Hair of the Dog That Bit the U.S.

12/17/2014 09:45

by Peter Coyne

"The test of a first rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function."  That's something F. Scott Fitzgerald wrote… We're not sure if it's true… but we're going to submit two opposed ideas to you today nonetheless.

The first idea is: Too much of a good thing leads to disaster. If you read yesterday's episode, you know this the main gist of our co-founder, Bill Bonner's new book, Hormegeddon.  The second and opposite idea is: Too much of a good (properly administered) leads to prosperity. That's our friend and economist Richard Duncan's thesis from his book, The New Depression.

We'll start with Bill first, since we spent time with him yesterday and have a lot to share.

First came QE1… followed by QE2… then QE3… and now, hints of QE4.
"I wrote quite a bit about this in Hormegeddon -- this idea of correction" Bill told us. "In your personal life, if you do something stupid, like you invest badly, you run out of money. The situation cures itself -- the problem is gone. Or if you do something really lunatic like, you think you can fly, so you get up on top of a big barn and you start flapping your arms around and you jump off… the problem solves itself almost immediately. You don't do that again."

The same idea doesn't apply to policy makers, however. As Bill put it to us, policy makers think humans can fly. "So, they order the public to get on top of tall buildings and the jump off, flap their wings, and they all die. Then the policy makers say, 'Well, they didn't do it right!'. And so the get another bunch of people to get up on the building."

A prime example, Bill points out, is the Fed's quantitative easing. First came QE1… followed by QE2… then QE3… and now, hints of QE4.

"Is there any evidence anywhere in history that money printing makes anybody -- except, of course, it's beneficiaries -- wealthier" asked Bill. "Not that I know of…"

A little credit expansion may be good… a little more may have a small or benefit… some more after that … and you're probably headed for "Hormegeddon" -- disaster by public policy.  Advice written by an early newsletter man, C.V. Myers, strikes at the heart of the matter. In his autobiography, 50 Years in the Furnace, he wrote:
There is a consequence to everything you do.
Today is the consequence of yesterday.
Tomorrow will be the consequence of today.
Before you act think of the consequence and decide if it's worth it.
Every debt must be paid. Every debt in history has been paid. If you don't pay, your lender pays. This is the natural law of consequence, as sure as gravity.
Our debt-ridden world has overlooked this natural law.
Our friend, author and economist, Richard Duncan, doesn't dispute Myers' point. He does, however, dispute Bill's. Richard believes we can escape the day of reckoning by swallowing the hair of the dog. He thinks too much of a good thing can lead to prosperity. We'll let you decide for yourself...

Over the past half-century, more than $50 trillion in debt has been added across all sectors of the U.S. economy. Duncan's doesn't think humanity can cope with such a colossal bankruptcy.  The economist Ludwig von Mises disagreed. In his book, Human Action, Mises suggested biting the bullet and embracing the bust:

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Consider the 1920-21 depression. Unemployment peaked at 11.7%. A year later, it dropped to 6.7%. Two years after that it fell to 2.4%  How? We don't know… but spending was cut over 82% in two years. Taxes were lower. There were fewer regulations.

Hogwash, says Duncan. He believes our salvation lies in continuing credit expansion. Japan's an example of this. At writing, the Nipponese debt to GDP ratio is over 250%.
Our salvation lies in continuing credit expansion...

Richard figures that means the U.S. can safely increase its debt to GDP to 200% too -- adding another $17 trillion in debt.

"We know we have to increase the debt," Duncan calmly explained to us, when we saw him last. "Why not, over the next 10 years -- instead of wasting money on unnecessary wars -- invest a trillion dollars in biotechnology research… a trillion dollars in nanotech… a trillion dollars in solar."

"There's a good chance we could find a cure for cancer" he posited, "and improve the material well-being of everyone on Earth. Maybe we could start paying back some of the debt. At the very least, we lose nothing. By increasing the debt, we stave off a devastating depression."

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