The REAL Debt Problem

  • National debt sets milestone, Wall Street Journal yawns
  • Investors dumping Treasuries not the problem — it’s something else
  • We were due: Too-far-too-fast rally reverses hard
  • Feds tear up landlord-tenant agreements, big investors benefit
  • Airplane food now a restaurant attraction (?)… the grim prospects for third parties in 2020… a 10-year thank you… and more!

There’s a whistling-past-the-graveyard quality to this front-page, above-the-fold headline in today’s Wall Street Journal

US Debt

To be specific, figures from the Congressional Budget Office show the national debt is on track to reach 98% of U.S. GDP this year… and top the 100% level next year.

The last time that happened was 1946 — the consequence of massive spending to win World War II.

Remarkably, the Journal tells us it’s no big deal: “The surge in borrowing so far isn’t creating angst among investors or hampering the U.S.’ ability to borrow more.

“Investors have gobbled up U.S. Treasury assets, drawn to their relative safety. Moreover, interest rates are expected to remain low, suggesting the government still has plenty of room to borrow.”

All of that is true… and totally beside the point.

The problem is all that debt will prove to be a lead weight on the U.S. economy’s leg in the years to come.

Some relevant figures from our macro maven Jim Rickards: Going back the last 40 years, the typical post-recession recovery produced 3.2% annual economic growth.

But something changed drastically after the 2008–09 recession. Thanks in large part to the debt run-up by Bush before the crisis… and Obama afterward… average annual growth after 2009 was only 2.2%.

“It was a real recovery, yet the output gap between the former trend and the new trend was never closed,” Jim explains. “The U.S. economy suffered over $4 trillion of lost wealth based on the difference between the former strong trend and the new weaker trend.

“The new recovery will only produce 1.8% growth, even worse than the 2.2% growth before the pandemic.”

Result? “High unemployment will persist for years, the U.S. will not regain 2019 output levels until 2022 and growth going forward will be even worse than the weakest-ever growth of the 2009–2020 recovery.”

As long as Jim mentioned high unemployment, let’s briefly check this week’s edition of the little chart of horrors…

Pre-Pandemic Record

The good news is that at 881,000, new jobless claims for the week gone by were the lowest since the lockdowns hit in mid-March. The bad news is that the number is still far higher than the pre-pandemic record set in late 1982.

Point is there’s a direct link between sky-high levels of government debt and sluggish economic growth.

Jim has long spotlighted research by the economists Carmen Reinhart and Kenneth Rogoff. They found that once government debt reaches 90% of economic output… well, that’s the point of no return.

As Jim explained it in his 2019 book Aftermath, “The debt itself causes reduced confidence in growth prospects partly due to fear of higher taxes or inflation, which results in a material decline in growth relative to long-term trends.”

Yes, the debt-to-GDP ratio fell after World War II. But that was an extraordinary circumstance: The United States’ industrial base emerged from the war unscathed, while the rest of the world’s was devastated.

No such consolation this time. Now we’re just in the same high-debt company with developed-world basket cases like Japan, Italy and Greece.

Which is exactly the fate we’re looking at now: “The end point is a rapid collapse of confidence in U.S. debt and the U.S. dollar,” Jim recently wrote his Strategic Intelligence readers.

“This means higher interest rates to attract investor dollars to continue financing the deficits. Of course, higher interest rates mean larger deficits, which makes the debt situation worse. Or the Fed could monetize the debt, yet that’s just another path to lost confidence.

“The result is another 20 years of slow growth, austerity, financial repression (where interest rates are held below the rate of inflation to gradually extinguish the real value of debt) and an expanding wealth gap.

“The next two decades of U.S. growth would look like the last two decades in Japan. Not a collapse, just a slow, prolonged stagnation. This is the economic reality we are facing.”

And you didn’t see that part of the story in today’s Wall Street Journal

[Ed. note: How do you make financial arrangements for 20 more years of slow growth and crazy-low interest rates?

That’s the subject of a recent discussion Jim had with personal-finance guru Robert Kiyosaki. During this meeting of the minds, Jim and Robert laid out five steps you can take right now to bring peace of mind in the years to come.]

Had to happen sooner or later: The stock market is pulling back after a too-far, too-fast rally.

Just as the Nasdaq was the highest flier among the major U.S. indexes in recent days, it’s falling hardest today — down 4% at last check to 11,563. In contrast, the Dow is holding up best, down less than 2% at 28.561.

Gold isn’t able to recover from yesterday’s whacking. At last check, it’s down another 13 bucks to $1,930. Silver has sunk back below $27.

So much for the Trump administration’s deregulation bent.

Get this, if you haven’t already heard: Residential landlords have a new government agency to answer to — the Centers for Disease Control and Prevention.

If tenants fill out a CDC form asserting they’ve lost income or incurred huge medical bills as a consequence of the pandemic, they can be spared eviction between now and year-end. Offending landlords face penalties ranging from $100,000–500,000 plus a year in jail.

Oy. It’s not as if landlords haven’t been trying to work it out with strapped tenants all along. They don’t like vacancies, after all. But no, the federal government has to butt in and arbitrarily rewrite the terms of everyone’s leases.

“The fallout from suspending rental contracts will be deep and long lasting,” writes Jeff Deist from the Mises Institute.

“Many landlords will find their situations untenable and stop making mortgage and property tax payments. New rental housing stock will be depressed as owners worry about the next suspension of rent payments now that the precedent has been set. After all, why wouldn't moratoriums happen again when the next pandemic or financial crisis hits?

“Rental housing units will drop in price as more landlords abandon the business — setting the stage for commercial and private equity buyers to grab units on the cheap from individuals and small owners. Ultimately, foreclosures, evictions and tax sales will happen no matter what the federal government does.

“The likely outcome is bigger players owning more and more of the rental housing stock,” Deist goes on, “consolidating the permanent renter class and adding to the rootlessness many Americans feel.”

Yep. The eviction freeze would only accelerate a trend we already saw taking shape three months ago.

Now Bloomberg News cites the case of a private equity real estate firm in Miami that’s licking its chops. “In the long term, this eviction moratorium will, unfortunately, create a lot of distressed properties for landlords that cannot pay their mortgages,” says Daniel Kattan of PIA Residential. “For us, it will be an opportunity to buy more.”

Ugh. You can’t help wondering if that’s actually the plan, right? Or is Team Trump simply that oblivious to the law of unintended consequences for small-fry landlords?

We’re eager to hear from you if you own rental property to generate income. What’s been your experience this year? What are your concerns going forward? Drop us a line and share your ground truth with us.

Well, here’s one way to make lemonade from pandemic lemons…

Reuters Business

Most of Thai Airways’ fleet has been grounded for months. Indeed the airline is in bankruptcy court. So the company has taken the cafeteria at its headquarters… and turned it into an “airline-themed” restaurant.

Diners are met by real cabin crew, they sit in real airline seats and they… eat real airline food. The company says it’s serving 2,000 meals a day.

“I like the in-flight meals on Thai Airways, but we only get to have it when we fly,” customer Kanta Akanitprachai tells the Reuters newswire. “Today we get to have it here. That’s good because we want to eat.”

Hmmm… Either the fare on Thai Airways is a lot better than most airline food… or folks in Thailand are desperate for any sort of novelty experience in this COVID-weird world.

“I agree,” a reader writes after we said, “A pox on all of ‘em” at the end of Tuesday’s 5.

Specifically, we said in the battle between Team Trump and the deep state, “the best thing that could happen is each side brings about the other’s demise, and we can get a fresh start as a free country.”

Back to our reader: “The best outcome of the November election would be Libertarian Jo Jorgensen. Not going to happen, of course, but I always vote for the best candidate on the ballot and that is not Trump or Biden.”

The 5: Without passing judgment on Jorgensen’s positions or qualifications here, her prospects for making a splash this year appear grim.

In 2016, Libertarian candidate Gary Johnson garnered 3.27% of the popular vote. It was by far the LP’s best showing since its formation in 1971. Which sounds promising for 2020, right?

Last year, the folks at Reason magazine examined the performance of third parties and independent candidates in the election cycle following the one in which that party or candidate racked up a meaningful vote count.

Alas, the precedents aren’t good. Ralph Nader won 2.74% of the popular vote in 2000, but he was a nonfactor in 2004. Ross Perot garnered 18.91% of the popular vote in 1992… but less than half that percentage in 1996. John Anderson pulled 6.6% in 1980 and he considered a 1984 run before backing out. George Wallace and the American Independent Party, which won five states in 1968, were a nonfactor in 1972.

We suspect Johnson benefited in 2016 from a fair number of Republicans who found Trump unpalatable and Johnson’s background as a Republican governor of New Mexico superficially appealing — or perhaps reassuring that he wasn’t a nutcase.

This year, we imagine many of them will either line up behind Biden as the “last line of defense” against Trump… or behind Trump as the “only hope” against the Dems. Bleah.

“High-intensity, high-participation, high-polarization moments are deleterious to the electoral health of nontraditional politicians and parties,” summed up Reason’s Matt Welch.

And as our founding editor Addison Wiggin observed here in early 2017, “The worst thing Donald Trump has done is he’s gotten people interested in politics again.”

“This!” says another reader in response to “a pox on all of ‘em.”

“But I don’t understand the comment about Flynn being a dangerous dude.

“Now that the ‘but’ is out of the way, Amen! to Dave’s comments at the end of Tuesday’s 5.”

The 5: Ye shall know them by the company they keep.

Flynn wrote a book with neoconservative “scholar” Michael Ledeen. Ledeen makes run-of-the-mill neocons look sane. What’s more, Ledeen likely had a hand in the Niger uranium forgeries that duped many Americans into supporting the Iraq War.

Our final correspondent delivers a variation on the theme: “‘A pox on all of ‘em.’ I love that and couldn’t agree more! Your constant dribble of teasers for yet another product promising untold riches followed by a lengthy exploding offer that all looks eerily similar is making me wonder if I fell for a scam here, but calling a pox on both of them earned back a modicum of my trust.

[Ooh, nice job of switching topics. We did not see that coming!]

“Does your parent company (whatever that is) offer some kind of all-in-one package? It’s confusing and frankly concerning to keep getting endless pitches from Seven Figure, St. Paul, Agora, Laissez Faire, etc.?”

The 5: Almost! The Financial Reserve is our all-you-can-eat VIP service delivering essentially everything published by Paradigm Press, St. Paul Research and Seven Figure Publishing.

Along with that unprecedented level of access, you get regular correspondence from our fearless leader Addison Wiggin — who conducts weekly in-depth interviews with our own editors as well as intriguing voices from outside our firm. (We spotlighted his most recent conversation with Zach Scheidt yesterday. Tomorrow, Addison talks with longtime friend of The 5 Dan Denning, co-author with Bill Bonner of The Bonner-Denning Letter.)

To learn more about the privileges and benefits that come with Reserve membership, call (800) 360-2162 and speak to one of our VIP customer care reps.

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. If memory serves, sometime around now marks 10 years since I assumed managing editor duties of this e-letter.

I had a small hand in The 5 from the beginning in 2007, and my involvement grew throughout 2010, but it became my five-day-a-week responsibility somewhere around Labor Day that year.

If you were around at the time, you know I collaborated for a couple of years with founding editor Addison Wiggin before he turned his attention full time to growing our firm’s presence both domestically and internationally — leaving the daily care and feeding of his baby in my hands. I thank him for his trust.

None of it, then or now, would be possible without the most passionate, informed and engaged readership of any financial e-letter anywhere.

So thank you for being among their number and making The 5 a part of your day. (Even, or especially, if you’re among the crowd that says it takes more than 5 Mins. to get through!)

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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