How to Reason Your Way into Catastrophe – The Next Financial Crisis

We begin today with a bold prediction: Elizabeth Warren will be our next president. (Biden’s candidacy died in the Ukraine.)

If the stock market collapses before the next election, she will win in 2020. If it doesn’t, she may have to wait until 2024.

We take no joy in this prediction. Ms Warren is a pigheaded, sanctimonious know-it-all, with all the wrong ideas about how an economy functions.

EXPOSED: The truth behind Australia’s ‘miracle’ economy

In that regard, she is little different from Donald Trump. But Ms Warren has ‘plans’ for everything. And as we will see, they are all bad.

Moral philosophers

There was a time, believe it or not, when economists wouldn’t presume to tell us what interest rates should be. They were ‘moral philosophers’ who merely observed and tried to understand.

Then, they discovered the flimflam of ‘modern economics’, with its fame, fortune, formulae, data, statistics, math, and quack science. Now, they get paid big salaries for advising, directing, pontificating, and — in the case of the Federal Reserve — manipulating a $20 trillion economy.

John Maynard Keynes was probably the most famous of the new breed. He argued that the feds could use ‘countercyclical policy’ to offset the natural ups and downs of a market economy.

As it turned out, the authorities were quick to counteract the downs…but reluctant to interfere with the ups, leaving a bias towards loose monetary and fiscal policies.

Not once since the Carter administration, for example, has the US budget (fiscal policy) been in real surplus (not counting Social Security contributions). Not surprisingly, the eventual ups and downs are more dramatic than ever.

Paul A Samuelson, whom we mentioned on Friday, attempted to make the profession more credible by adding more numbers and more rigor.

He won a Nobel Prize for his scientific approach and used it to forecast that the Soviet Union would overtake the US ‘no later than 1997’.

Of course, the Soviets themselves were the great rationalisers. They decided that advertising, brand competition, and market prices were ‘irrational’, and that they could do better by allowing groups of bureaucrats to make the important decisions.

You know how that turned out; they reasoned their way into a 70-year catastrophe.

Modern sages

Over the weekend, another sage of modern economics was in the news — Thomas Piketty. He gained fame with his 2013 book, Capital in the Twenty-First Century. In it, he maintained that capital always increases faster than the value of the worker’s time (‘r > g’). The rich get richer, in other words.

In a new book, out in English next year, he tells us that we should do something about it — including taxing billionaires at a 90% rate. ‘There shouldn’t be any billionaires’, adds Bernie Sanders.

Ms Warren — whose advisors are said to be working with Piketty — is paying attention too. She’s proposing a tax of 2% on fortunes over $50 million and 3% on fortunes over $1 billion. And don’t think you can escape. She’s proposing a stiff ‘exit tax’ for anyone who tries to get away.

And coming up fast, in the ranks of the damned, is Modern Monetary Theory (MMT), a thoroughly rational guide to managing public-sector finances.

The MMT-ers say all money comes from the government. The feds can spend, spend, spend — they believe — until inflation shows up like barbarians outside the city walls. Then, they can raise taxes to sop up the excess money.

Totally logical…and absolutely bonkers.

Imagine an application of MMT during the medieval period: ‘Hey, we don’t have to worry about fixing the castle walls until we actually see the enemy coming’. But by then, it is too late.

Evil afoot

In the 1960s, low levels of inflation were such a fact of life that Gardner Ackley, chairman of the Council of Economic Advisors, wrote his headline ‘Prospect of Avoiding Inflation Is Good’ with full confidence.

Soon after, inflation made a fool of him.

Barely 10 years later, prices had doubled. In 1974, consumer prices were going up at a 12% rate. It took Paul Volcker and the worst recession since the Great Depression to bring inflation under control.

But who will raise rates to 20% in the next crisis? Who will bring inflation to heel? Who will raise taxes during a financial crisis?

Elizabeth Warren, that’s who. She will blame the ‘greedy rich’, and tax the hell out of them.

Yes, Dear Reader, there is evil afoot.

On the march are Donald Trump’s trade wars and his trillion-dollar deficits… Bernie Sanders’ $2.5 trillion ‘Housing for All’ program…the Congressional Progressive Caucus’ plan for $2 trillion in infrastructure spending…Elizabeth Warren’s soak-the-rich taxes…and central banks’ next round of rate cuts and quantitative easing.

When the next crisis hits, no matter who is president, this mischief will come bounding over the walls, breaching the gates…setting fire to our roofs, looting our wealth, killing our young men, raping our women…and selling the rest of us into debt servitude.

But wait. Maybe technology will save us. More microchips in the F-150? More computing power in the iPhone 12? Cheaper wheat and steel? More hit shows? More bandwidth? Skinnier jeans? Uber? WeWork?

We wouldn’t count on it.


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Bill Bonner,
For The Rum Rebellion

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.

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