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Postcards from the florida republic
An independent and profitable state of mind.
It’s an amazing day to be on social media.
Everyone - everywhere - is suddenly an expert on the sovereign debt market, the United States’ credit rating, the role of fiscal policy, and the future of America’s financial condition.
Overnight, everyone everywhere has acquired deep expertise on one of the most complex topics in all of finance – a topic which, until last night, anyway, very few people could even comprehend.
I guess all the worry about AI taking over is for nothing.
Here’s how this remarkable total revolution in finance started…
Last night, Fitch Ratings downgraded the United States’ long-term credit rating, dropping it from AAA to AA+.
Those of us who’ve been around the block a few times remember a similar move from Standard & Poor’s Global Ratings back in 2011, after a highly politicized legislative-executive standoff over the debt ceiling.
At the time, S&P cited deep concerns about “the deterioration of standards of governance” in D.C..
But, as usual, the essential message is getting lost. Here’s what you need to know…
What Fitch Is Really Saying Here
Let’s go to the text from Fitch Ratings.
"The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management," Fitch said in a report last night. "In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process [and] the GG (General Government) debt-to-GDP ratio is projected to rise over the forecast period, reaching 118.4% by 2025. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade."
The announcement surprised some in Washington.
Economists like Larry Summers stormed off to Twitter to shake their fists at the sky and declare the U.S. economy resilient. Paul Krugman rushed to defend the economy as well.
These men can’t get it through their thick skulls that the current trajectory of the U.S. system is crumbling at a veritable gallop. It’s been decades of this mess.
“We have a printing press,” they cry. “We can’t run out of money.”
Know who else has printing presses? Venezuela and Argentina.
Having a printing press can’t be an excuse for the fact that the U.S. government is $32.6 trillion in debt and facing 6% inflation while it runs a currency backed by the “full faith and credit” of an inept government. This economy faces long-term competition from the BRICS, who want to create a gold-backed currency with the purpose of back-stopping trade.
“But the economy!”they cry. “It’s strong!”
Yes, second-quarter GDP did come in higher than expected.
But the economy is being powered by Keynesian fairytales — lots of stimulus, lots of infrastructure spending, lots of graft.
Spend… spend… spend. You can do that all you want… until you can’t anymore.
It’s not sustainable.
All this spending will run out next year… and then what?
Will we borrow more then? Are we content to pay north of $1 trillion a year on interest alone? For all the rambling about the need for government to do more good for the people, that trillion-dollar interest burden eats into what is possible.
Will we pass more subsidies, then?
What is the plan? What makes a sustainable economy?
They don’t know.
This is the magic of Keynesian and Modern Monetary Theory thinking.
They literally don’t believe money matters, and they prove it every day.
Because their brains are so addled, they have instead politicized this process.
To root against their spending is to “root against the economy.”
They’re already blaming the GOP, corporations, and the American people to boot.
They’ll call for higher taxes… which will hinder growth.
Yet, they’ve already admitted in Congressional Budget Office (CBO) documents that the next 30 years will feature growth under 2%, modest inflation (sure), and debt that will hit $50 trillion by 2032. They admit there’s no real plan to embrace structural economic reform to power the things that keep going up in cost as the borrowing explodes: Housing, food, energy, and education.
Economy Government, Stupid
When James Carville coined the term “It’s the economy, stupid” in 1992, it spoke to the heart of that election and the sentiment of the American people.
Politicians and bureaucrats are missing the message from Fitch.
There is a total lack of cooperation by Congress to do their single most important job: Manage the people’s balance sheet and stop this break-the-glass strategy of addressing debt.
Americans are sick of gridlock. They’re sick of the politicization of everything. They’re sick of constant warring between two inept parties. We’re exhausted from the current form of the American experiment. (Hence the birth of the Florida Republic state of mind.)
I’d say Fitch is doing Americans a solid favor by sending a message to Congress, the White House, and everyone else who defends the status quo. Enough is enough.
How hard is it to recognize spending is a severe problem in this economy? That very borrowing and spending is all that’s powering the economy they’re cheering.
LOTS OF GOVERNMENT SPENDING!
“It worked for FDR!” they cry.
The New Deal produced a massive recession in 1937 and we limped into World War II. Then we had a rationing economy for four years. Yet, they view that era as an unmitigated “economic success.”
It’s clear they have zero understanding of history.
That’s why they’re doomed to repeat it.
The idea that they cling to this idea that we will never run out of money shows their complete misunderstanding of the damage they are causing ordinary Americans.
Argentina won’t run out of money. Zimbabwe didn’t run out of money. Weimar Republic-era Germany didn’t run out of money. Venezuela didn’t run out of money.
And The West won’t run out of money… it’ll just be worth less than toilet paper if they keep this pace of spending up over the long haul.
In their core, they forget that this borrowing and spending is a tax on Americans in the future - whether it’s higher taxes to pay for it, inflation to run down the debt, or fewer services in the future. After all, Social Security is insolvent in 10 years.
“But we don’t run a budget like a household!” they say.
But will we really sit here and explain FX swaps, sovereign risk weights, commercial bank reserves, and the role of deficit spending to Americans with one bloodshot eye open at 9 AM each day?
We already know the system is broken.
Globally, six of every seven dollars is now going toward refinancing debt. And it will continue that way until it breaks.
There is no plan to pay down this debt aside from inflating it away… as if that is a good idea for the American household.
This isn’t just about taxes.
It’s about the fact that they are eroding the value of people’s money - which is their time, their life… all those hours they spent working to build a better life are eroded by these magical Keynesian thinkers who cannot understand what value is.
They’re the worst kind of people.
They think they’re brilliant because of the letters tacked onto the end of their name, or the fact that they went to Harvard or Yale… They leave a trail of destruction in their wake.
They go to the bathroom in your driveway, knock at your door, drag you to that steaming pile they created, beat their chest, and proudly scream, “Look at what I did! You’re welcome!!!”
Then they run down the driveway with a finger in the air, like they’re Joe Namath winning the Super Bowl.
And these are the people who understand what Fitch was saying.
Don’t get me started on the other self-described experts.
PS: I studied fiscal policy under Paul Weinstein, a former policy advisor to the Clinton administration, on matters related to the deficit and debt.
We shared great conversations that foreshadowed last night’s decision. More on that tomorrow, as he came up with one of the great ideas to help reduce debt in this nation but was met by an opposition that defies logic. I’ll explain tomorrow.
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.