As expected, investors were worn out by last week’s wild ride. This week, they need to slow down. Take a rest. Try to figure out what is going on.
After taking about 10 minutes over the weekend to think about it, everyone seems to have decided that all is well.
The Dow rose a healthy 213 points yesterday. Gold went up $17.
Investors are still bullish. The press is bullish. Warren Buffett is bullish.
What are the odds that all this bullishness will pay off? About zero, in our opinion. Not that stocks might not go up for a while. But they’re not likely to go up far enough or for long enough to make owners much money.
Why? You know why, Dear Reader. Because the debt is still there. And it’s getting bigger.
Debt weighs down a household…or an entire economy. With gross US government debt equal to 100% of GDP you can’t expect a thriving economy. All you can expect is a Japan-like, slumpy, zombie economy. Shoppers still walk around. People still go to work. But nothing much happens.
Remember, Rogoff and Reinhart predict that when you get over 90% debt-to-GDP, the economy slows down by about 1%. Instead of 3% long term growth, we get 2%.
That’s the optimistic way to look at it. More likely, debt will weigh on the economy…causing the feds to intervene. They launch more stimulus measures…and transfer more of the economy over to the control of the federal government. This, too, will slow the real economy down.
Then, more desperate than ever, the feds will panic. They will print money – a lot of it. Then, all Hell will break loose.
But wait…that’s still a long way in the future.
Besides, we have a feeling that there’s something else going on too. For example, there’s the Empire…stumbling into every trap the gods set for it. Half the federal budget is related to the imperial agenda. In a way, this puts the US in a marvellous position. It could save itself easily. It could balance the budget in a single stroke.
As you know, we have renounced all political involvement here at The Daily Reckoning. We are smirking observers…not earnest world- improvers, nor even willing participants in the political process.
And if, by some accident, we were suddenly elected president we would immediately demand a recount!
But what a great thing it would be to be president of the USA today! Such a great opportunity…
Oh…it makes our aorta bulge and our head hurt to think of it…
…we would go on TV…nationwide…Prime Time…and, with gravity in our voice and mischief in our heart…announce:
My fellow citizens. We are faced with a choice. Either we continue with our program of trying to police the entire world. Or we give it up. If we continue, we will go broke. And our armies will be destroyed…along with our economy and our currency. If we stop now, we can save our currency…our economy…and our way of life.
Which will it be? Guns or butter? A respectable nation…or an empire with a death wish? I know which I will choose.
Effective immediately, as Commander-in-Chief, I am ordering all US troops stationed overseas to come home. We will defend our nation to the death, but we will no longer meddle in other countries’ affairs. We will be a decent nation, a good nation; we will no longer be a great empire. Most Americans never wanted it anyway.
I am also submitting a balanced budget for next year. You will see in it that I am closing all foreign bases and eliminating all military spending that is not directly related to our real national defense.
That alone would spare the USA the misery of its inevitable comeuppance. But if we were president…why not go further? How could we resist? More below…
And more thoughts…
It is not our place to give advice to anyone. If the US government wants our advice, it will have to at least send us invitations to fancy parties and let us go through the ‘diplomatic passport’ line in airports.
Yes, it’s true, had it asked our advice about the Great Reckoning, the US could have saved itself trillions of dollars…and now the economy might already be in a genuine recovery, instead of staggering towards bigger and bigger problems.
But the phone never rang. Our feelings were hurt.
Still, civic minded as we are, we can’t help but offer a little counsel – at no expense – to our leaders.
First, let’s look at the problem we are becoming: Japan!
Yes, dear reader, as incredible as it seems…we were right 10 years ago. Very long term DR sufferers will recall that we so often warned about “following in Japan’s footsteps” that readers got sick of hearing about it. We had to promise never to mention it again.
But now we’re breaking our promise. Yes, we were 10 years too early. Yes, we didn’t expect the biggest bubble in human history. Yes, we were probably wrong about all sorts of things…but here we are…following in Japan’s footsteps!
Why? Because we have a sick, debt-disabled economy…and because the feds won’t let it die. In Japan, they’ve kept it alive for 20 years…consuming the savings of an entire generation in order to keep it on life-support.
And now the US is on life support too – with deficits equal to 10% of GDP…as far as the eye can see. Ben Bernanke has already pledged to keep the key lending rate at zero for the next 2 years…so the IV drip will continue…just as it has in Japan.
So, welcome to a Japan-like zombie economy. But at least Japan didn’t have to pay for military zombies stationed all over the world too!
Okay, those are the facts on the ground, as we see them…
So, let’s go back to POTUS. The decider. The chief exec. And let’s imagine that he were we…or we were he…or some such thing….
And we were on TV… We had just announced that we had saved the Republic…by cutting off the Empire. And then, how could we help ourselves…?
But wait. There’s more.
My fellow Americans, I don’t know about you, but I’m tired of supporting all these zombies. Why are there so many zombies? Because there’s so much meat for them…
You wanted change…I’ll give you change…
Here’s how to get rid of zombies. I’m proposing to scrap the entire tax code. From now on, Americans will pay 10% of their income…no deductions…no nonsense. You’ll fill out your tax return on a postcard.
Serfs in the Dark Ages were only required to work one day in 10 for their lords and masters. You shouldn’t have to do more.
The federal government will have to get by on that. That’s all. I’m proposing a Balanced Budget Amendment…with a permanent 10% tax rate. No ifs. No buts. No zombies.
You all know what a 10% flat tax will do? It will make the US the most dynamic economy in the world.
And what about all the debt? Simple. We’re raising interest rates. Yep. To 5%. It will drive all these deadbeats into bankruptcy. The debt will disappear…almost overnight. So will a lot of these big, zombie banks.
And by the way, by executive order I’m hanging George W. Bush, Dick Cheney, Joe Biden, Alan Greenspan, Paul Krugman and Thomas L. Friedman.
Some of them for war crimes. The others…well…just because the world will be a better place without them.
Thanks for listening.
For Daily Reckoning Australia