Quick Takes – The Coming Economic Doom: In Slow Motion; Looming Closer; Worse Than You Think

     Another “quick takes” on items where there is too little to say to make a complete article, but is still important enough to comment on.

     The focus this time: Whichever party controls the White House when it comes will suffer for it.

     First, a little ironic mood music:

     Carrying on…

     Can’t exactly create economic prosperity with tax money when there isn’t much there left to tax, like in Minneapolis.

“Commercial real estate bears a disproportionate share of the city’s fiscal burden. As those values decline dramatically, the short-term fix will be increasing residential property taxes. That will reduce residential real estate values, and drive more upper-income residents out of the city. Which could turn into a financial death spiral.

“Why are Minneapolis’s problems so acute? Because of crime. Formerly a low-crime city, the George Floyd riots and accompanying attacks on law enforcement have caused a dramatic increase in the rate of serious crime. That has caused businesses, as well as individuals, to avoid the city. With leases continuing to expire, there is no reason to think the downward trends have bottomed out.

“The City of Minneapolis, meanwhile, is exploring ways of redeveloping George Floyd Square in a manner that will, in the mayor’s words, ‘honor the life of George Floyd, and point toward a more equitable future.‘”’ Somehow, I don’t think that is the focus that the city needs if it is to recover economically.”

     But out of sight; out of mind.

“Few politicians in either major party are willing to admit this, but our big federal entitlement programs are rapidly running out of money. What happens then?

“…

“Many Americans will say: We’ve been hearing scary things about the national debt for decades and we’re still doing pretty well, aren’t we?

“…

“The economy suffers enough from federal regulation, but imagine the mayhem if the government actually owns lots of business shares. Our political leaders will need to take their heads out of the sand before it’s too late.”

     That’s be socialism—a position that increasingly both parties would love to impose on those icky corporations.

     Both national and corporate debt are creating a perfect storm…

“Both trust funds are filled with special issue bonds that are liabilities to the Treasury. Since the Treasury has no surplus upon which to draw, when these bonds are presented for redemption, Treasury must issue additional debt to retire them. But this is what would have happened if program benefit payouts exceeded tax collections in a system with no trust fund, so the trust fund might as well not even exist. The trust fund is filled with worthless paper, so emptying it out will have no effect.

“The true problem is the accumulation of ever more federal debt to provide revenue to allow the trust fund to redeem its claims on the Treasury. As total baby boomer benefits payments mount, the Treasury has had to issue bonds at an accelerating rate. This is why it only took 260 days to go from a national debt of $34 to $35 trillion a few weeks ago.

“In the absence of significant reform, growing shortfalls will have to be covered by evermore newly issued debt or monetized debt. In either case, the effect on long term interest rates will be the same: they will rise from either increased demand in the credit market arising from additional federal borrowing or, if the Fed decides to monetize these new debt instruments, decreased supply in the credit market arising from creditors requiring a premium for expected inflation.

“This latter effect arises because creditors will only buy a bond if its price is low enough to ensure a return that is high enough to protect the real purchasing power of their investment. This phenomenon is what economists call the Fisher effect.

“Many firms have taken on high levels of debt because very low interest rates made the cost of carrying debt artificially low. This allowed many firms to spend money on dubious things like DEI training for employees and initiatives aimed at drawing approval from ideologically driven investors.

“…

“What voters should be worried about is that failure to address the entitlement problem might work the Fed into the kind of untenable debt situation that Japan had (and has), which in turn may induce the Fed to take drastic action to keep the economy out of a deep and prolonged recession.

“In the event of a recession triggered by increasing interest rates from continued deficit spending, the Fed may ask for Congressional approval to purchase private equities in an effort to avert the collapse of an entire generation’s 401Ks from widespread firm bankruptcies due to their inability to cover debt payments. This is hardly unprecedented. The Bank of Japan began purchasing stocks in 2010 and is now the largest owner of Japanese stocks in the world. This undoubtedly contributed to Japan’s stock-market plunge a few weeks ago since the bank is now trying to sell those assets.

“Voters need to understand that by not pressuring politicians to deal with entitlements now, we might end up with a substantial amount of the means of American production being owned by the government. This will harm our free-market society incalculably because, slowly but surely over time, it will rob the economy of its entrepreneurial zeal and strong property rights. It will make ESG and woke capitalism look like child’s play, delivering to central planners what they were unable to achieve in America on the battlefield or at the ballot box.”

     TTFN.

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