America in a Nutshell

The Pacific Northwest is a land of plenty. Winters along the coast are not particularly harsh. The salmon run like clockwork. Pine forests are much more conducive to large mammals than the viny, jungle-like brush of the East Coast. And so, in terms of resources, the Native American tribes of the Pacific Northwest were wealthy. They didn’t starve. In fact, their culture and political structure reflected the bounty with which they lived. 

A  Kwakiutl man who desired political power would ask his family and friends to donate rugs, jars of salmon oil, leather pants, and other things. And then whichever aspirational leader could garner the most campaign contributions would be declared the next big man of the tribe. The new big man would then throw a big party (inauguration ball?), and all the pants, salmon oil, and rugs would get thrown into a giant bonfire. After all, there’s no better way to demonstrate how much you have than to set it all ablaze. 

Modern Americans take it for granted that we have evolved to a far more civilized way of living. But I don’t think that primeval desire to see it all burn sits very far below the veneer.

You know we’re $4 trillion in the hole since the March lockdown? Forgivable loans, bond and stock purchases, some (not enough) money to the states to backstop teacher and cop salaries… so if you’re a teacher, OK, you may be feeling alright about it, maybe not so much if you’re a cop — things haven’t been going so well for the men and women in blue lately. Oh, I almost forgot: You may have gotten a $1,200 check in the mail FOUR MONTHS ago… but other than that, we might as well have had a big, masked, socially distanced party and set that $4 trillion on fire for all the good it’s done us. 

A Good American

OK, sometimes my cynicism gets the best of me. Because that $4 trillion hasn’t just gone up in smoke; the Federal Reserve has bought roughly $2 trillion worth of bonds and even stocks to keep interest rates low in order to support an economic recovery. It seems like a powerful action, but how exactly is that recovery supposed to get going when 2 million–3 million jobs have just been potlatched into thin air? That’s the Fed’s dilemma in a nutshell.

So the Fed has bought stupid-low interest rates for a few trillion dollars. The yield on the 10-year bond is now 0.65%. Doesn’t sound like a very good trade-off for the Fed, does it? Well, it’s not. And it’s because a crisis like this actually does present an existential threat to America. And the Fed really can’t do very much about it.

Let me ask you: Why are low-interest rates so important right now? Put it this way: Low interest makes buying a car or a house very attractive right now. Why is that important? Well… because the U.S. economy is more than 70% consumer spending and 3 million jobs just went POOF!

In a growing world, low rates invite companies to invest in production capacity, hire workers, kick-start the whole vicious cycle. But the world isn’t growing. We have too much production capacity and not enough demand. And so, the burden falls on you.

The Fed is trying to make it as easy as possible for you to do your patriotic duty and go into debt because if consumer spending slows down for any length of time, the American dream goes to hell in a bucket.

The whole American “get a job, start a family, get a mortgage” debt trap thing gets tossed around pretty flippantly. I mean, I remember people practically bragging about their debt at parties (you remember parties right?): “Oh that’s nothing! I’ve got two car payments, a $500,000 mortgage, two kids going to college in the next decade, and I’m nearly out from under the $100,000 I took in student loans.” 

It’s like taking on debt is the American way. It’s more true than most people realize…

I’m Gonna Break This Down for My Doctor Readers and Be Real Clear About the Symptoms 

I listen to a lot of sports talk radio, and I’m probably the only one who thinks that subhead is funny. But whatever, my article. Anyway…

This all has to do with the reserve status of the U.S. dollar and America’s status in the world. The dollar is the world’s currency, and America serves as the world’s banker. As such, the world sends us its savings — its surplus — in the form of Treasury bond purchases, and we pay them back… with interest. That interest comes from two places: inflation and American consumer spending. 

In other words, money comes here, gets churned around the economy via purchasing (velocity of money), and if the U.S. dollar truly is a value-add, then there’s a surplus that gets skimmed in the form of taxes that then pays foreign money off. And the whole cycle works much better with a bit of inflation which makes the interest payments a lot more manageable. 

Now, you may have noticed that there hasn’t been a lot of inflation for the last, oh,12 years. This is part of the reason that the federal debt has ballooned. We’re borrowing more, and the Treasury payments are not being helped by inflation, so the government borrows more and is in essence paying back debt with more debt — not sustainable. 

You can bet the Fed has noticed the lack of inflation. Powell does his Native American inflation dance every chance he gets, and it ain’t working because the deflationary forces from tech and automation are more powerful. 

For some reason, we can’t be honest about this and say, “Ya know what? We need to slow the rate at which automation and corporate M&A destroys jobs. Without consumer spending growth, we got problems.”

Instead, the Fed and the government are asking you to do more, to buy more. And since more debt is the only way to make that happen in an economy that is losing jobs, then yeah, rates will stay enticingly low until the cows come home driving brand new cars. 

Two more points and I’m done. One: This is why stock market panics coincide with job losses and declines in consumer spending. The smart money is well aware that it can all fall apart a lot easier than most of us think. You can fret over elections, this ridiculous TikTok thing, money laundering, or whatever else this latest market selloff is being blamed on. The truth is: It’s the economy.

Which brings me to number two: Fed Chair Powell consistently says he doesn’t care about asset bubbles, and in fact, he’s not even sure there’s a link between money printing and bubbles. Cmon. He knows what his predecessors have known: A good ol’ asset bubble is the quickest way to jumpstart enthusiasm and spending. Yeah, the hangover from a bubble is a bitch, but it seems like a fair trade when the whole system hits a do-or-die point. 

There’s a Saturday Night Live skit from back in the late ’70s when inflation was out of control. One of the cast spoofed Jimmy Carter asking every American to take out a dollar bill and set it on fire because fewer dollars in circulation would lower inflation. Hmmm, I wonder if the Kwakiutl were onto something. Maybe it’s time to set some stuff on fire, get some replacement spending going to juice the economy. 

Until next time,

Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.