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Musings Report 2023-44 10-28-23 Great Expectations and Wile E. Coyote
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Great Expectations and Wile E. Coyote
I recorded a podcast with my long-time collaborator Gordon Long yesterday, and Gordon shared his impressions of returning to the US after a few weeks visiting family in Europe: that we're "eating our seed corn" and where this leads is Wile E. Coyote suspended ever-so briefly in mid-air, having run off the cliff in pursuit of the Roadrunner.
From the point of view of previous generations' frugality and reliance on savings rather than borrowing, our current reliance on debt is "eating our seed corn" because we're not saving "seeds of future prosperity" in the form of capital, we're borrowing against future income as if that income is guaranteed, and relying on the collateral of debt-fueled asset bubbles in real estate and stocks, as if those assets can never go down for long before resuming their upward climb to ever greater heights.
Gordon did not want our discussion to be limited to financial charts and economic statistics. he wanted to probe our "Great Expectations" for future prosperity and ask "why" we're so willing to rely on our governments' borrowing eye-watering sums every year to meet their ever-expanding obligations, as if there isn't an expiration date on this reliance on ever-expanding borrowing.
The expiration date is Wile E. Coyote in mid-air: our reliance can't come to an end because we need it to continue indefinitely, and therefore we assume it will, as if our Great Expectations will be met simply because we have them.
The conventional economists' cheerleading chatter encourages our Great Expectations, as they're constantly telling us we're all getting wealthier and our wages are rising. But these statistical cheers are at odds with the experience of young workers who share their perspective on TikTok and other social media: full-time work and commuting doesn't leave enough time for one's personal life, never mind having kids, housing is unaffordable, buying a house is out of reach and so is retirement.
This doesn't sound like a society in which everyone's getting wealthier and earning more every day, in every way. This sounds like a society in terminal decline as older generations who bought assets long ago are reaping the gains of asset bubbles while younger generations have to wait until the oldsters pass on their wealth.
Recall my recent anecdote of the modest house bought for $135,000 in a desirable San Francisco Bay Area city in 1996 that is currently valued at $1.4 million--a 10-fold increase in 27 years while inflation and wages doubled. If the house had appreciated at the same rate as wages, it would be worth $270,000, about 20% of its current valuation,
The question few ask or answer is: who will have the means to buy all these assets at today's valuations? The assumption is everyone will inevitably get richer, and so the houses worth $1 million today can climb to $2 million and younger generations will be able to buy them.
Put another way, we've instilled an expectation that "you can have it all," and it's the government's job to enable this one way or another.
Taking on more debt is the painless solution everyone approves. This is a weakness in democracy, as there is no political will for forcing sacrifices on constituencies when we could meet everyone's needs by borrowing more money.
The problem with debt is that it accrues interest, and as debts expand the interest becomes substantial enough that it crowds out other spending. The painless solution is to borrow more to pay the interest and then borrow even more to meet the ever-expanding obligations.
This "solution" works when interest rates are near zero. This is how Japan has maintained nose-bleed levels of government borrowing for decades: the interest accruing is still manageable.
Japan has also been aided by its self-contained funding: corporations, banks and households have continued buying government bonds even though they pay near-zero because Japan's economy has stagnated for decades in deflation, meaning prices stay the same or decline, so near-zero interest bonds are "keeping up with inflation."
Overseas investors borrow money in Japan's markets at near-zero rates and then invest this borrowed money in higher-yield bonds elsewhere: borrow at 0.1% and invest in bonds paying 4%. This is the "yen carry trade," and it works until currencies muck it up by losing value or gaining value in the wrong direction.
The US government debt is issued in the form of Treasury bonds, bills and notes in various durations. US corporations, banks and households will not not buy bonds paying 0.1% if inflation is 4%-5%, and neither will foreign investors. So the US Treasury has to offer yields that match or exceed inflation.
Some observers think Japan is about to experience its own Wile E Coyote moment, for if inflation rises in Japan after 30 years of stagnation, then the buyers of near-zero-yield bonds may balk.
The other trick is of course for central banks to create currency out of thin air and use this "free money" to buy government bonds. This is called "monetizing the debt" because newly issued money is used to buy the bonds and bury them in the central bank's accounts. It seems like a financial perpetual-motion-machine--a painless way for the government to borrow trillions without worrying if anyone will buy the bonds.
But history hasn't been kind to this sort of sleight of hand, as whatever seems painless ends up bringing down the entire financial system.
As I've often noted in blog posts, we've substituted financialization for real-world advances in the purchasing power of wages and productivity, i.e. real prosperity, for an illusion of prosperity generated by borrowing monumental sums to fund our obligations and expectations and inflating asset bubbles.
Once inflation (from any source) enters the picture, bond yields cannot stay near zero because nobody will choose to lose money as inflation eats up their capital. Interest rates rise and stay elevated, and interest soon eats the government budget alive, crowding out other spending.
It's the equivalent of taking on a huge mortgage at a high rate of interest. Unless your income is skyrocketing like clockwork, the cost of servicing this debt crimps your spending, as there's little left over after paying the mortgage, property and income taxes, insurance and other essentials.
Lenders start declining to lend the heavily indebted household more money, as the greater the burden of debt service, the greater the risk of an eventual default. Bond buyers quiver at the same issue when governments issue enormous quantities of new bonds (i.e. debt), as history shows that governments tend to pay back their ballooning debts with depreciated/devalued currency. You get your money back, but its purchasing power is only a fraction of the money you bought the bond with.
The other problem (along with interest and the risk of default or currency devaluation) is the US economy, along with all other economies to varying degrees, depends on free-spending households and enterprises consuming more goods and services every day essentially forever. If borrowers can no longer borrow more to spend more, the economy shrinks, i.e. recession, and this triggers the feared defaults as incomes decline.
Lenders are forced by basic prudence to stop lending to risky over-leveraged borrowers, and so spending dries up.
This generates a self-reinforcing feedback loop, as spending declines lead to layoffs and declines in income, which then trigger more defaults which then reduces lenders' appetites to lend, and so on.
The big difference between now and two generations ago is the percentage of the economy that is reliant on debt, and the sum total of debt, public and private, is much higher now. As long as the asset bubbles don't pop, the illusion of solvency can be maintained. But alas, all asset bubbles eventually collapse under their own weight, and so there's a "business cycle / credit cycle" built into markets and economies: credit expands to the point that its growth is unsustainable at current yields / interest rates and income, and the easy-money-era-fueled speculations blow up because they were inherently risky.
This generates a reset / retrenching in which debts are written off, debt loads fall, savings rise, speculative ventures fall out of favor as bankruptcies soar and so on.
This is widely viewed not just as healthy but essential.
The question now is whether the debt loads, debt service and expectations of ever-higher borrowing to fund ever-expanding obligations can survive even a modest reset.
Yet another problem with depending on expanding debt to pay for all the things we've come to expect as our birthright is the loss of discipline: when we have to live within a strict budget of what we earn, then we are forced to improve our efficiency, make trade-offs and sacrifice what is less important to fund what is more important.
Our society and economy have lost the ability to manage this process of discipline, which is, like periodic resets, essential to the functioning of the economy, for without the selective pressure of discipline, then efficiency and accountability decay, which is exactly what we see now as the default settings everywhere.
When you can solve all problems by simply borrowing more and pushing the costs into the future, everyone loves that solution. You win elections, everyone gets more money to spend, and so everyone's delighted.
But without any discipline, there's no pressure to become efficient, productive and accountable. Everything decays when money is flowing freely because it can be borrowed in limitless sums.
This sets up either a reset of the entire debt and the economy that has become dependent on its expansion or an endless stagnation as "business as usual" bleeds the society of vitality and Great Expectations. Young people give up and accept stasis and decay as the norm. They give up on marrying, having children and owning homes, and sink into the quiet despair of entertaining themselves with child-like trends and fashions. This is what I call social defeat, and it is visible everywhere, should we glance beneath the surface.
Wile E. Coyote has Great Expectations: he's going to "have it all" once he catches the Roadrunner. And so Wile runs off the cliff, confident it will all work out just fine. Then there's the moment of realization that gravity is now a mortal enemy and there's nothing beneath our feet but air.
What's our response to the potential for reset or stagnation? Prepare for any eventuality by not eating our own seed corn, paying off debt and by limiting our dependence on the government to meet our Great Expectations. Increase our reliance on what we control and what we and our networks / community can provide. This is the essence of self-reliance.
Highlights of the Blog
Our Neofeudal, Neocolonial World 10/26/23
The Profitable Destruction of Americans' Health 10/23/23
Best Thing That Happened To Me This Week
I received very kind comments from subscribers that left me feeling "I am not worthy":
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From Left Field
NOTE TO NEW READERS: This list is not comprised of articles I agree with or that I judge to be correct or of the highest quality. It is representative of the content I find interesting as reflections of the current zeitgeist. The list is intended to be perused with an open, critical, occasionally amused mind.
Many links are behind paywalls. Most paywalled sites allow a few free articles per month if you register. It's the New Normal.
Is new malaria vaccine ‘world-changing’? Maybe.-- 80% effective at best, 40% in other cases....
Drug Overdose Death Rates (NIH) -- horrific....
10 Reasons Our Civilization Will Soon Collapse -- all well-established...
A capitalist cheerleader wrote the US’s hottest new self-help book. Surprised?
Study links long COVID to gut inflammation and serotonin deficiency-- more evidence that the microbiome matters...
Stress Is Weathering Our Bodies From The Inside Out -- bad news for Type A people like me, I must be a hollow shell by now...
If You’ve Ever Heard a Voice That Wasn’t There, This Could Be Why
Why US Businesses Can't Wait To Get Out Of China--uncertainty about future sudden policy changes is anathema to enterprise...
Most Expensive Places to Live in the U.S. in 2023-2024 --Stockton, CA? Really?
China’s Age of Malaise -- long-form essay, behind the firewall, but worth a read...
A college graduate who just started her first job shared the shock and upset of working a 9-to-5
Young Chinese adults can't find work. Now many have a new job description: 'Full-time children'
"We learn from our gardens to deal with the most urgent question of the time: How much is enough?" Wendell Berry
Thanks for reading--
charles |
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