Hard Landing Ahead

When Glenn Burke and Dusty Baker invented the high five on October 2, 1977, it was a moment of pure spontaneity.

Baker had hit a ding dong off Houston Astros pitcher J.R. Richard.  Burke stuck his hand up.  Baker hit it.  Journalist Jon Mooallem recounts the story:

“Burke, waiting on deck, thrust his hand enthusiastically over his head to greet his friend at the plate.  Baker, not knowing what to do, smacked it.  ‘His hand was up in the air, and he was arching way back.  So, I reached up and hit his hand.  It seemed like the thing to do.’

“Burke then stepped up and launched his first major league home run.  And as he returned to the dugout, Baker high-fived him.  From there, the story goes, the high five went ricocheting around the world.”

The high five, however, wasn’t the only thing ricocheting around the world in the autumn of 1977.  Consumer price inflation was also running hot.  Guns and butter spending over the prior decade had taken a match to the paper dollar.

The consumer price index (CPI) hit 61.6 in October 1977.  When the War on Poverty was unleashed in 1964 by LBJ the CPI was just 30.94.  In 13 years, consumer prices had doubled – an increase of 100 percent.

For perspective, over the last 13 years – from 2011 to present – consumer prices, as measured by the CPI, have increased by about 42 percent.

It wasn’t until late-1981, when the 10-Year Treasury was yielding 15.32 percent, that consumer price inflation finally moderated.  That’s not to say prices went down after 1981.  They didn’t.  Rather, they continued to go up.  The slope of increase merely became a bit more gradual.

Dead End Street

The important thing to understand about inflation is that it starts with the inflation of the money supply.  And in a debt based monetary order, like the current form of the U.S. dollar, the inflation of the money supply is accomplished by inflating the debt.

The latest monthly Treasury statement was published this week.  This edition includes a running tally of receipts and outlays of the U.S. government through July 2024.

With two months left in the fiscal year, the Treasury is the hole with a $1.5 trillion deficit.  Moreover, spending is on target to hit a deficit of $1.9 trillion for FY2024.

Net interest on the debt is already at $763 billion.  This puts it at the second highest outlay, behind social security and above health, Medicare, and national defense, among others.  Over this same period of FY2023 net interest on the debt was $561 billion.

At $763 billion, net interest on the debt has consumed about half of the deficit spending to date.  Thus, for every two dollars Washington borrows, one dollar is being spent to pay the net interest on the debt.  What’s more, total interest on Treasury debt securities through July is over $956 billion.

Borrowing money to pay debt interest is a reckless method for keeping a budget.  Anyone can see that this is a dead-end street.

Over time, as more and more borrowing takes place, the total interest grows and consumes a larger and larger portion of the budget.  Eventually, paying debt interest crowds out all other budget items.

Unless radical spending cuts are put in place the federal government will be left with two choices.  Default or mass inflation.

High Fives

After many decades of doing the expedient, kicking the can and increasing the debt limit, the U.S. government is in a dire fiscal condition.  You would think this impending crisis of epic proportions would be a central focus of this year’s presidential election.

Yet neither Trump nor Harris mentions a word of it.  In fact, they both want to spend more.  Welfare.  Warfare.  And everything in between.

Voters, too, want to get their hands in the till.  Some want their college loans to be forgiven.  Others don’t want to pay taxes on tips.

There are also those who want foreign wars to escalate so they can produce more bombs and fighter jets.  And everyone wants to reap the promises owed to them in the form of social security and Medicare.

No one seems to notice or care that the country is broke.

This will all come to a head during the next recession – which may already be underway.  Washington’s standard response, as always, will be to attempt to stimulate growth with massive amounts of deficit spending.

But with deficit spending already running at a rate of $1.9 trillion per year, any additional deficit spending will be downright suicidal for what value remains of the dollar.  Still, congress and the future president will pass an emergency spending bill, with high fives all around.

In this regard, the choice between default and mass inflation isn’t really a choice at all.  The central planners and policy makers made their decision long ago.  Their choice is mass inflation.

Hard Landing Ahead

The next step in this direction will come with cuts by the Federal Reserve to the federal funds rate.  The desire is to ease Washington’s fiscal situation.  Interest rates must be artificially lowered to help contain the burgeoning net interest on the debt outlays.

By suppressing interest rates, the Fed will better accommodate the financing of Washington’s massive $35 trillion debt pile.  In return, consumers will be rewarded with higher prices.

The stated inflation target for the Fed is an arbitrary 2 percent.  Will it be able to hit the target?  Will it overshoot to the downside?  Or will inflation get away from the Fed once again?

This week’s CPI report showed consumer prices increased 0.2 percent in July and at a 2.9 percent rate over the last 12 months.  Last month’s CPI report showed consumer prices had increased 3.0 percent over the prior 12 months.

Policy makers and Wall Street, eager for rate cuts, compare 2.9 percent to 3.0 percent and say inflation has declined 0.1 percent.  They point to this, and softening employment data, as cover.  They perceive these as signs of rate cuts at the September FOMC meeting.

But just because the CPI is a tenth of a percentage point lower in July than it was in June doesn’t mean prices are coming down.  They aren’t.  They’re going up at a rate of 2.9 percent a year – well above the Fed’s 2 percent inflation target.

In effect, the Fed will be ending the inflation fight before its job is done.

Wall Street may celebrate the forthcoming rate cuts.  The U.S. Treasury may offer a sigh of relief.

However, a dark cloud hangs over their anticipation.  Fed rate cuts signal a recession is closer than many people recognize.  And a 0.25 percent rate cut will do little to stop it.

Time is running out to prepare for the hard landing ahead.

[Editor’s note: It really is amazing how just a few simple contrary decisions can lead to life-changing wealth.  And right now, at this very moment, I’m preparing to make a contrary decision once again.  >> And I’d like to show you how you can too.]

Sincerely,

MN Gordon
for Economic Prism

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