Suffering Fools: The Blank Check Rant Continued

Suffering Fools: The Blank Check Rant Continued

It’s been more than six years since I engaged in ceremonial bridge burning and otherwise sought to alienate friends, colleagues and acquaintances as a matter of course. As it turns out, overt, systematic efforts to antagonize other people aren’t conducive to favorable life outcomes. Who knew?

These days, I still cast aspersions, but it’s never directed any one person, specifically. Well, sometimes it is, but I don’t make it explicit. That lets me retain plausible deniability. And if I had to make a list of intangible things you absolutely have to have, plausible deniability would be somewhere near the top.

You might fairly contend that oblique criticism is cowardly. But the problem with being transplanted into a community of people to which you never did (and still don’t) belong, is that you don’t really understand your fellows and neither do they understand you. Such is my predicament in the community of people who comment regularly on capital markets and the economy.

I’m reminded of a discussion I had with a preeminent economist last year. This person explained they don’t suffer fools gladly, but in the collegiate context, that means something entirely different than it does in the world I inhabited for almost a decade. I won’t elaborate, but suffice to say the idea of, to use a real world example, snapping a smiling selfie with Nassim Taleb just months after he cursed at you on social media (as Bloomberg’s Joe Weisenthal once did) is anathema to my constitution. Relatedly, economists don’t have “spirited” arguments in the Hamilton-Burr sense. I’m a Hamilton-Burr type of guy: We can engage in the most eloquent discourse imaginable, but… well, just “but.”

The necessity of staying within certain boundaries even when assailed in the most caustic terms is what makes it impossible for me to, for instance, do podcasts. Or to engage people on social media. Or to “name names,” as the saying goes. I don’t play well with others. Hence my island exile.

It’s with that in mind that I eschew name-calling when I point out glaring discrepancies in arguments advanced and positions taken by many of the names and websites you’ve heard of and may read daily on markets and the economy.

To be sure, I name names when the offender is of such stature that there’s no chance of any verbal jousting. Jeff Gundlach will never know I exist, for example, and neither will Jamie Dimon or Leon Cooperman. So, I’ll occasionally lampoon them, content in the assumption that even if, by some cosmic miracle, they stumbled across my musings, they’d laugh and go promptly back to not knowing I exist. But dozens of the “regular” folks you might follow on “Finance Twitter,” people whose soundbites appear in articles published by financial news portals and some widely-followed purveyors of propaganda, do know I exist, and riling them up is a recipe for personal disaster.

Of the many glaring discrepancies shared by regular commentators on markets and the economy, almost none is so commonly held as that which juxtaposes allegiance to budget orthodoxy with the acknowledgement that climate change may kill us all within a century.

This is topical. And that’s an understatement.

Developed economies are currently engaged in massive deficit spending “financed” by central bank money creation, and I know of nobody (other than myself) willing to suggest that the limits of such alchemy are so unknowable as to be scarcely worth our consideration.

Modern finance is (and you’ll pardon the expression as I rarely lapse into the profane) a labyrinthine clusterf–k. A hopeless tangle of mind-boggling cross-holdings, characterized by overlapping obligations, duration mismatch, liquidity transformation and layer upon layer of rehypothecated collateral. No one understands it. There isn’t a living soul who can untangle this box of Christmas tree lights.

Somewhere in there are the ingredients for inflation. But you can also find everything you need for deflation. Or any other cake you want to bake.

We’re now so many steps removed from anything that’s a semblance of “real,” that it’s patently ridiculous to speak deterministically about the relationship between monetary aggregates, growth and inflation in advanced economies.

Ironically, considering how often I chastise him, Leon Cooperman understands this, or at least if the discussion is confined to 30,000-foot-level thinking. During an interview with Bloomberg last week, Cooperman cited Socrates in noting that wise men admit they know nothing. His point was that while “the party” (as he called a conjuncture that sets ultra-easy policy against an economy that purportedly doesn’t need it) probably won’t end well, “nobody knows when it’s gonna end.” “We’re all guessing,” Cooperman went on to say. “But I think we’ll have a bad end to this.”

And yet, back in May, during another interview with Bloomberg, Cooperman practically shouted that “We’re borrowing from the future!” That tired, old canard relies on a series of misleading narratives, most of which are captured by still another ridiculous canard: “We’re putting our grandchildren further and further into debt.”

I’ll leave aside the fact that as long as the US remains an advanced economy with a high level of monetary sovereignty, Treasurys aren’t “debt.” They just aren’t. As I’m fond of putting it, you can’t properly “owe” a sum denominated in a currency that you, and you alone, have the legal authority to issue. That doesn’t make any sense. It’s a logical (i.e., a philosophical) impossibility.

Leaving that for another time and pivoting quickly back to the pernicious discrepancy mentioned above, most people who espouse some version of budget orthodoxy and thereby accept as unequivocally true the idea that issuing bonds to “fund” dollar-denominated expenditures is necessarily tantamount to “borrowing from future generations,” also accept the reality of climate change. That, in turn, means accepting the notion that at some point in the next two centuries, large parts of the planet won’t be inhabitable.

No initiative that I’m aware of carries a price tag higher than that generally associated with the most ambitious green agenda pushed by Progressives in the US. Generally speaking, Progressives tend to question the link between deficits, debt and inflation, in part because the link has broken down over the years and in part because if we can do away with budget constraints, we can spend as much as we want to turn things around on the climate front so that future generations are possible.

Note that latter bit. I’m continually irritated by the number of (nominally) sane people who parrot some version of the “Borrowing from our future”/”Indebted grandchildren” narrative while simultaneously accepting the reality of climate change and the necessity of doing something about it.

As Cooperman acknowledged, we don’t know what the proverbial “point of no return” is when it comes to policy largesse and inflation. It’s not something that’s knowable. Anyone who tells you different is lying to you, either accidentally or on purpose. There’s a psychological element to across-the-board, economy-wide inflation. The more opaque the financial system and the economy that underlies it are, the harder it is for regular people to make the connection between policy and the value of money. If people can’t make that connection, the only kind of real world inflation that’s possible is that directly associated with identifiable shortages created by straightforward mismatches between supply and demand. Clearly, we can create that kind of mismatch across the entire economy overnight if we inexplicably decided, for example, to send everyone $15 million in the mail. But the mere act of creating money to finance infrastructure spending, green initiatives or simply to buy bonds from ourselves, isn’t very likely to cause average people to adopt an inflationary mindset.

Consider that QE is itself an act of obfuscation befitting of the “labyrinthine clusterf–k” characterization I employed above. We could just print money and spend it. Instead, we issue an interest-bearing version of that money, create the same money to buy that interest-bearing note from ourselves via an arm’s-length intermediary, then spend the same money and call that expenditure “funded.” Closing the insanity loop, we pay ourselves interest in the very same money, and then remit the interest payments back to ourselves. That’s QE. And if average people were smart enough to understand it, hyperinflation would have arrived a long time ago.

But average people don’t understand it. Nor do they care to understand it. That’s the main reason it’s impossible to know when “reckless” policy will result in an inflationary spiral. And deflationists would tell you the entire debate is at least partially meaningless because many of the factors which contributed to disinflation over the past forty years have, if anything, gotten worse in the pandemic era, whether it’s debt burdens or the acceleration of automation in the business world. Some of those trends may be counteracted by on-shoring and other inflationary pandemic dynamics, but that’s the point: We just don’t know.

While we don’t know what the point of no return is for policy extravagance, we can sketch a timeline for the point of no return when it comes to the environment. Just ask the UN’s Intergovernmental Panel on Climate Change, which on Monday essentially said, over 4,000 pages, that if we don’t do something now to turn things around, our grandchildren won’t have to worry about servicing any debt burdens. Because there won’t be any grandchildren. The very concept of grandchildren presupposes an inhabitable planet. Donald Trump was fond of saying “If you don’t have a border, you don’t have a country.” Well, allow me to modify that: “If you don’t have a planet, you don’t have any grandchildren.”

Read more: The Roof Is On Fire

The bottom line from the UN’s report is very simple: Absent enormous government expenditures over the next decade, future generations, to the extent they can subsist at all, will be living in a “Mad Max” sequel. That’s a virtual guarantee.

And yet, scarcely any economist — conservative, liberal, Progressive, orthodox or heterodox — is willing to come out and say the US should simply issue as much money as it takes to jumpstart the type of projects that might save us from what scientists say is otherwise certain doom. It goes without saying that no analyst (and hardly any politicians) would ever champion the complete and total abandonment of fiscal rectitude in favor of a literal blank check for climate initiatives.

Why not? Except by reference to insanity, there’s no way to explain rolling the dice on oblivion out of respect for the size of ledger entries and speculation about what those entries might entail for the “value” of something (money) that we created. If an asteroid were hurtling towards Earth and scientists could guesstimate the date of our extinction, surely there wouldn’t be a debate in Congress about how much is “too much” when it comes to providing the Pentagon and NASA with the resources they’d need to work out a plan to intercept the projectile. Would we worry about the “inflationary” consequences of any associated deficits if we knew that on or around May 16, 2032, life on Earth would vanish on impact?

You’d think the answer would be a resounding “no,” but that’s essentially what we’re doing currently. This is how far down the rabbit hole we’ve gone when it comes to being trapped by our own shared myths, in this case the imaginary constructs we call “money” and “government finance.” We’re now weighing what scientists tell us is a slow-motion apocalypse against the possibility that moving to avert the end of the world might be inflationary or that hypothetical future generations of leather-clad Mel Gibsons won’t remember us fondly because we saddled them with a series of large ledger entries.

The same is true of spending to ameliorate societal inequities. Forget what’s “right” or what’s “wrong.” I always encourage people to abandon normative language if they want to see things clearly. A society in which most people are poor and miserable will be prone to upheaval and, eventually, dissolution. How much is “too much” to prevent anarchy?

None of the assertions (made or implied) here are debatable. But people debate them every, single day. And vociferously so. Those people are disingenuous or else they’re just morons. In neither case is it obvious why I should engage with them or care what they have to say.

This is why Elon Musk has a history of being antagonistic towards analysts on conference calls. He understands that the questions they’re asking are, at best, so inconsequential in the grand scheme of things as to be laughable and therefore not worth his time. He suffers fools better than I would, even when he doesn’t suffer them at all.

The Blank Check Rant

16 thoughts on “Suffering Fools: The Blank Check Rant Continued

  1. Amen regarding climate change. If the species is extinct in 100 years, then it won’t matter how much we did or didn’t spend.

    Let’s redefine inflation as the number of years it takes an average person working an average job to buy a house.

    If housing prices can double in a year or two, without wages also doubling, then in my view that’s inflation. I don’t care how else they spin it.

    Food, energy, housing, and other things that people actually need to live, should never be excluded from an inflation measure.

    1. I’ve always assumed CPI was secretly… or not so secretly the Commercial Products Index and basically existed to help companies set their annual price increases evenly so they would engage in minimal cost competition. Use to determine decaying or laugh increasing buying power is probably something nobody involved with it really has any concern for.

      Inflation or deflation ultimately have nothing to do with what we can or cannot do. I am certain you can have double digit inflation or deflation but still build a bridge if the workers, equipment and metal exist. Inflation and deflation are mostly choices currently, whatever underlying natural forces may exist they are dwarfed by choosing to operate on shareholder value maximization on a day to day, quarter to quarter basis and that’s a choice. Supply chain fragility comes from that choice. “Best Cost” locations for labor come from that choice. Treating workers as commodities comes from that choice. We could choose differently and likely must choose something else if we want human civilization to last.

  2. “Modern finance is (and you’ll pardon the expression as I rarely lapse into the profane) a labyrinthine clusterf–k. A hopeless tangle of mind-boggling cross-holdings, characterized by overlapping obligations, duration mismatch, liquidity transformation and layer upon layer of rehypothecated collateral. No one understands it. There isn’t a living soul who can untangle this box of Christmas tree lights.”

    This precisely the reason I quit teaching the subject. Instead, I changed to teaching strategy and tried to prepare my students to be better managers than those taught by my colleagues. I largely failed though I did help create a couple dozen millionaires who contact me once in a while to say thanks. The reason I follow your meanderings is that you have information I can’t readily obtain and the ability to transmit your understanding in these posts better than anyone else.

    Mostly the first half of this post is a nearly perfect description of me. The main difference is I burnt my bridges with a sharp rant 16 years ago and spent the rest of my life until last year caring for my terminally ill wife of 54 years. I married her because she was the only person who would give me at least as good I gave (and was a better golfer). I did have the same assistant for over 20 years who took absolutely no crap from anyone. Other than that, no friends and isolation is mostly complete.

  3. In the grand scheme of things, nature does what it does. So when a species evolves and gets to a point where it starts causing a problem for the planets other inhabitants, nature generally finds a way to slow it down. Regretfully, this particular species has gotten so clever that it has found ways and means of circumventing the usual methods of controlling said problem causing species. The issue is now quite large but not to worry, it looks like this particular species is going to devastate the climate in which it lives! How clever is that? Just let it wipe itself out and then you can repair the damage and start again. That shouldn’t take more than a billion or two years.

  4. When your spending increases output and social welfare by more than its cost, it is worthwhile. If it increases it less, it reduces society’s well being. I have long advocated the Federal Reserve buying a 100 year bond from the US Treasury at a somewhat market interest rate. Cash could be placed in the social security and medicare trust fund and invested in a world stock market index fund. That would put an end to the cries about funding social security and medicare. If the investments did well, maybe we could even consider funding these expenses in a way that would be more fair- like a low value added tax designed to be mildly progressive. It would encourage savings/investment and could make these programs much more fair to the next generation.

  5. When figuring out a math problem (and I am no mathematician) for which there are unknown variable(s), I often push those unknown variables to the extreme by setting the variable(s) to a really large number — positive or negative — to determine a potential outcome. What happens when we fill in the deficit with a really large number — maybe hundreds or thousands of trillions of dollars? Let’s say a President and a Congress decide one way to get elected and, since deficits mean nothing, is promise each working-age adult a $100K a year, for life. Get the money to Main Street.

    My gut feeling is, we would end up with millions of people deciding not to work. We would have terrible problems in getting products out of factories, onto ships, unloaded at the port and trucked to the ultimate destination. Housing prices would skyrocket without the construction workers and factory-made products available. We would have services crying for workers. Restaurants, bars and hotels would have to pay much higher wages just to stay open, let alone, provide good service. Other countries would follow suit in order to maintain population that would otherwise emigrate to the richest country on earth. Hmmm, well maybe something less than $100K a year for life would work. Or maybe the money should not go to Main Street but to Wall Street. Maybe, maybe, maybe.

    No matter the amount of money leaving the printing press, there are consequences.

    My guess is, if politician are to decide upon where the printing presses unload the hoards of dollars, those dollars will not be used for the purposes that you or I deem important. Hell, politicians can’t even agree on whether climate change is man-made or the byproduct of natural forces. Or if Covid-19 is a individual rights problem or societal problem. So restraint might be worthwhile.

    Are there rational goals for which the printing presses should be used? Yes, but who are the rational decision-makers?

  6. Currencies are relative to other currencies. I feel that is the only thing I really need to be mindful of.
    Socrates would look upon Cooperman as another silly sophist/soothsayer. Argument/date of arrival

  7. When life expectancies drop off due to our polluted environment, mankind will get serious about change- hopefully, that will not be too late.

    In the meantime, it is hard to take the politicians trumpeting climate problems seriously until they are willing to talk about, for starters: overpopulation, massively reducing oil/coal global usage, increasing nuclear power, manufacturing less disposable crap made from petroleum, cleaning up the pollution, both plastic and chemical, coming out of the world’s largest rivers – although mostly in China, Asia and Africa- the Mississippi River does make the “Top 10” list.

    Asking people to give up plastic straws is a laughable first step, imho, There is already a plastic garbage patch in the Pacific Ocean that is twice the size of Texas. Can we clean that up?

    In the meantime, while politicians go to “climate change conferences” in vacation spots around the world, Russia is negotiating shipping routes through the Arctic Circle.

    We need real leaders who have the guts to make some difficult decisions. Our leaders were/are too scared to mandate vaccines six months ago when they should have done so, let alone issue a mandate to clean up the Earth..

    1. The truth is, what our leaders do isn’t really all that important in the grand scheme of things. There are over two hundred sovereign nations on the planet and their leaders can do whatever they want. We are not in charge of those other countries nor should we be. Some are going to burn coal, sell off their forests and do many other bad things. We got to do all the bad stuff so why shouldn’t the other guys get their chance. The fact that it’s a bad idea is pretty much irrelevant. There used to be a widely sold humorous t-shirt that said “Stop Plate Tectonics” on the front. Ha. Stop man wrecking the earth. Ha.

  8. You stated in your article that “Treasur[ie]s aren’t debt”. Actually, they are. They are an obligation to repay the principal plus(or minus, as the case may be) interest by the date of maturity. You justifiably assert that that obligation has no risk because it is “denominated in a currency that you, and you alone, have the authority to issue”, but they are still an obligation, and that obligation must be met despite the fact that said treasuries are issued in your own currency. It is the obligation itself which makes it a debt. As opposed to an equity which is a matter of opportunity, and not an obligation. Not meeting those obligations would be disastrous. This is a primary motivation for QE. The central bank reduces the cost of servicing debt not just in the sovereign sector, but across the debt markets, thus increasing the appetite for taking risk in financial ventures, and/or in the asset markets. It would seem that there has been more of the latter than the former in the last decade, and that might be the rub as far never-ending QE is concerned. QE quite obviously exacerbates the inequitable distribution of wealth. At some point that becomes intolerable. When that point is reached QE would either have to be amplified to the extent that every Tom, Dick, and Jane would become millionaires in the asset markets, or limits would be put on QE so that the central bank would no longer be lining the pockets of the super wealthy. The former would create an acute labor shortage, and generate massive systemic inflation which would, in turn, kill the Golden Goose of perpetual QE. The latter would engender a steep drop in the price of assets across the board. In short, TINA(There Is No Alternative) would become what I like to call TANGO(There Are No Good Options).

    Now should we sweat any of this in the face of oblivion? Of course not! That doesn’t mean that the consequences of implementing these policies in pursuit of the very questionable, if not even laughable goal at this point, of a long-term 2% inflation target should be ignored because they are too far away, and too indeterminable to be considered.
    You could very well have taken a similar stance regarding climate change in the 1970’s. You could have argued back then that it was so far away, and so indeterminable that it just wasn’t worth considering. In fact, most people did feel that way back then. Not so much now.

    1. Go into a philosophy classroom and tell the professor that an “obligation” denominated in a currency you issue is a “debt.”

      And then let me know how it feels to get laughed out of the room.

  9. I really love your musings which put a lot of things clearcut on the table in a logical deduction and imo should be in an oped column in the FT to set a no-nonsense benchmark for the steadily declining quality of fin. journalism. Modern finance is complex, yes. But the principles are as simple as they have ever been – as far as dealings with human behavior go…

    Nevertheless I strongly disagree with the notion that Top-Tier-Sovereigns can print as much as they want – let’s even assume it were rationally spent which would NEVER happen anyway in modern “democracies” and political systems = medieval horsetrading and corruption.

    Also consider how long it would take until some orange or otherwise masqueraded clown would enter the stage promising endless BBQ parties with free beer…

    In one form or another the “average” person will snuff out that all their toiling “for a better life” is obsolete if there is no limit to gvt.spending. As another commentator pointed out, nobody will do the dirty and BS-work (in total 90% of available “jobs”).

    Humans are almost exclusively relational and dumb beings, generations away from overcoming their irrational subconscious mind – like every animal they need rank, file, competition and achievement/success moments to give them a sense of purpuse and wellbeing; the craving and common suffering keeps them going and bonding (only few truly enlightened buddhists can live up to “without craving there is no suffering”).

    That implies inequality – up until to a point where it becomes futile to continue toiling on an not-so-level playing field. I am pretty certain we already crossed that point some time ago and the current QE / fiscal handshake certainly isn’t making things any better – quite the opposite. Cost of housing will break the neck of this endless reckless policy – the only gamechanger would be a massive productivity jump within this decade or even shorter.

    The ultimate perversion is Central banks like SNB being tolerated to print money to buy up foreign companies and thereby pricing out each and everyone else. WTF. In order to weaken their currency!!!! BOJ started the same allocating more to international portfolio investment. That is absurd. Currency manipulation at its best and against the rules defined for exactly that reason. And now some “progressive” clowns coming out “oh let’s print a trillion and buy blue chips to fund medicare or whatever”. It just doesn’t work that way in our current system.

    Making my point: There certainly is not a lack of funds. They are reliably ending up and accumulating in the same old few hands at the top of the pyramid – like it has always been, only today protectef by sacred private property laws and armies of lobbyists.

    Imo 21st century communism is the logical endpoint, there is no other way. This time technocracy and modern technology might introduce the necessary efficiency which killed it back in the 80s. For starters land reform and sweeping expropriation of equity holdings into a sovereign wealth fund is the way to go, especially tech companies which are the precursors of robot-only-output companies with almost none human employees to extract the fruits of “labour”…

    My bet and vote is on the clown coming on stage with this policy of hard distribution. Almost certainly will need a proper crisis before that happens though…

    1. Perhaps conceptually simple, but humans have a knack for making implementation complex for anything having to do with large groups. Are we at a point of history repeating itself or could this be new ground. Humans have made small sections of the planet unlivable before, but not the whole damn thing.

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