The Debt Death Trap

Recipe for Disaster Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] The Debt Death Trap - Kamala Harris casts the deciding vote on Biden budget resolution… - “Nothing like it has ever occurred in U.S. history with the exception of FDR’s effort to redirect the entire U.S. economy as part of the effort to win World War II”… - The debt death trap… Recommended Link [It’s Your Turn]( [Read more here...]( For five years now, Teeka Tiwari has arguably helped more everyday people learn how to get rich from crypto than anybody else… Now it’s your turn. You have one final opportunity to get the life you’ve always wanted… thanks to a breakthrough discovery that Teeka just made. [Get All The Details Here]( Portsmouth, New Hampshire February 5, 2021 [Jim Rickards] Dear Reader, This morning we got our first look at what we can expect for the next two years (assuming Joe Biden lasts that long). The Senate voted on Biden’s $1.9 trillion budget resolution last night. The vote broke along partisan lines, ending in a 50-50 stalemate. Republicans had proposed a package that would cost about $600 billion. Vice President Kamala Harris cast the deciding vote at 5:30 this morning, breaking the tie. Harris’s role is key because she’s essentially a 51st senator who will break 50-50 ties in favor of Democrats. You can expect many more of these types of votes. This morning’s vote allows the legislation to go forward. But that doesn’t mean the process is over. The Senate added amendments to the bill that the House had already passed. For example, Senate Democrats reversed previous Republican provisions that would have supported the Keystone XL pipeline and fracking for oil and natural gas. Cancellation of the Keystone Pipeline will destroy tens of thousands of high-paying jobs with benefits. Denying new gas and oil leases will increase energy prices and diminish America’s newfound energy independence from foreign suppliers. I’m not going to get too deep in the weeds here, but because the Senate added amendments to the bill, it had to go back to the House, which needed to sign off on the changes. This afternoon it did. The House passed the resolution. A final bill will be drafted and passed through an obscure process called reconciliation, which would deprive the Republicans of the ability to filibuster the bill (although under Senate rules this can only be used once per fiscal year and for that reason is usually reserved for major legislation such as tax law changes). Difficult To Comprehend The size and scope of this spending program are difficult to comprehend. Nothing like it has ever occurred in U.S. history, except for FDR’s effort to redirect the entire U.S. economy as part of the effort to win World War II. It will provide aid to some in need but, it will also supply windfalls to favored political interests, whether they are in need or not. This $1.9 trillion comes on top of the $900 billion spending package passed last month and the $3 trillion of spending packages passed by Congress between April and June in 2020. Of course, this entire run of (essentially) $6 trillion in COVID and economic relief is in addition to the $1 trillion baseline budget deficits already built-in for fiscal 2020 and fiscal 2021. The total deficit spending tab for both years, pandemic and non-pandemic, comes to $8 trillion. Recommended Link [Media Calls This A “Baby Boomer Hobby”... 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COVID has become an all-purpose excuse for practically unlimited spending. What it will not do is stimulate the economy or end the no-growth and slow-growth depression we are now in. Obviously, the policy response to the pandemic caused the new depression. The Worst Decline Since 1946 The final numbers on the economy for 2020 are in (subject to the usual adjustment processes). GDP growth in the U.S. for 2020 was negative 3.5%. How bad is that? It is worse than in 2009 when growth collapsed by about 2.4%. It is worse than the 2000 and 1990 recessions, which were both quite mild. It is worse than the severe recession of 1982 when growth fell about 2%. In fact, it is the worst decline since 1946 in the midst of the demobilization after World War II. Before that, you have to go back to the Great Depression years of 1930, 1931 and 1932 to find a worse collapse. In a $22 trillion economy, a 3.5% collapse equates to about $770 billion in lost output. The actual damage was far greater because output figures and GDP do not capture lost wealth in the form of failed businesses, lost skills, and declining asset values in commercial real estate, airlines, resorts, cruise ships and many other endeavors. The 2020 collapse was bad enough, but where do we go from here? How will the Biden policy plans play out in the real economy regarding growth, jobs, inflation or deflation? Most analysts and TV commentators say that growth will come roaring back in 2021, and we’ll be back to 2019 levels of output by mid-year. Don’t believe it. The Biden plan will hurt growth, destroy jobs and produce a new recession as early as the first half of 2021. The overall effect will be deflationary (although inflation will follow in 2022 and later as the effects of deflation become unsustainable due to debt burdens and reduced consumption). The pillars of Biden's program boil down to two things. One is his monetary policy, which consists of zero rates and money printing. The second is his fiscal policy, which includes deficit spending and a higher debt-to-GDP ratio. This will be exacerbated by higher taxes, lower wages (due to more immigration) and more regulation. It’s a recipe for economic disaster. Recommended Link [A $7 "Biden Survival" Blueprint?]( [Read more here...]( He's run closed-door meetings at the Pentagon... He's met with the Fed chairman and advised the CIA... And he's been paid a fortune to advise wealth private investors... But right now, he's ready to give away his most valuable piece of investment intelligence, practically for free. Why? "Because," says this ex-high-level insider, "I can't keep this under wraps any longer." "Not with everything that's at stake. [See What He's Uncovered Here]( No Velocity Monetary policy will fail because velocity is falling faster than money can be printed. Velocity measures turnover, the rate at which money changes hands. Velocity peaked in 2008, just ahead of the global financial crisis, and it has continued to plunge until it took a total cliff dive in 2020 during the pandemic. This is why the Fed has been printing so much money. It takes more money just to keep GDP constant when velocity is collapsing. When velocity drops, you get less “bang for the buck” in terms of economic growth. The Fed has very little control over velocity. That’s because velocity is driven by psychology and inflationary expectations. Right now, expectations of inflation are low. People don’t want to spend; they want to save or pay down debt. The result is that velocity continues to drop, which is a major headwind to growth. The Fed’s solution (now endorsed by Janet Yellen, former Fed Chair and new Secretary of the Treasury) is more deficit spending by the Congress. The idea is that if citizens won’t spend, Congress will. The goal is to accelerate money velocity. That might work when you have little debt. But that’s obviously not the case today. Like Greece, Lebanon, Italy and Japan The debt-to-GDP ratio is the total amount of U.S. government debt divided by GDP. The U.S. debt-to-GDP ratio is about 125% today. That ratio will get worse once the new Biden spending bills pass, pushing the debt-to-GDP ratio to 130%. The only other developed countries with debt ratios that high are Greece, Lebanon, Italy and Japan. This debt-to-GDP ratio is highly significant. The research shows that at debt-to-GDP ratios of 90% or less, there is a Keynesian multiplier from government borrowing and spending. You can borrow a dollar, spend a dollar and get, say, $1.25 of GDP. The multiplier drops as the ratio gets higher, but as long as you do not surpass a 90% ratio, there is still some bang for the buck. Once you hit 90%, the multiplier is less than one. The U.S. crossed this critical threshold in 2011. This means if you borrow a dollar and spend a dollar, you get less than $1.00 of GDP. You’re now in a debt death spiral. When the debt is that high, you can’t borrow your way out of it. Each dollar of additional borrowing adds a dollar to the debt but adds less than a dollar to GDP. An economic time bomb is ticking. Velocity is dropping. Debt is growing. Growth is slowing. The explosion will come in the form of asset bubbles bursting, stocks crashing and soaring gold prices. It’s a debt death trap. Regards, Jim Rickards for The Daily Reckoning P.S. I don’t want to scare you, but I want you to be prepared… [My latest warning]( is something I want every American to see. That’s because the United States is on a [terrifying trajectory]( and the new administration may well push it over the cliff. Keep in mind, you won’t find this information anywhere in the media. I fear your only warning is detailed [right here.]( Again, I don’t want you to panic, but I do want you to prepare. [Go here to learn how.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [James Rickards][James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Add feedback@dailyreckoning.com to your address book: [Whitelist us]( Additional Articles & Commentary: [Daily Reckoning Website]( Join the conversation! Follow us on social media: [Facebook]( [LinkedIn]( [Twitter]( [RSS Feed]( [YouTube]( The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. 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