This past week, longtime PBRG friend Porter’s Stansberry has warned about the forces leading to the next big credit collapse—and how you can profit from it. 3
Today, Porter asks what the election of Donald Trump means for the markets. His answer “flies in the face of virtually every modern economist and pundits on CNBC”…
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From Porter Stansberry, founder, Stanberry Research: Some people are happy. Some people are acting like someone shot their dog. But nobody likes my answer about what Trump means for the markets. So what do I (Porter) believe will happen now?
Well, my answer flies in the face of virtually every modern economist and pundits on CNBC. Virtually everyone believes that government spending and/or tax cuts will have a powerfully positive effect on our economy.
The Republicans believe tax cuts and military spending are the basic formula for economic prosperity. The people cheering today believe that Trump’s wall (his announced infrastructure spending), his tax cuts, and his estimated $6 trillion budget deficit over four years will create winners in the stock market and wealth for our nation.
In some limited ways, that will prove to be true. The Pentagon, for example, is the world’s largest consumer. It buys more oil than any other entity. And if Trump builds a wall across our southern border, he’s going to buy a lot of steel. But in other, far more important ways, the idea that government spending and government debt is a positive force in the economy is completely wrong. Fatally wrong.
We’re in the midst of a weeklong series of Digests that I’m writing in order to explain what I believe will be the best and most important series of trades of my entire career. As you surely know by now, it’s the idea behind our brand-new service, Stansberry’s Big Trade.
I believe we’re approaching an important new credit-default cycle, which will create the largest legal exchange of wealth in history. Investors in highly leveraged equities will be wiped out. Investors who can anticipate this massive wave of coming corporate default will make a fortune. And that’s my goal—to help you understand why this cycle is inevitable so you can position yourself to profit from these events.
As if on cue, we saw the car-rental companies “blow up” yesterday because of distress in subprime car loans…
It was a superb example of the far-reaching and poorly understood influence of the credit markets.
Today, given Trump’s unexpected victory, I’d like to focus on the role government is likely to play in the coming debt crisis.
I want to make sure you understand… no matter who is president, no matter which party is in power… the only thing our government can do about a credit cycle is make it worse.
You only need to understand two economic ideas to see through the media news and know what’s really going to happen next. The economic forces I describe below are far more powerful than any particular candidate or political party.
The first economic concept is easy: It’s the declining marginal utility of debt.
This won’t surprise any subscriber who has ever owned a business or used a credit card. At first, small amounts of debt create large percentage changes in spending and investment. But, as debts add assets and matching liabilities to your balance sheet, additional debts make a smaller and smaller percentage change in growth.
Say you’re a college student. Your income may be $10,000 a year, working a part-time job. If you take out a $5,000 loan, you can increase your spending dramatically—a 50% increase. But after your fourth year of college, you will have compiled $20,000 in loans on your balance sheet. This plus your income for the year means an additional $5,000 in debt will only increase your asset base by 16%. And as your debts grow, the marginal increase in utility provided by each additional dollar in debt will decrease.
As your debts (like our government’s) tally toward $20 trillion (or more than 100% of GDP), the marginal utility of additional debt can actually become negative.
First things first…
Before we move into the negative implications, let us first prove our contention that, like every other economic variable, debt suffers from declining marginal utility.
Just look at the following chart. We’ve taken actual U.S. GDP (the total production of our economy each year) and divided it by total public debt. In the 1960s (at the very top of the chart), each additional dollar in government debt produced at least an additional dollar in GDP growth because government spending was a smaller part of the economy and government debts remained small.
Of course, as spending and debts grew, we began to see the effect that the marginal utility of deficit spending started to have. Compared with debt, GDP began to shrink as each dollar of additional debt led to less and less growth in GDP…
This isn’t controversial or surprising…
Mainstream economists tend to ignore the marginal utility of debt… But they don’t deny the concept. What follows, however, is extremely controversial. Lacy Hunt and a growing number of academic economists have found, using empirical data, that contrary to all conventional Keynesian economic theory, government spending actually hurts the economy over time.
Here’s Hunt summarizing the most recent academic data…
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Based on academic research, the best evidence suggests the [government expenditure] multiplier is -0.01, which means that an additional dollar of deficit spending will reduce private GDP by $1.01, resulting in a one-cent decline in real GDP. The deficit spending provides a transitory boost to economic activity, but the initial effect is more than reversed in time. Within no more than three years the economy is worse off on a net basis, with the lagged effects outweighing the initial positive benefit. |
Trump’s negative impact on GDP…
While Trump’s wall-building and tax cuts can temporarily boost GDP, within three years, his spending will cut into GDP at a rate roughly equal to 1% of total government spending.
This is completely counterintuitive. Despite the large number of different academic studies that prove a negative government-spending multiplier exists across multiple countries and time periods, many people can’t accept the idea.
Hunt believes it can be explained by looking at how government spending has changed over time. He points out that since the early 1970s, “mandatory” government spending (on social programs like Medicare and Social Security) has grown from being roughly 50/50 with discretionary government spending (like the Pentagon) to being almost 70% of government spending. These kinds of transfer payments can’t produce any wealth. They’re simply a redistribution of income that’s being produced elsewhere in our economy.
An even more fundamental explanation…
Research shows that a negative multiplier only exists when we have a large public debt burden—more than 70% of GDP, according to most studies.
Studies also suggest that the magnitude of the negative multiplier increases with debt load, but in a non-linear way. This can only be explained by the Austrian School of Economics ideas about game theory (as we discussed in yesterday’s Daily): As individuals in an economy begin to fear a monetary collapse, they cause additional economic disruption—like buying gold, fleeing a currency, or simply withdrawing from the legal economy.
When you put these ideas together—the declining marginal utility of additional government debt, the negative multiplier of government spending, and the non-linear impact of massive government debt burdens—it’s hard to believe that the president can do anything to alter the course of our ongoing credit-default cycle. The only prediction that’s consistent with sound economy theory is that the government is going to make this default cycle a lot worse.
Or… to summarize… it’s not likely that a government that’s facing its own $20 trillion debt burden is going to be able to do much to help the unwinding of $1 trillion to $2 trillion in private obligations over the next three to five years.
Reeves’ Note: By finding companies and industries that have been completely corrupted by unsustainable debt loads, Porter and his team are teaching readers how to hedge their portfolios from the risks of the coming default cycle. They believe that making 20 or 30 times your money in some of these names is likely.
As Porter says: “When you know that a company cannot ever afford to repay its debts, it’s only a matter of time until it defaults. You can either be a winner or a victim when that happens. It’s up to you.”
If you haven’t signed up for the free webinar Porter is hosting next Wednesday, November 16, at 8 p.m. Eastern time, this is one you don’t want to miss. He’ll show you exactly how to make the life-changing gains he sees coming. You can click here to reserve your spot.