When Sanity Itself Evaporates

This is nuts. The partisan political battle is on the verge of a volcanic eruption over the Donald’s miraculous 72-hour Lazarus act, while the ruling class’ favorite pro-Dem poll—the Wall Street Journal/NBC News Survey—has put Biden 14 points ahead.

But, what?

The Robin Hooders’ and robo-traders promptly took the S&P back over 3400 on Monday because, well, by the lights of the Wall Street Journal what matters is not the prospect of a Kamala Harris/Progressive Left Regency, but that the rising probability of a Biden victory had purportedly reduced the casino’s negativity vibes otherwise known as “uncertainty”:

Investors appear cautiously optimistic that President Trump’s health condition is improving and that former Vice President Joe Biden’s rising lead in the polls means less uncertainty.

Have these so-called financial journalists been lobotomized?

If “certainty” is all it takes to levitate the stock averages, well then if Karl Marx himself were way ahead in the polls, presumably that would be a ‘buy” signal, too?

Of course, the fact of the matter is that the machines were buying chart points Monday to the tune of +60 and +485 on the S&P 500 and Dow, respectively, based on various moving averages, stochastics, waves, bands, candlesticks, pennants, Fibonacci ratios and other trading voodoo. That’s the sum and substance of what’s left in the once and former “market” for stocks: No signal whatsoever—just machine generated noise and churn accompanied by absolutely absurd, shape-shifting Wall Street narratives about why the “buy” keys are red hot at any given moment in time.

Indeed, if there was anything behind the recent rally other than technics and  the above evident retail momo chasing, it was the faint hope that another Everything Bailout will slither out of the Washington fiscal sausage machine before the voters sleep-walk into the upcoming quadrennial ritual of national futility.

As it happened, of course, the nation’s Lazarus in the Oval unexpectedly sent the so-called bipartisan stimulus talks back to the graveyard when he tweeted the Dow to a 400 point plunge just before 3:00 PM:

Nancy Pelosi is asking for $2.4 Trillion Dollars to bailout poorly run, high crime, Democrat States, money that is in no way related to COVID-19. We made a very generous offer of $1.6 Trillion Dollars and, as usual, she is not negotiating in good faith. I am rejecting their….request, and looking to the future of our Country. I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business.

So, that’s two solids from the Donald in just two days, even if the next installment of Washington’s bipartisan fiscal bacchanalia is merely to be postponed by 30 days. Still, in these unhinged times, anything which slows down the nation’s fiscal train-wreck has to go in the plus column.

As always, however, there was far less than meets the eye to the Donald budgetary demarche. It appears that the only material difference between the two sides was on the matter of a Federal bailout for state and local governments, where the most recent House passed bill contained $436 billion and Stevie Mnuchin’s last offer had been $250 billion.

Alas, the Donald apparently didn’t object to sticking future taxpayers with still more debt—only that he didn’t want the extra $186 billion going to bailing out “poorly run, high crime, Democrat States”, which have no chance of ending up in his Electoral College column anyway.

Beyond that the Donald, Stevie and most of the Capitol Hill GOP were copacetic, apparently, with 160 million Americans getting $1,200 of additional helicopter money each whether they needed it or not; unemployed workers getting weekly UI benefits equating to somewhere between a $47,000 (Mnuchin) and $57,000 (Pelosi) annual wage as between basic state UI benefits and the renewed Fed top-up; and $150 billion for schools (Mnuchin), $75 billion for testing (Mnuchin) and hundreds of billions more for child care, airlines, restaurants, health care and a medley of bipartisan charities and hobby horses having nothing at all to do with the Covid..

In all, had the Donald not been on the political warpath against Dem governors and mayors they would have undoubtedly split the difference on the money at say $1.9 trillion, thereby bring the totality of Everything Bailouts to $5.1 trillion.

So did we say Washington is collectively out of its mind?

Well, spending more than 25% of GDP virtually sight unseen in a matter of eight months would have/does surely qualify for that characterization.

For want of doubt, just recall what the Donald tweeted less than a month ago. It reminds that notwithstanding today’s temporary solid, he has single-handedly ripped to shreds whatever remnant of fiscal sanity remained in Washington upon his seizure of the Grand Old Party during the 2016 primaries:

Democrats are “heartless”. They don’t want to give STIMULUS PAYMENTS to people who desperately need the money, and whose fault it was NOT that the plague came in from China. Go for the much higher numbers, Republicans, it all comes back to the USA anyway (one way or another!).

The bolded sentence tells you all you need to know. Whichever candidate/party comes out on top from the quadrennial futility scheduled for 29 days from now will make no never mind. Anything which remotely resembles rational fiscal governance is now deader than a door-nail, meaning that the 2020s—the decade when the giant 78 million Baby Boom generation becomes fully retired and collectively suckles on Uncle Sam’s horribly depleted budgetary accounts—will be a time of Fiscal Armageddon. Full stop.

That’s a downright cynical viewpoint, of course, but how else would you describe a circumstance in which economic sanity itself has evaporated on both ends of the Acela Corridor. For instance, here is the syncopated spend-a-thon and printing spree of Uncle Sam’s fiscal and monetary branches, respectively, since the Covid-Hysteria erupted in March.

Every incremental dime spent to allegedly combat the Covid was borrowed, and every dime borrowed was monetized by the central bank. Yet if that’s not economic madness, why not just get rid of working and taxes altogether, and simply borrow and print the entire GDP?

And, no, the fact that that $3 trillion of borrowing and printing was done in a matter of months to combat the so-called Covid emergency doesn’t make a bit of difference. That’s because while there was a humanitarian case for targeted aid to workers through public unemployment insurance (see below), there was never an economic case for the massive coast-to-coast soup lines that Washington is pleased to call “stimulus”.

After all, there has not been some mysterious failure of economic function or “demand” back in the nether regions of the U.S. economy’s financial plumbing. To the contrary, output of goods and services fell sharply in April and afterwards because the Donald’s malpracticing doctors, the CDC public health vertical and power-hungry mayors and governors ordered it so.

Those government ordered shutdowns and impaired operating conditions, in turn, caused paychecks and household incomes to fall proportionately. But so what?

The government commanded an economic contraction and not surprisingly it got less of both supply and demand. There was absolutely no macroeconomic imbalance or reason to believe that this state-ordered contraction of goods and services output would have degenerated into a downward spiral of depressionary doom.

Indeed, that’s the Big Lie which underlies the entire stimulus craze mindlessly embraced by Wall Street and Washington alike. Call it the macroeconomic death wish presumption—the hoary notion that if workers temporarily spend less because they are earning less that each round of the production-wages-spending cycle will become progressively smaller until the economy virtually disappears into a black hole. That is, of course, absent heroic counter-cyclical “stimulus” by the fiscal and/or monetary authorities.

That is now and always has been Keynesian claptrap. To the contrary, if the economy is hit by an external shock—-whether a gigantic asteroid shower or the Virus Patrol lockdowns—what happens is that a perfectly rational quantity- and time-limited series of adjustments are undertaken by the great Unseen Hand to keep supply, demand, inventories and investments in some form of reasonably even keel.

The collectivity of businesses and consumers in America simply do not go into an inexorably linear free-fall in the process of making such adjustments. They stop when a tolerable equilibrium is restored, even if it results in lower aggregate GDP.

For instance, during the Great Recession businesses heavily shed excess labor for about 14 months through May 2009 before gradually reversing direction and actually reverting to labor accumulation 10 months later (March 2010).

And as we have demonstrated elsewhere, this labor liquidation cycle was not stopped by the Fed’s furious money pumping during the fall-winter of 2007-2008. That merely reflated the trading sardines of Wall Street, while the so-called “shovel ready” fiscal stimulus did not materially hit the GDP spending stream until well after businesses had collectively finished their economics-based labor liquidations.

Likewise, business liquidated inventories for 13 months through September 2009, and then began a re-accumulation process which drove higher production, hiring and wage bills from there forward. Again, the Fed’s money-pumping “stimulus” never left the canyons of Wall Street during that period, while the Obama fiscal boondoggles led to unneeded highway interchanges completed years later and munificient pork for state and local governments that simply replaced local tax revenues that had dipped below trend.

Stated differently, even during the Great Recession the US economy did not go into free-fall and did not need any Washington based “pump-priming”. As we will essay in Part 2, that remains the case this time around the recessionary track as well.

In fact, there is no case for almost everything contained in the Everything Bailouts. The economy would recover on its own as soon as the Virus Patrol gets its boot heel off from business, while throwing borrowed money into the spending steam in the interim mainly raises demand for imported goods.

In fact, there only thing holding down domestic production of services is obviously the lockdowns and the Covid-Hysteria being generated by the Virus Patrol.

Accordingly, the $300 billion per shot of helicopter checks does nothing except transfer wealth from future taxpayers to existing taxpayers, while the $525 billion of walking around money handed out to more than five million so-called small businesses— some of them real and many of them concocted for the purpose of collecting the Federal loot—amounts to a purely lottery-style redistribution of income .

As we will also show in Part 2, if you want to solve the real humanitarian problem—as opposed to the non-existent economic problem— owing to the lockdowns, pump some extra money into the pre-existing state UI system and be done with it.

Obviously, they went way overboard with that in March and April as tracked by the chart below. But more than half of that surge was already there in the base-line state UI programs and would have happened anyway.

Indeed, had Washington merely topped up the state programs with $100-$200 per week and covered the previously uncovered contract, gig and part-time workers, it could have been done for well less than $300 billion or just 10% of what has already been authorized.

In the meanwhile, the actually spending frenzy which did occur has left Washington literally fiscally incontinent. After all, when you have a Republican Secretary of the Treasury uttering the following foolishness, that’s exactly where you are:

“Now is not the time to worry about shrinking the deficit or shrinking the Fed balance sheet. There was a time when the Fed was shrinking the balance sheet and coming back to normal. The good news is that gave them a lot of room to increase the balance sheet, which they did. And I think both the monetary policy working with fiscal policy and what we were able to get done in an unprecedented way with Congress is the reason the economy is doing better.”