markets have bid up in anticipation of all that forthcoming federal largesse.
The price of gold is rising too, which indicates markets believe that the new government spending will weaken the dollar. (More on that in a moment, too.)
Theres much going on here, so lets dig into this
At the outset, its worth noting that theres nothing in the U.S. Treasury to pay for all this new spending. Indeed, so far this year federal tax receipts are down by quite a bit. Obvious reasons, right?
Looking ahead, the new $900 billion for COVID and the $1.4 trillion of other government funding will come from the Fed. That is, the Fed will make new entries on the national balance sheet, and voila Money!
The Fed will transfer funds to Treasury, then Treasury will shell it out to bank accounts across the land.
So Merry Christmas, in a manner of speaking, courtesy of the Fed.
Theres a certain historical symmetry in all of this.
Particularly, this Niagara of Fed money is flowing over the cliff just before Christmas. And the Fed itself was established by Act of Congress on Tuesday night, Dec. 23, 1913.
Were witness to central banking at its finest, from one Christmas Eve to another, separated by 107 years.
Meanwhile, right up front Ill say that Im no Scrooge. Im basically okay with the government spending $2.3 trillion dollars it doesnt have.
I could be cynical and simply remark, So what else is new?
More practically, the country is in the midst of a 10-month (so far) national medical emergency.
And sure, many big metrics of the economy look good; stock markets come to mind. Tesla! Amazon! Zoom!
But other big metrics are frighteningly bad. Theyre a tragic disaster at the personal level for people across the land.
Due to government policies certainly, due to the widespread lockdowns the country currently has tens of millions of people not working or earning an income. Youve no doubt seen imagery of miles-long caravans of cars lined up to collect food from food banks.2
Dallas car line for food, this past Thanksgiving week.3And things are just as bad in vast swaths of the housing sector.For example, Forbes reports that, More than 14 million American households are currently at risk of eviction with nearly 5 million of those households expected to receive eviction notices starting Jan.1 when a ban issued by the Centers for Disease Control and Prevention lapses.4Meanwhile, of those 14 million households, the average arrearage on rents and mortgages is over $6,000.Do the math; thats over $84 billion right there, unpaid to landlords and banks across the land.And much of that $84 billion unpaid to landlords and banks is owed to other banks and lenders, who have obligations on their end. Its a vicious chain of events.Look at it this way. The renter or homeowner failed to pay rent or a mortgage. The landlord or bank didnt get paid. The next level of lenders went unpaid. And so on up the money ladder.If money is like oxygen, then unpaid obligations are like someone standing on the air hose.And thats just for housing. Much the same thing is going on with other significant parts of the money-lending economy: unpaid automobile loans, consumer loans, student loans.Unpaid for months at a spell. And arrearages increase every week, every month. Up, up, up.With tens of millions of people either not working or working reduced hours and all these bills going unpaid, were headed for a series of cascading financial disasters in 2021.So yes Pretty much everyone, from Wall Street to Main Street, expects the government to do something.Pass a relief bill from Congress? Sure. By all meansSpend money that the Fed creates out of nothing. Yeah Why not?Whats another couple of trillion? The national debt is already something like $25 trillion.Why choose now to pinch pennies?Which brings us back to burning furniture.In some respects, this unfolding national economic disaster takes me back to something we studied at the Naval War College; namely, the Russo-Japanese War of 1904 05.Its probably fair to say that many Americans have never heard of this war.But at the Naval War College, the Russo-Japanese War is (at least, used to be) an important part of the strategy curriculum, worthy of serious attention.In fact, some historians call that conflict World War Zero. It foreshadowed so much else that occurred in World Wars I and II in both the Pacific and even in Europe.The war began in February 1904 with a sneak attack by Japan on Russian forces in Port Arthur, China; a place now called Dalian. It was the First Pearl Harbor, according to Dennis and Peggy Warner, whose thorough,1974 book on the war is entitled The Tide at Sunrise.The war included immense armies fighting massive, set-piece battles on land. And great fleets clashing at sea.The outcome of the war even crystallized the beginnings of a U.S. military-diplomatic role as a Pacific Ocean power throughout the 20th Century. Theres quite a story thereAmong other things of interest to Americans, President Theodore Roosevelt helped broker an end to the conflict. He staged a conference at Portsmouth, N.H., which ironed out a peace treaty between the belligerent parties. For this, Roosevelt was awarded the Nobel Peace Prize in 1906.But lets set aside the Nobel Prize angle and focus in on a small, but telling, detail of the Russo-Japanese War. It occurred as events played out toward the end of combat operations.In May 1905, the Russians and Japanese came together in a titanic naval battle in the Strait of Tsushima, between the southeast tip of Korea and Japan. This area is in the southern region of the Sea of Japan (aka Eastern Sea to Koreans).During the Battle of Tsushima, the Japanese navy crossed the T, as the saying goes, and got the better of the Russian fleet. Japanese battleships blasted the Russians and all but annihilated the Russian force.It was an epic victory for the Japanese. A complete rout. Over two dozen major Russian vessels were sunk or captured.It was an abject defeat for the Russians. The Japanese even captured the Russian admiral in command.A mere three small Russian vessels outran the Japanese pursuers, fled north and limped into the Russian port of Vladivostok.Along the way, the crews burned the ships furniture in the boilers to keep up steam.You get that? They burned the furnitureBecause thats what you do to escape a disaster and survive.Which brings us back to the U.S. government spending money it doesnt have just now.Theres a distinct attitude in Washington indeed, across America that the country can spend, spend, spend. And its a product of the facile accounting and bookkeeping down the street, on Constitution Avenue, at the Federal Reserve.The current fad in economic thinking is Modern Monetary Theory (MMT). We touched on it here: Dollar Doomed as Biden Taps Yellen for Treasury - St. Paul ResearchThe idea is that the Fed can create whatever money the government wants to spend. Just conjure it up on the balance sheet.Spend-spend-spend, and send the bill to the Fed.But the Feds dollars are not true wealth. They are just a claim on wealth. Another term for it is confiscation.Because real wealth is based on creating real things. I discussed it here: Back to Basics: A Real Economy Makes Real Things - St. Paul ResearchWealth is based on using energy, applying it to materials and adding value.Real wealth is oil and gas, food, ores, metals, machines, factories, buildings, useful services, patents.Any economy is, at root, a reflection of how a society arranges people and materials to create and consume its wealth. Some economies function better than others.Economies that create wealth tend to do well over time. Economies that confiscate wealth tend to fail.And right now, America is a mixed bag. Yes, theres wealth creation. But at the same time theres national scale monetary confiscation.As the Fed prepares to open the valves for even more spending, its the equivalent of burning the furniture in the boilers. The immediate goal is to limp through the current mess and get to some future point of safety.But when the country arrives in that safe harbor, we will all be much poorer for the voyage.Along the way, those trillions of new Fed dollars wont make America richer. They will actually impoverish the nation.To keep social peace to avoid widespread human tragedy and catastrophe the country is indebting itself to astronomical levels.New spending will eventually, inevitably diminish the value of the dollar.Trillions of new Fed dollars will confiscate things of real value from the rest of the economy.All that new currency will chase the same (or more likely, less) amount of goods. Its the very definition of inflation.And yes, absolutely Sometimes you do what you have to do As a person, or as a nation.Nobody asked for COVID. Nobody wanted national-scale lockdowns. Nobody voted to wreck the economy.But the policy response by government has been to strangle productivity and then spend money the country doesnt have.Theres a future cost to that, called inflation.Youll protect yourself to some extent by owning gold or other precious metals. Those will likely preserve your purchasing power. Other hard assets too.But whatever you do, just recognize whats happening out there.The country is burning the furniture to keep going.This is Americas tide at sunrise.On that note, I rest my case.Thats all for now Thank you for subscribing and reading.Best wishes,Byron King
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