Salient to Investors:

David A. Stockman writes:

The US is broke – fiscally, morally, intellectually – and the Fed has incited a global currency war that will soon overwhelm it. This latest Wall Street bubble, inflated by phony money from the Fed rather than real economic gains, will burst within a few years when America will descend into an era of zero-sum austerity and virulent political conflict. Get out of the markets and stay in cash.

Since March 2000, while the Fed has expanded its balance sheet sixfold:

  • Economic output has grown an average of 1.7 percent a year, the slowest since the Civil War.
  • Real business investment has risen only 0.8 percent per year.
  • The payroll job count has risen 0.1 percent per year.
  • Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent.
  • The real net worth of the bottom 90 percent has dropped by 25 percent.
  • The number of food stamp and disability aid recipients has more than doubled, to 59 million, or one in five Americans.

The state-wreck originated in 1933, when FDR opted for fiat money, economic nationalism and capitalist cartels in agriculture and industry. World War II did far more to end the Depression than the New Deal did.

Nixon’s defaulting on the nation’s debt obligations by ending the convertibility of gold to the dollar started a four-decade spree,  ran up a cumulative $8 trillion current-account deficit, increased the ratio of total debt to GDP to 3.6 from its historic level of 1.6.

Greenspan’s loose monetary policies did not set off inflation only because domestic prices for goods and labor were crushed by the huge flow of imports from Asia. The G.O.P. embraced Keynesianism for the wealthy.

If and when the Fed even hints at shrinking its balance sheet, it will elicit a tidal wave of bond sell orders, because even a modest drop in prices would destroy the arbitrageurs’ profits.

The 10-year deficit is actually $15 trillion to $20 trillion, far larger than the CBO’s estimate of $7 trillion, which imagines 16.4 million new jobs in the next decade, versus the 2.5 million created in the last 10 years.

Even linking the cost-of-living adjustment for Social Security payments to a different kind of inflation index would save just $200 billion over a decade, or 1 percent of the problem.

With no changes, over the next decade or so, the gross federal debt will rise from $17 trillion to $30 trillion and from 105 percent of GDP to 150 percent.

Chinese infrastructure spending over the last 15 years – the greatest construction boom in history – is slowing and China faces its day of reckoning, too. Brazil, India, Russia, Turkey, South Africa and the other growing middle-income nations cannot make up for the shortfall in demand. US monetary and fiscal stimulus has reached its limits. Japan is sinking into old-age bankruptcy and Europe into welfare-state senescence.

The Fed has abetted the Wall Street casino, crucified savers on a cross of zero interest rates, and fueled a global commodity bubble that raises food and energy prices, excluded by the Fed in calculating inflation.

The solution is so radical it can’t happen – a sweeping divorce of the state and the market economy, a renunciation of crony capitalism and Keynesian economics in all its forms, and the US shifting its focus to managing and financing an effective, affordable, means-tested safety net.

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