What’s a mere $4.7 trillion between friends?

I note that our Senators have beclowned themselves (yet again) by passing, in rapid succession, a “bipartisan” $1.2 trillion and a “partisan” $3.5 trillion infrastructure bills, which now go to the House for approval and then to President Biden for his signature.  The fact that the money isn’t there to pay for them (despite optimistic claims by our politicians) is neither here nor there.  They’ll find it, somehow . . . or so they say.

These bills may be some of the last nails in the coffin of our economy in its present form.  So far this fiscal year, our deficit is already at $2.237 trillion – and that’s just in one year.  Our national debt as of the end of June this year stood at $22.3 trillion – $1.8 trillion higher than the same month last year.  With numbers that large, the new infrastructure packages are lost in the static.  They’re yet more unpayable debt, added on to the debt we already can’t afford to repay.

Charles Hugh Smith points out that our economy as a whole is increasingly unstable, largely because of debt loads like that.  He’s writing about the economy in general, rather than US government debt, but since that debt underpins everything else via deficit spending, it comes to the same thing.  He headlines his article “How Breakdown Cascades into Collapse“.

Another key weakness is the entire system’s reliance on debt, leverage and speculation. Few seem to understand that physical production and delivery systems can grind to a halt for financial reasons–for example, lines of credit being pulled, a counterparty to some arcane commodity swap goes under, taking the presumably solvent corporation down with it, and so on.

The more debt that’s been piled up, the greater the instability of the entire system. Risk always appears low until the system destabilizes, and then all the hedges fail and risk breaks out, flooding through the entire financial system.

Leverage is great fun on the way up, as it magnifies gains. Since the Federal Reserve implicitly guarantees that “buy the dip” will generate massive gains, why not ramp up leverage ten-fold to maximize those Fed-guaranteed gains?

Leverage is less fun on the way down. When the underlying collateral has shrunk to 20% of the leveraged bets being made, a 21% decline in the asset wipes out all the collateral holding up the palace of leveraged debt.

The Fed can print money but it can’t create collateral, nor can it make insolvent entities solvent. All the Fed can do is increase the debt and leverage, which is not the solution, it’s the problem.

. . .

The Fed’s entire strategy in the 21st century has been to inflate asset bubbles that generate the illusion of wealth–the so-called wealth effect which is presumed to inspire voracious borrowing and spending.

Unfortunately for the Fed, most of the gains flowed to the top 0.1%, and an economy based on a handful of billionaires buying super-yachts and spaceships is a line of dominoes awaiting the inevitable “accident.” So there are two systemic problems with relying on asset bubbles to generate “wealth”: 1) since 90% of the assets are owned by a thin slice of the populace, bubbles increase destabilizing inequality, and 2) bubbles are intrinsically unstable. So the U.S. economy, dependent on the Fed for the “juice” of monetary stimulus, is now dependent on incredibly unstable bubbles in assets, debt and leverage, bubbles which have generated extremes of wealth/income inequality that are destabilizing the social and political orders.

As the three charts below illustrate, the fragility and instability are well hidden until it’s too late: bubbles, debt, leverage, budgets and revenues can only click higher because the system breaks down if there is any sustained decline (the rising wedge model of breakdown). Once the subsystems fail, there’s no putting the eggshell back together.

There’s more at the link.

I regard these “stimulus” bills as harbingers of the fast-approaching financial storm.  We simply do not have, nor are we likely to have, enough money to pay for them, unless we borrow it;  and increasingly, lenders are taking a long, hard look at the US deficit and asking themselves how on earth we can ever be expected to repay it.  If lenders aren’t sure they’ll be repaid in due course, why should they lend us even more money?  In their shoes, I wouldn’t.

These bills also ensure that inflation will become an entrenched reality for years to come.  The Federal Reserve will have no choice but to devalue our currency through inflation, so that our existing deficit can be repaid in devalued dollars.  Without that, there’s no way we’ll ever be able to afford to repay it.

Our politicians on both sides of the aisle are fiscal bulls in our economic china shop.  Neither party can be trusted to do the right thing.  Our politicians are almost all as bad as each other.  How we get rid of them, I don’t know, because they’ve entrenched themselves in their positions and are grimly determined to hang on to power;  but get rid of them we must, because if we don’t, they’ll drag us over the fiscal cliff with them.  They’ve abandoned financial reality in favor of their tax-and-spend wet dreams.  It’s up to us to wake them up from their dreams, so that they realize they were, in fact, a nightmare for our country and the rest of us who live here.

Peter