Bill Bonner

The US now finds itself in much the same fiscal boat as Japan. America’s “stimulus” efforts have become permanent, structural elements of the economy.

Since November, the Fed has injected about $4 billion a day into the economy through its QE2 program. And the federal government gives the economy almost another $5 billion worth of deficit spending a day. Together, this is $63 billion going into the economy each week.

In time of emergency – in a war, say – you would expect the feds to do extraordinary things for a short time. But now – with no war…and no national emergency…no recession…and no end in sight – the authorities are subsidizing the economy with a combined fiscal and monetary boost equal to more than $2 trillion a year! And that doesn’t include the effect of zero interest rates.

Not surprisingly, these massive stimulus efforts require equally massive borrowing efforts. Talk about crowding out! The government has completely displaced the private sector from the credit markets. As the chart below shows, as of last year public sector borrowing had been more than 100% of total domestic credit for two consecutive years.

Public Sector Borrowing - 100% of Domestic Credit Growth for 2 Consecutive Years

This presents a problem. To fund this public sector borrowing, Washington must either borrow someone else’s savings (or borrow directly from the Federal Reserve by way of debt monetization). The Japanese are a “go-to buyer” of US Treasurys (and the second largest holder of US government paper after China). But in view of the recent devastation, as well as the decline in savings and the rise in its own deficits, Japan is unlikely to continue to be a major source of financing for the US. Rebuilding the quake-damaged country will surely take priority.

Meanwhile, China is putting more emphasis on domestic consumption. This will mean allowing the yuan to strengthen versus the dollar and less frantic buying of US government paper as a result. This suggests that China too will be less ready to help out a friend in need.

If we look at the US government’s massive spending as an investment, the payoff is obviously and hugely negative. GDP growth – albeit largely phony – comes to only about $500 billion this year. That’s a net loss to the economy of $1.5 trillion, more or less.

Of course, it’s not an investment at all. It’s a subsidy. And like all subsidies, the economy adapts. And then becomes dependent.

Last year, the Obama administration estimated the budget deficit for the current year at $900 billion. They were off by nearly 100%. The budget deficit is now estimated to be $1.7 trillion – and it could rise. Out of every dollar spent by the US government, 43 cents, not 26 cents as Obama’s team estimated, will be borrowed. How’s that for budget control? And this is in a year when the economy is growing and, according to the official storyline, “recovering.”

The stimulus efforts are clearly failing to stimulate economic growth, but they are succeeding very well at debasing the dollar.

Our colleague in London, Dominic Frisby, makes an interesting point:

If you take the Nikkei and measure it in dollars, or take the Dow and measure it in Japanese yen, the performance has been virtually identical over the last two years.

In other words, the Dow’s great rally has been an illusion caused by a falling dollar. And the Nikkei’s slump an illusion caused by a rising yen. Whether you are a US investor buying Japanese stocks or a Japanese investor buying American stocks, you get the same result. Currency movements are distorting what is really going on in the equity markets.

Or to put it another way, the buoyant US stock market is hiding the profound weakness of the US dollar. This weakness has not spiraled into a crisis yet.

But suppose the dreaded double-dip recession comes? Suppose another earthquake, another revolution, or some other surprise, causes a resumption of the bear market on Wall Street? Suppose the budget deficit goes to $2 trillion – as forecast by former OMB director David Stockman?

Business, investors and households adjust to the extra money. No longer like WD40, intended to loosen the nuts and bolts of a cranky economy, the liquidity becomes more like diesel fuel. Then it is practically impossible to take it away. Shut off the supply of fuel and the machine stops.

The only sure way to keep the juice flowing is by means of the QE program. That is why Marc Faber expects QE2 to lead to QE3 and QE4…up to QE18.

We’re not so sure it will go that far. The system, such as it is, might just blow up first.


Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • jason

    This reckoning says…”now, with no war..” I am a bit confused. I thought that the USA was currently in about 5 or 6 wars. `

  • Phil

    The USA gifted Japan with a HAARP tsunami.

    But, what are friends for.

  • JMR

    A am taken back by the drop in private sector borrowing over the last two years. Is that a bigger drop than the first two years of the Great Depression?

  • Clay

    The more the goverment eases, the more time I have to buy silver. Oh Yeah!!!
    I’ve been collecting silver since the 90’s and can’t wait till $100 dollars and ounce for my dream home!!! Bring it!

  • Jack

    In other words … America, you can’t handle the truth.

    QE is an addicting,narcotic drug and we all know how that ends.

  • dean

    No need to worry. Let QE be your friend

  • Dave

    Yeah yeah yeah, once again everything is AFU. Meanwhile I am up over 40% in the last 12 months. And if I hadn’t been listening to this doom and gloom constantly I would have done even better.

  • 2 funny

    Dave could have gotten better than 40%?

    Holy Hanna! Give Mr. Buffett a call STAT! He has a job opening!

  • leftyG

    two years ago, we KNEW the gov’t borrowing needs would suck up everything, and then some.
    dave didn’t seem to “get” the part about dollar debasement/inflation of the “currency”.
    and, without the keynesian unicorns and happy rainbows forever? yep! jest a tad of gloom and doom.
    there’s a word for people who have lost the basic fear of mad fiscal/monetary scientists playing around with unheard of sums of debt and deficit: FOOLS!
    and, they’ll soon enough be parted from even their “40%” nominal gains. pay yer taxes, dave. take what is left and measure it against PM’s, oil, cotton, sugar, rice, corn, grains. your paper is WAY down.
    many people who follow the agora sites are NOT fools. it IS 2 funny when people who can’t think straight start calling clear thinkers names…

  • JMR

    With a public/private sector borrowing chart like that, there is no way there won’t be a QE3. I’m not saying that it will be announced before the July Fed meeting, though.

    And as far as the doom and gloom goes, fed policy is pumping up prices and a lot of money is to be had through speculation, but when higher input costs work their way through the system THEN the doom and gloom will happen. Profit margins are reported on at least a three month lag time. So none of the reported earnings have yet to be affected by the inflationary pressures of QE. Even the earnings to be reported this quarter have a huge buffer from lower labor costs associated with all the layoffs. Wait for another year for the doom and gloom and maybe a speed bump or two until then. But when higher input costs are attempted to be passes on to the consumer, these unemployment levels can cause commerse to halt in the same fashion that banking halted three years ago.

    Look at the wealth demographics in this country, only the wealthy will be able to afford higher prices. The rest, probably 30% of consumers, will not have the money to spend. That’s where the doom and gloom is, but it could be alieviated with a higher dollar. But a higher dollar isn’t going to happen with QE.

  • JMR

    The doom and gloom is true reporting. The problem with it, though, is that inflation takes a while to work it’s way through corporate profits. Though serious inflationary pressures have around for a couple of months now, no earnings reports have been announced from those periods. Even when earnings are announced, things will likely still be mediocre until some time after output costs are attempted to be passed onto consumers. Right now, input costs are rising but haven’t been passed to the consumer in all measures of inflation (excluding food and energy).

  • Don Levit

    Out of every dollar spent, we are borrowing 43 cents (how come there is no cents sign on the keyboard)?
    Modern Monetary Theorists, as I understand them, claim that we can never go broke, and the dollars will always be there. They claim the main backing of the full faith and credit of the U.S. Government is its ability to tax.
    Currently, taxes are supporting 57% of our budget.
    Does there come a point, say taxes supporting 30% of our budget, where the power to tax is neutralized?
    Or, does MMT claim that simply having the power to tax will maintain people’s full faith and credit of the U.S. Government?
    Don Levit

  • JMR

    If you’re a day trader, don’t worry about the doom and gloom; you’ll probably close your position before anything happens. But if you hold long term, you should heed the doom and gloom and worry about fundamentals.

    It takes a long time for the doom and gllom of inflation to cause problems, and inflation has only started to be reported a couple of months ago. It could even go away before it comes back again… it’s a long term problem.

  • Dave

    My holdings are in gold, silver, oil/gas stocks and coal, I have been paying attention after all. But I still have a 23% cash reserve. My biggest problem with all these assets is that they keep hitting 52 week highs and deny me new buying opportunities. Even it was just paper I’d rather have 40% more of it than remain static in the face of inflation. My point is this; my biggest investing mistakes over the years have been NOT buying and missing the trends because I was scared off by the constant dire warnings like these. What is the alternative when the fed forces you to stay invested? Bill is eternally pessimistic but does not offer much actionable advice.

  • kenn

    “This suggests that China too will be less ready to help out a friend in need.”

    ROFLOL Friend? Your a sly one…

  • kenn

    Dave, I’m up 40% also,,, in gold. The difference is when the inflation bomb hits I’ll still have 100% of my 40%. Well, at least until the government confiscates it, legal of course, precedent set by hero Roosevelt…

    What will you have.

  • Dave

    I have gold, silver, miners, oil, NG and coal stocks, an occasional currency trade. My point is that Bill does not offer much in the way of actionable advice. You need to take action to meet these crisis and challenges. You either move forward or you lose. If you are mired in constant doom and gloom and thus take not action you are the bigger loser. I have learned this the hard way.

  • Dave

    I took the Mogambo Guru’s advice. It was actionable and he stated it very succinctly. Whee!!!

  • OKE

    The article erroneously ads QE and the deficit, but QE is just a way to “fund” part of the deficit.

    “Together, this is $63 billion going into the economy each week.” Not so

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