Are You Ready for the Coming Debt Revolution?

by Bill Bonner, Acting-Man

Nothing to Lose

There is a specter haunting America … and all the developed nations of the world.

It is the specter of a debt revolution.

We left off yesterday talking about how the economy of the last 30 years – and especially that of the last six years – has favored the old over the young.

“Rise up, ye young’uns,” we as much as said, “you have nothing to lose but your parents’ debts.”

We showed how the value of U.S. corporate equity, mainly held by older people, had multiplied by 28 times since 1981. That was no honest bull market in stocks; it was a market sent soaring by an explosion of credit.

But what did it do for young people whose only assets are their time and their youthful energy? Alas, the real economy has increased by only five times over the same period.

 

Non-fin equity vs. GDPNon-financial corporate equity valuation vs. GDP 1980 – 2015, indexed. The gap has never been larger than today, via Saint Louis Federal Reserve Research – click to enlarge.

 

A Grim and Menacing Specter

And when you look more closely at work and wages, the specter grows grimmer and more menacing. Average hourly wages have barely budged in the last 30 years. And average household incomes have fallen – from $57,000 to $52,000 – in the 21st century.

But as our fingers came to rest yesterday, there was one question hanging in the air, like the smoke from an exploded hand grenade: Why? Was this huge shift – of trillions of dollars of wealth from young working people to old asset holders – an accident?

Was it just the maturing of a market economy in the electronic age? Was it because China took the capitalist road in 1979? Or because robots were competing with young people for jobs? Nope… on all three counts.

 

robot teamIndustrial robots – not at fault

Photo credit: BMW

 

First, old people, not young people, control government. Ultra-wealthy campaign funders like Sheldon Adelman and the Koch brothers were all born in the 1930s. The big money comes from wealthy geezers like these, eager to buy candidates early in the season when they are still relatively cheap.

Old companies fund most Washington lobbyists, too. And old people decide elections: There are a lot of them… and they vote. They know where the money is.

Second, the government – doing the bidding of old people – restricts competition, subsidizes well-entrenched industries, raises the cost of employing young people, and directs its bailouts, cheap credit, and contracts to the graybeards.

Third, the credit-based money system increases the profits and prices of existing capital. It encourages borrowing and spending. This rewards the current generation while pushing the costs into the future.

 

sheldon-adelsonCasino magnate Sheldon Adelson – as we have previously pointed out, he’s the quintessential crony capitalist. To say that the current system has been to his advantage is actually understating things somewhat.

Photo credit: Ethan Miller / Getty Images

 

Grandparents Prey on Grandchildren

None of this was an accident. None of it would have happened without the active intervention of the old folks, using the government to get what they could never have gotten honestly.

This is not the same as saying they were completely aware of what they were doing and what consequences their actions would have. We doubt the Nixon administration had any idea what would happen after it tore up the Bretton Woods monetary system in 1971.

It was behind the eight ball, fearing foreign governments would call away America’s gold. Few in the White House realized they had made such a calamitous mistake when the president ended the convertibility of the dollar into gold.

And yet it created a world in which parents and grandparents could prey on their grandchildren… for the next 44 years. And it’s still not over. The new credit money – which could be borrowed into existence with no need for any savings or gold backing – was just what old people needed.

 

preying grandmaPreying grandmother bursting from the attic

Image credit: Universal Pictures

 

We have estimated that it increased spending by about $33 trillion over and above what the old, gold-backed system would have allowed. That spending lifted the value of the geezers’ assets and increased their living standards.

Meanwhile, the average 25-year-old reporting for work in 2015 can’t expect a single dollar more in real hourly wages than his father did in 1980. The total value of outstanding U.S. corporate bonds was 17% of GDP in 1981. Now, it’s $11.6 trillion – or 65% of GDP. What did corporations use that money for?

Some of it went into capital investment that made companies more productive and more profitable. But much of it went where you would expect it to go: to buy back shares… to acquire other companies at inflated prices… and to pay off executives as the value of their share options went up!

Who did this benefit? Mostly people over 50. Government debt is even worse. Unlike most personal debt, it doesn’t go to the grave with the person who borrowed it. It sticks around to burden the next generation – who got nothing from it.

 

Federal debtFederal debt over time … after Nixon defaulted on US gold obligations, it started going parabolic, via Saint Louis Federal Reserve Research – click to enlarge.

 

Federal debt in 1980 was less than $1 trillion. Today, it is $18 trillion. That money was used to fund federal programs – few of which provided any benefit to young people. An accident? A mistake? Partly. But old people must have known what they were doing.

 preying grandpaHe sure looks like a suspect …

Photo via Pinferest.com / Author unknown

 

Their lobbyists asked for the spending. Their politicians voted for it. Their companies enjoyed the revenues. And they pocketed much of the money. When the economy threatened a correction, they demanded more credit on easier terms to keep the money flowing. And when their credit balloon popped in 2008, they whined to the feds to protect their ill-gotten gains.

Honest capitalism? Not if they could prevent it. Creative destruction? Not on their watch. Pay for what you get? Not if they could put the bills on the next generation.

Young people of the world, unite!

 

The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

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