25 Jun If something cannot go on forever…
“How long is forever?” – The Lonely Realist
Stein’s Law—named for economist Herbert Stein, Chairman of the Council of Economic Advisers under President Nixon — states that “If something cannot go on forever, it will stop.”* America’s rising standard of living, ever-increasing GDP, global hegemony, and democratic stability cannot last forever. How much longer does America have before it hits a wall?
John Kenneth Galbraith said there are only two types of forecasters, “Those who don’t know and those who don’t know they don’t know.” TLR does not profess to know “when” or “what” will trigger the hitting of a wall. Forecasters who profess to know are among those who don’t know they don’t know. The quantity and complexity of data make it impossible to separate the relevant from the anecdotal to accurately forecast future events. For example, from an economic perspective, no one can know where, when and how the combination of Modern Monetary Theory, overly-generous Trump/Biden COVID stimuli, the Federal Reserve’s overly-accommodative fiscal policies, fallout from the Ukraine War, China’s zero-COVID policy, knock-on supply chain, sanction and tariff effects, climate change, inflation, and maturing agricultural, industrial, technological and biotechnological revolutions will take us.
The United Nations Conference on Trade and Development recently prepared an assessment of the impact of only the Ukraine War on trade, finance, technology, investment and sustainable development. It reached the darkest of conclusions, stating that the War has caused “a rapidly worsening outlook for the world economy, underpinned by rising food, fuel and fertilizer prices, heightened financial volatility, sustainable development divestment, complex global supply chain reconfigurations and mounting trade costs…. The risk of civil unrest, food shortages and inflation-induced recessions cannot be discounted, particularly given the fragile state of the global economy and the developing world as a result of the COVID-19 pandemic.” UNCTD projected that inflation in grain prices alone will grow much worse as the impact of the Ukraine War is felt, which will sharply reduce disposable incomes, particularly in the developing world. Demand destruction therefore will accelerate and will likely get far worse … and the Ukraine War is only one of the coalescing pressures on global health.
Societal/political pressures also are increasing. Wealth inequality has reached critical levels – and not only in the U.S. –, its impact exacerbated by unlimited access to information and misinformation. A potential tipping point is inflation … or inflationary overload. TLR previously commented on the types of pressures that in the past led to historical upheavals, including those that triggered the Boston Tea Party, the storming of The Bastille, fallout from the assassination of Archduke Ferdinand, Russia’s October Revolution, and the Rise of Hitler. The last several years bear a disquieting resemblance to those episodes, particularly to the 1930s, and America’s reactions over the last decade to Russia’s, China’s and Iran’s aggressions actions have been disturbingly reminiscent of “Munich Moments.”
America’s declining relations with China continue to be a significant pressure point. Unless those relations turn a corner, it may be that the U.S. and China indeed are Destined for War as Graham Allison warned in his 2017 book (discussed by TLR here, here and here). Tensions over Taiwan are increasing at an alarming rate and the risks of China, Taiwan or America hitting a trip wire that triggers hostilities loom larger day-by-day.
The consumption financed by the last 13 years of excess money-printing and ballooning debt has triggered a predicted inflationary surge at a rate unmatched for >40 years. Inflation is another term for savings-destruction. The value of Americans’ (and the world’s) nest eggs therefore is deteriorating, which is one of the ways in which inflation impacts on those who hold fiat currencies like the Dollar. Alternatives like Bitcoin haven’t yet proven their worth as safe havens. When coupled with the Fed’s recently-adopted Quantitative Tightening (QT), currency deterioration accelerates the erosion of value and leads to asset deflation and accelerated demand destruction, an ugly and destabilizing picture for the foreseeable future.
TLR has frequently commented on America’s debt bomb. U.S. student debt currently stands at $1.7 trillion, consumer debt is $15.8 trillion, U.S. mortgage debt is $11.2 trillion, U.S. corporate debt is $12 trillion, States’ debts total $1.2 trillion, Federal debt is $28.4 trillion, and there is $8.9 trillion of debt on the Fed’s books. Those debts are a tax on future growth and prosperity. They’re an obligation today’s generation has imposed on future generations that necessarily will reduce their wealth and consumption. In past eras, generational debt bombs have had serious social and political destabilization consequences. John Mauldin in a recent commentary analyzed the scale of America’s debts and deficits. His disturbing conclusion is that America’s debt growth “simply can’t continue, which means it won’t continue…. At some point, that amount of debt … will start creating cracks in the system.” Cracks already exist. How much time remains before they widen to unleapable fissures is open to conjecture (mostly engaged in by “those who don’t know they don’t know”). How those cracks might be bridged also is open to conjecture (with some observers hoping that America’s government will provide the answers and others looking to the Fed, neither of which appear adequately forewarned or forearmed). What is clear is that any possible cure will be unpopular, painful and destabilizing. But then, “if something cannot go on forever, it will stop” …, which also might occur as a consequence of a Minsky Moment (a widening war, revolution, economic calamity, climate disruption, pandemic or etc.).
The pressures are building, slowly quickly drawing America and the world closer to the time when “forever” will stop.
* Stein’s Law is both tautological – by definition, if something cannot go no forever, it will stop – and illogical – nothing can go on forever. It nevertheless has been a mainstay of TLR commentaries (many would say an over-used one found here, here, here, here, here, here, here, here, and here).
An index of TLR titles can be found here.
Finally (from good friends)