February 21, 2012

Borrowing Your Way Out of Debt and Other Normal Abnormalities

Bill Bonner

Bill Bonner
Reckoning from Buenos Aires, Argentina...

Dow up 45 points on Friday. The 10-year T-note right on the 2% yield mark.

Almost all the news is good. It looks like recovery is finally here.

Or, are we just getting used to a punky economy...where even a little improvement looks like a boom?

As far as we know, the US economy is still in a Great Correction...with plenty more correction ahead.

But people get used to correction...and used to the feds pumping in cash and credit to keep things from getting too rough. It is not exactly “normal” for a central bank to lend money below the rate of consumer price inflation. And it is not exactly “normal” for the government to run a deficit equal to 8% of GDP...or for it to spend $1.50 for every dollar it gets in tax revenues.

A lot of things aren’t “normal.” But if you do them for long enough, people get used to them. Even giving away money begins to seem normal.

The feds didn’t invent their EZ money theories. John Maynard Keynes came up with the goofy program many years ago. He met with Franklin Roosevelt and explained the idea. Roosevelt later confessed that he had no idea what Keynes was talking about. But he liked Keynes’ palaver. Because it gave him a theoretical justification for taking control of the economy.

Keynes’ basic idea was stolen from the Old Testament. Pharaoh stored up grain during the years when harvests were good. Then, he gave out the grain when they were bad. He looked like a genius. FDR probably wanted to look like a genius too.

But governments found it a lot easier to spend during the lean years than to save during the fat ones. In practice, they didn’t save at all. And then, when trouble came, they had no real resources with which to do any good.

Instead, they could only borrow money...or print it.

The real problem now is that the private sector has debt to settle. But you can’t settle debt with more debt.

No, dear reader, you can’t borrow your way out of debt. But you can sure in-debt your way out of borrowing. That is, you can run up so much debt that no one wants to lend you any more money. And when that happens...you’re like Greece.

But the USA isn’t Greece — except in the important ways. Both nations spend more than they can afford, depending on debt to make up the difference. And it works...sometimes for longer than you might imagine.

And while it’s working, everybody is pretty happy.

Investors seem to think our problems are behind us. But are they? We turn our heads to look back. Yes, we see a few problems back there. Households have reduced their debt-to-GDP ratio by 15%. Unfortunately, they’ve got a long way to go. At least another 15%. Maybe another 50%.

And as long as they’re working on it...there can’t be a genuine recovery.

All the feds are doing is setting us up for more, worse trouble. Government debt is rising fast.

So...how does this eventually resolve itself? Badly is our guess...

But wait.

You probably think the feds are smart people. If they’re running up big debts, it must be for a good reason, right? And they must know what they’re doing, right?

And if things start to go bad, they’ll see the error of their ways and change direction, right? Hey, that’s what’s nice about modern democratic government! The people control it. They’ll always do what’s best for themselves, right? And what’s best for the people is best for the country.

On the other hand, nobody wants the country to go broke, do they? So, it won’t happen, will it? Isn’t that the way things work?

No, afraid not. Often things happen that no one wants to happen. Who wants a $15 trillion US national debt? Who wants 25 million people without jobs? Who wants Mitt Romney or Barack Obama in the White House?

’Nuff said.

And one more thought...

On Thursday, we begin a 2-month sabbatical. That is, after working day in and day out since 1973...and writing The Daily Reckoning since 1998, we’re ready for a break

What are we going to do?

Well, we’re going to dig up dirt...mix it with water...and use it to lay up stones. Then we’re going to pour concrete and make arches...and then put vaulted ceilings on top of them. Then, we will build a cupola in the center of it and heap dirt over the entire roof. With a little luck, the thing won’t fall down or cave in.

We’ll let you know how it goes.


Bill Bonner,
for The Daily Reckoning


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