The House Passes Budget Deal to Increase Military Spending

Guest Post by Bill Bonner

POITOU, FRANCE – The House voted to go along with the budget deal, providing more money (more inflation) to just about every cockamamie scheme the feds can come up with.

The Washington Post:

The House passed a sweeping two-year budget deal Thursday that increases spending for military and domestic programs and suspends the debt ceiling through mid-2021, sending the White House-backed legislation to the Senate.

We pause to remind readers that “inflation” means an increase in the amount of money available. It can show up in consumer prices… or in asset prices.

The important thing is that once you inflate (stimulate with money and credit) an economy – either Main Street or Wall Street – people adjust their behavior. They pay more. They spend more. They borrow more.

Then, their livelihoods, their wealth, their reputations – and the entire economy – depend on more inflation. So, you’ve got to continue inflating… or go into rehab.

Inflate or Die. There’s no third choice.

Weirdness Prevails

In the meantime, strange and remarkable things happen. Inflation changes markets, economies, and even the way people think. The longer it goes on, the more distortions, perversions, and curiosities it brings.

Yesterday alone brought news from Oddity Central that…

A 20-year-old woman was recently arrested in Germany for walking into a car dealership and trying to buy a €15,000 (roughly $16,700) car with fake banknotes printed on a cheap inkjet printer using regular printing paper.

One employee told German media that he literally asked the woman if she wanted to play Monopoly or buy a car, but after seeing that she was serious, he called the police.

And this headline from CNN:

Nike’s rare ‘Moon Shoe’ is sold for $437,500, shattering the auction record for sneakers

And a tweet arrived with this shocker:

#Switzerland’s #yieldcurve is now negative for all maturities, hence anywhere between 3 months and 50 years.

All over the news spectrum, weirdness prevails. Comets shaped like dollar signs are seen in the night sky. Elvis is spotted in a mall in Kansas City. An egg is laid, etched with the Federal Reserve’s formula for the neutral rate… Surely, the second coming is at hand.

Boeing grounded its best-selling plane after alleged design flaws killed some 350 people. Boeing has net equity of minus $5 billion (its liabilities exceed its assets).

But here’s the queer thing: The stock of this 100-year-old behemoth still sells like a sleek tech startup – at over 40 times earnings. Go figure.

Figuring is, of course, what we’re up to here at the Diary. And what we figure is that the whole system has gotten a little screwy… and we think we know why.

It might have something to do with Boeing’s failure to make a safe airplane… and with America’s loss of industrial capacity. And we also think it will result in a disaster – worldwide depression and hyperinflation – in which the planet’s leading currencies are all discredited, debased, and devalued.

Path-Dependent

But let’s take one thing at a time. So, let’s return to the news.

Axios chief financial correspondent Felix Salmon probably spoke for majority opinion when he said this of the debt deal:

There is no evidence from 240 years of American history that the level of national debt has ever really mattered.

The U.S. prints its own currency, and can borrow as much as it likes[…] deficit hawks have preached doom for decades. They have never been proven correct.

This is such a liberating insight – that the feds can run up as much debt as they like – it is amazing the geniuses who guide U.S. fiscal policy didn’t think of this sooner. But if they had… by now, they’d be coming to an entirely different conclusion.

Ah, Dear Reader, you are so quick… you’re jumping ahead of us to a deeper insight, aren’t you: that what you see depends on what you have seen. “Path dependence,” they call it.

Where you are at any given time depends on how you got there. And the 240 years of America that supposedly prove that you can’t have too much debt are the same 240 years in which Americans wisely thought too much debt WAS a problem.

In other words, it is only because policymakers generally restrained themselves that debt was not a big problem.

The same insight applies all across the U.S. economy. It is only because of the hidden discipline of the past that Americans think they need no discipline now.

America’s industrial sector, for example, gained a worldwide reputation for efficient, quality output. Specifically, Boeing put out good airplanes at good prices – because customers demanded it.

It’s not easy to stay on top of the world in manufacturing. You need to invest vast amounts of time and money to keep up with the latest technology and skills.

But what if you had a customer with such deep pockets, he didn’t seem to care how much you charged or how shoddy your products were? Would you become more efficient and more concerned with quality? Or less?

And what if your executives and their executives were the same people, moving from one to another as the opportunities arose? Would the two sides be more demanding of each other, or less?

Andrew Cockburn in Harper’s:

A generation ago, Seymour Melman, a professor of industrial engineering at Columbia, devoted much of his career to analyzing this very subject. He concluded that defense spending’s impact on the broader economy was wholly harmful, a consequence of the bad habits injected into the bloodstream of American manufacturing management by a defense culture indifferent to cost control and productivity.

The U.S. machine-tool industry, for example, had powered postwar U.S. manufacturing dominance thanks to its cost-effective productivity that in turn allowed high wage rates for workers. But, Melman wrote, as more and more of its output shifted to defense contracts, the industry’s relationship with the Pentagon…

became an invitation to discard the old tradition of cost minimizing. It was an invitation to avoid all the hard work… that is needed to offset cost increases. For now it was possible to cater to a new client, for whom cost and price increase was acceptable – even desirable.

In consequence, as Melman detailed, the U.S. machine-tool industry gradually ceased to compete effectively with nations such as Germany and Japan, where cost control still reigned supreme.

In Boeing’s case, over the last six years – when it should have been focused on the 737 MAX – the company used $43 billion of its precious capital to buy its own shares. Executives and shareholders got big bonuses for neglecting the core business.

Flexible Currency

And back at the federal level… Politicians made a reasonable effort to balance the budget, year after year, until the early 1970s.

They had to. The gold-backed dollar meant that money – and savings – were limited. If the feds borrowed too much, it crowded out private-sector borrowing, leading to a tightening of credit and a recession.

That, too, is a big part of the reason the 240-year history of U.S. debt reveals no great calamity. The first 190 of those years passed with a gold-backed currency that made it very difficult for debt to get out of control.

But the money system changed in 1971 – when Richard Nixon closed the “gold window” at the Treasury. Henceforth, Americans have used a flexible currency without a restraining feedback loop. The feds could inflate almost as much as they wanted.

Little by little, in fits and in starts, deficits grew as the old conservatives still struggled to “hold the line” against runaway spending. It is only in the last 10 years that the conservatives gave way… and now, the feds permit themselves to go hog wild on debt – even with no grave national emergency in front of them… and no plan whatsoever to pay it off.

We’ve seen what 240 years of worrying about debt and deficits has wrought. Now we’ll see what a few years of NOT worrying about them will bring.

We don’t think we’re going to like it.

-----------------------------------------------------
It is my sincere desire to provide readers of this site with the best unbiased information available, and a forum where it can be discussed openly, as our Founders intended. But it is not easy nor inexpensive to do so, especially when those who wish to prevent us from making the truth known, attack us without mercy on all fronts on a daily basis. So each time you visit the site, I would ask that you consider the value that you receive and have received from The Burning Platform and the community of which you are a vital part. I can't do it all alone, and I need your help and support to keep it alive. Please consider contributing an amount commensurate to the value that you receive from this site and community, or even by becoming a sustaining supporter through periodic contributions. [Burning Platform LLC - PO Box 1520 Kulpsville, PA 19443] or Paypal

-----------------------------------------------------
To donate via Stripe, click here.
-----------------------------------------------------
Use promo code ILMF2, and save up to 66% on all MyPillow purchases. (The Burning Platform benefits when you use this promo code.)

Click to visit the TBP Store for Great TBP Merchandise