September, 22, 2023
‘What the world is missing today is hope. I see more fear than anytime in my business career. . . . What’s going on in China is a great example of fear,” he said, commenting on how consumers are saving 35% of their disposable income, following the COVID-19 outbreak. — BlackRock CEO Larry Fink, Sept. 29, 2023
Credit contracts when borrowers won’t borrow and lenders won’t lend. Once a full-blown credit contraction begins, it does not end until all rotten excesses are wrung out of the economy.
Money supply growth viewed by its annual rate of change — as depicted above — illustrates the abnormally massive scale of the Bidenomics injection. The reason inflation did not follow suit to the same magnitude is an indication of how weak the underlying economy is. The subsequent monetary contraction illustrated above will be rapidly followed by deflation. This is an exceptionally unstable economy, ready to collapse. The Fed remains focused on fighting the last battle, as usual. This only contributes to violent swings in prices.
Unions are also busy fighting the last battle, going on strike for higher wages. They are pricing in permanent elevated inflation levels into their wage demands. This is typical of the mass mindset at a significant turning point. The result of increased wage settlements will add to the pressures ensuring deflation. The greater the prices now (whether for gas, food, interest, wages, or anything else), the sooner economic activity will be snuffed out.
The MAGA movement (successor to the Tea Party) stands opposed to the current interlude of madness — social, political, and economic insanity. Baghdad Bob on the Potomac. Now that the wheels are coming off the economic bus, those on the lowest rungs are rapidly converting to the MAGA fold. With inflation of food, energy and housing soaring, interest rates rising, and competition from hordes of low-wage illegal immigrants, Democrats have nothing to offer (and plenty to repel) much of their disappearing base. New York City is now the poster child for this dynamic. Workers are stuck with higher tax bills and lower services as a result of the immigration crisis. When Trump returns to his Manhattan home, cheering crowds greet him.
When AOC and friends unsuccessfully attempt to placate outraged constituents, they only accelerate their demise.
Roosevelt Hotel in Manhattan is Ground Zero for the 2024 election.
Already awash in crime and urban flight, New York City is further slashing police funding to subsidize illegal immigrants in $500/night hotel rooms. Children’s soccer fields are being converted to tent cities for immigrants. Crime is soaring. Albany and Washington conspired to throw New York City suckers residents under the bus. Then they backed the bus up and ran over them again. Meanwhile, 20,000 attending a Trump rally called on short notice is a slow day. Big change is afoot.
Where is all this headed? Will Durant again provides historical perspective:
That aristocracy . . . adopted the new morality and shared in the new wealth; it thought no longer of the nation, but of class and individual privileges and perquisites;
In progressive societies the concentration [of wealth] may reach a point where the strength of number in the many poor rivals the strength of ability in the few rich; then the unstable equilibrium generates a critical situation, which history has diversely met by legislation redistributing wealth or by revolution distributing property.
In the literal sense, America is not destined to suddenly take a hard left turn in a Bernie Sanders fantasyland and seize the estates of the super rich. But tensions have now reached a breaking point and demand resolution. Much of that resolution will be accomplished organically, through market forces. A wholesale debt default lies ahead. This is the reason the Fed has flooded the economy with cash since the default began to coalesce in 2008 — an effort to postpone the inevitable. As Mark Twain advised, “Never put off till tomorrow what may be done the day after tomorrow just as well.” The day after tomorrow rapidly approaches.
Who are the debtors and who are the creditors?
Once answers to those questions become apparent, it becomes clear who has the most to lose in a wholesale debt restructuring. Those who are neither debtors or creditors will do fine. Creditors will never see much of what they are owed. Standing in opposition to an organic resolution is the Fed, doing the bidding of its banker patrons. Consider the two parallel graphs above (of the top 1% and bottom 50%) from the perspective of the concentration of debt by income class. It is not the elites or those on public assistance who are awash in debt. The Middle owes the elites but will never be able to repay what they owe.
Klaus Schwab’s nirvana of a feudal realm of debt serfs owning nothing but being happy is about to morph into a world in which the serfs default on their debts, leaving feudal lords holding empty bags.
The data depicted in the graphs below is not immediately obvious. Each of these four classes of debt is displayed as the ratio between the amount of debt held by the lowest 20% of Americans by income and that owed by the upper 20%, over time. These data series cut off in 2015, but our focus is the trends they depict. Except for student loans, a decreasing percentage of total debt pie was held by the bottom quintile. Interpretation of this record could indicate two things which are not mutually exclusive. Either the bottom quintile reduced their debts (except student loans), and/or the upper quintile increased its debt burden. The latter appears to better explain what occurred. Which would indicate an increased level of debt assumed by even those least needing it. Debt saturation has spread upward through the income column.
Now that the ticking time bomb of student loan debt has been reactivated with the ending of the pandemic moratorium as of October 2023, this represents about $175 billion of decreased disposable income annually (assuming these payments are made). That much money will be taken out of circulation every year to contribute to credit contraction. Student loan debt now stands at $1.8 trillion, second only in magnitude to mortgage debt. (Total mortgage debt of all sorts now amounts to $19.9 trillion.)
Student debt has now declined about $85 billion (%) from its peak in 2022, yet another symptom of contracting credit. Colleges are now downsizing in response. A college degree is quickly becoming a luxury ever fewer are able to afford.
Perhaps the most near-term politically relevant data we will examine is the record of wages in the pandemic aftermath. While wages took a step up at the start of the pandemic, they have trended lower since. In contrast, inflation (red curve) has been unrelenting in its rise. This is why so many are now struggling to make ends meet. Wages have now reverted to their level four years ago, before the pandemic, while prices are about 19% higher. Ouch. With food and energy prices continuing to rise, this makes for a bleak outlook for many citizens.
