The ‘Super-Bad’ Paradox

The ‘Super-Bad’ Paradox

We never know what will happen. All we know is what ought to happen.

Elon Musk, bless his heart, has a ‘super bad feeling’ about the months ahead. So do we. Something bad ought to happen.

But bad things are sometimes good things. Musk explained the paradox two weeks ago. Referring to the unhappy part of the business cycle, he said (emphasis added):

Yes, but this is actually a good thing. It has been raining money on fools for too long…

Some bankruptcies need to happen. Also, all the Covid stay-at-home stuff has tricked people into thinking that you don’t actually need to work hard…

Companies that are inherently negative cash flow (ie value destroyers) need to die, so that they stop consuming resources.

It’s annoying when no-account, money-losing companies stay in business, like a spoiled trust fund wastrel, squandering his family’s fortune. It’s painful to watch. And it’s a pleasure to see the kid run out of money.

And it would be nice to see people get back to work in a ‘normal’ 9-to-5 kind of way too.

The turning tide

But the world doesn’t put on its show for our entertainment. And it doesn’t make it easy to understand the plot. Yes, things happen that ought to happen. But not always what you want, or when you expect, or how you think it should go. We’ve spent years waiting for a major stock market correction, for example. By our reckoning, stock prices ought to get cut in half before we can be confident of a genuine new bull market. And we have our ‘I told you so’s at the ready.

Remember, beneath the chop of up and down stock price movements are deep tides. By our reckoning, stocks go up for decades. Then, the tide turns…and for decades the ‘primary trend’ is down. We wait for a low — when you can buy all 30 Dow stocks for the equivalent of five ounces of gold or less — then we’ll be reasonably sure the tide is ready to flow again.

In the meantime, the years go by…and imagine our disappointment! It’s like being a lifeguard in a wading pool.

Eventually the water rushes in. And toes no longer touch the bottom. That’s what ought to happen. But when?

Inflation is a political phenomenon. The feds spend money they don’t have…and can’t raise by honest taxation or borrowing.

So they call upon the Fed to ‘print’ more money. From 1999 to the present, for example, the Fed created more than US$8 trillion new dollars. It used them to buy bonds, thereby driving up bond prices and pushing down bond yields.

Had they not done so, the credit market would have reacted to the feds’ borrowing in the traditional way. Interest rates would have gone up as the biggest pig at the trough gobbled up more and more of the world’s savings.

Filling in the details

This is known as ‘crowding out’, when the government leaves little available credit for businesses and households. It’s also, usually, the beginning of an economic downturn — interest rates rise and it becomes harder for people to borrow. Businesses cancel new projects. Households delay remodelling the kitchen or taking a vacation. Things slow down, taking the pressure off of the credit markets.

The government gets whacked by the feedback loop too. Tax receipts go down. And its interest costs go up. It, too, must cut back.

Left alone, in other words, when the government spends too much money the system self-corrects. What ought to happen does happen. The boom gives way to a bust. But in the 21st century, the Fed intervened repeatedly, and with a heavier hand each time. It ‘printed’ 10 times as much money as it had from the day of its founding until the end of the 20th century. And it pushed down interest rates to levels never before seen.

What would happen next? Nobody knew for certain. But sensible people have had a ‘super-bad feeling’ for years. ‘There must be some price to pay for counterfeiting money and rigging the credit markets,’ say the sages. ‘If not, everyone would do it… all the time.

The two obvious consequences: more debt and more inflation. The details are being filled in now.

The US’s debt burden grew by more than US$50 trillion this century…to a total of more than US$88 trillion, including households, businesses, and the government. And inflation? Who could have seen that coming?

And now, what ought to happen? Higher prices ought to bring more output. More output ought to lower prices. Inflation ought to go back whence it came. Those bad feelings ought to go away.

Will they?


Dan Denning Signature

Bill Bonner,
For The Daily Reckoning Australia