Addictus Stimulitus

It’s hard to say who is loonier – the guy in the White House East Wing hopped up on steroids or the Wall Street robo-machines and Robin Hooders who slobber incontinently upon the slightest hint of another “stimulus” injection.

Either way, exactly seven hours after he implanted a tiny quotient of sanity into Washington’s fiscal madhouse yesterday afternoon by terminating talks on Everything Bailout 5.0, the Donald proved once again that he is a clear and present danger to the nation’s solvency and that Wall Street is flat-out disease-ridden with addictus stimulitis.

The fact is, the airlines don’t deserve nor need a bailout, while the idea of handing out another $135 billion of walking around money to small businesses who might otherwise lay-off redundant employees is just plain ludicrous. Theory of Money and Cr... Ludwig von Mises Best Price: $2.46 Buy New $8.54 (as of 06:40 UTC - Details)

Of course, the Donald doesn’t have a clue about the fact that the future taxpayers, who would bear the burden of servicing another $160 billion of public debt incurred for these two illicit purposes, are not mules to be drafted in behalf of his re-election campaign. That’s perhaps why 30 minutes latter he upped the ante by another $300 billion, promising to instantly mail a check for $1,200 (adorned by his signature) from Uncle Sam’s depleted treasury to 160 million Americans (plus a $500 tip for their kids), the overwhelming share of whom didn’t lose their jobs and don’t need the money.

Alas, this is the fiscal madness which today passes for conservative Republican government. So it literally scrambles one’s brain to contemplate what depredations the Kamala Harris/Left Progressive Regency might unleash if, as and when it landslides into office.

The House & Senate should IMMEDIATELY Approve 25 Billion Dollars for Airline Payroll Support, & 135 Billion Dollars for Paycheck Protection Program for Small Business. Both of these will be fully paid for with unused funds from the Cares Act. Have this money. I will sign now!
9:54 PM · Oct 6, 2020·Twitter for iPhone
If I am sent a Stand Alone Bill for Stimulus Checks ($1,200), they will go out to our great people IMMEDIATELY. I am ready to sign right now. Are you listening Nancy?
10:18 PM · Oct 6, 2020·Twitter for iPhone

Needless to say, the above nonsense from the Donald’s twitter feed is all it took. In a flash, the pajama traders’ brigade was sprinting toward recovery of all the ground lost in the last hour of cash trading on Tuesday.

So doing, they reminded one and all that we truly are enmeshed in a doom loop in which the politicians spend and borrow at will; the Fed monetizes the resulting tsunami of debt paper with alacrity; and the swells on Wall Street reward both sets of economic fools with paroxysms of mindless dip buying.

At this point we would ordinarily mention this won’t end well. But by now that surely goes without saying.

Still, it is worth amplifying the nature of addictus stimulitis because it is so deeply and stubbornly embedded in the mindset at both ends of the Acela Corridor that it is well nigh impossible to imagine a cure that leaves the patient in tact. For want of doubt, just consider the recent proclamation of one Andrew Sheets, Morgan Stanley’s chief of cross-asset gambling strategy: The Triumph of Politic... David A. Stockman Best Price: $0.59 Buy New $12.32 (as of 06:59 UTC - Details)

“The glass half-full view of stimulus talks is if you don’t get it today you’ll get it tomorrow from whomever wins the election,” Sheets said in an interview. “This V-shaped recovery is still intact.”

He got that right. There is now virtually no adverse economic condition, shock or even mild disturbance that does not generate a Wall Street/Washington consensus in favor or moaaar stimulus owing to five major presumptions:

  • It is assumed that unlimited monetization is sustainable and cost-free;
  • It is assumed that soaring public debt is no problem so long as interest rates are ultra-low;
  • It is assumed that Potential GDP is a real, measurable tangible thing and that any shortfall in actual GDP can and should be eliminated via aggressive monetary and fiscal stimulus;
  • It is assumed that “moral hazard” is old fashioned bogeyman of the fuddy-duddy set that should not interfere with purposeful pursuit of “no fault” macroeconomic stimulus;
  • It is assumed that economic stimulus and humanitarian social safety nets are part and parcel of the same thing and that bailing out reckless companies in order to help needy workers goes with the territory.

These baleful presumptions are now a bipartisan consensus, and it doesn’t take too much cogitation to see that taken together they form a self-fueling doom loop.

For instance, the more the Fed monetizes the public debt with fraudulent credits snatched from thin air, the greater the inflation of financial assets on Wall Street. In turn, that powerfully incentivizes stock-options obsessed corporate C-suites to forgo productive investment on main street in favor of financial engineering schemes like stock buybacks and overpriced M&A deals which pump corporate resources into Wall Street, thereby steadily dragging down the growth rate of GDP and laying the planking for still more “stimulus”.

Likewise, when politicians face no interest cost penalty on rising public debt, they are not loathe to mandate the transfer of societal credit resources to wasteful public expenditures and the subsidization of all manner of reckless and imprudent private financial behaviors. In turn, extensive mis-allocation of credit and private cash flows and widespread incidence of moral hazard undermines economic efficiency and growth rates, eliciting still more excuses for “stimulus”.

These kinds of perverse interactions are surely evident in the Donald’s Tuesday evening tweet in favor of $25 billion for another airline bailout.

Talk about moral hazard! The numbskulls who run the US Big Four airlines fairly reek of it as we showed recently: During the last six years they managed to spend $51 billion on stock buybacks and dividends when they only had $37 trillion of free cash flow to fund these Wall Street pleasing distributions.

But the fact that they piled up their debts from $22 billion to $66 billion during that same six year period to keep the ponzi going was really only the half of it. The US airline industry utilizes well more than $1.5 trillion of jet airliners and airport facilities, but the overwhelming share of that massive asset base is accessed via so-called “operating leases”, the funding for which does not show up as balance sheet debt.

That is to say, cheap debt has fueled the growth of a massive third-party aircraft leasing industry, thereby permitting the airlines to spend current cash flows and balance sheet capacity on financial engineering, rather than the accumulation of debt free assets that could be utilized for collateralized borrowings in exactly the kind of exigent circumstances currently extant.

So now that they have hocked nearly everything that moves or stands still in their far-flung operations, the airlines lamely claim to have no choice except to attempt to blackmail Washington by threatening to throw 50,000 employees under the Airbuses, so to speak.

But as morally repugnant as these maneuvers self-evidently are, the currently threatened massive layoffs only expose still another layer of moral hazard extant in the industry. To wit, virtually every single airline pilot, flight attendant, mechanic, baggage handler etc. is represented by a union. And despite the untoward purposes on which most of their dues are dissipated by union officialdom, one thing the latter have accomplished is to insure that every airline employee is eligible for the state UI programs.

Now that’s exceedingly relevant at this moment because the average annual earnings for the above four classes of airline employees puts them among the aristocracy of hourly wage earners:

  • Pilots: $150,000;
  • Mechanics: $75,000;
  • Flight attendants: $50,000;
  • Baggage handlers: $40,000

That puts virtually all of the ballyhooed airline employees at the top of the scale for UI benefits in most states, which benefits range between $400 and $700 per week for at least 26 weeks. What that means, of course, is that notwithstanding the braying of industry executives and Washington politician alike, these furloughed employees are not about to be thrown into the streets empty-handed; they are actually entitled to the ample job loss insurance benefits that are built into the long-standing social safety net. Human Action: The Scho... Ludwig von Mises Best Price: $6.75 Buy New $15.36 (as of 05:45 UTC - Details)

Yes, $400 to $700 per week is no princely sum, but periodic job losses due to recession, employer bankruptcy, disruptive technology change, alternative product substitution etc. are an unavoidable and essential feature of prosperous free market capitalism. The state cannot and should not insure laid off-workers for 100% of their previous wage; and even more crucially, it should not dissuade them from building up cash reserves and rainy day funds to augment the state’s modest UI support payments.

Self-evidently, zero interest rates and no-fault bailouts do exactly that: They encourage hand-to-mouth financial lifestyles, which leave workers high and dry in the event of unforeseen loss of paychecks and turn them into pawns to be exploited by unscrupulous C-suites and votes to be bid for by the likes of Nancy and the Donald.

Still, to hear the gnashing of teeth and wailing in Washington today you would think it is still 1890 and that 50,000 airline workers are about ready to become regulars at the Salvation Army soup kitchens. That is, in the name of economic stimulus, the pols and the corporate C-suites pretend the UI safety net doesn’t even exist, and that these aristocrats of the wage economy are not getting a level of humanitarian aid that is in the top tier of the labor market.

As for the airline companies, we’d say they know full well the route to the chapter 11 courthouses. Most have already visited such venues, sometimes more than once, and did so while keeping operations going and planes in the air under the supervision of the courts.

To be sure, the proper chapter 11 disposition of these four financial basket cases – Delta, American, United and Southwest – would result in stock prices of zero and the evaporation of billions of stock option values accumulated by the C-suites. And that would not merely amount to condign justice; it’s also exactly what the rules of productive capitalism actually require.

Needless to say, there is hardly a corporals’ guard left in the GOP which comprehends this and has a decent regard for the rules of free market prosperity, while the ranks of such economic enlightenment disappeared from the Government Party (Dems) decades ago. In that regard, Senator William Proxmire (D-Wisconsin) was surely the last of the anti-bailout Mohicans, save for Ralph Nader who quite the party in disgust, anyway.

Moreover, the current favorite “this time is different” excuse – that Dr. Fauci made us do it – doesn’t wash either. If the airlines are being harmed by Fauci and his malpracticing doctors owing to the lockdowns and Covid-Hysteria at loose in the land, they are welcome to lobby for re-opening the economy with all the might they can assemble on K-street, and to spend money assuring the public that the overwhelming share of Americans can travel safely without risk of being felled by the Covid.

In fact, there is a potential market of 210 million American’s under the age of 50 years, who have Covid survival rates ranging between 99.9997% and 99.98%, should they become infected with the virus. In so informing their potential customers, the airlines might even be so bold as to remind them that this infinitesimal Covid risk is only a teeny-tiny smidgen higher than the risk of dying in a plane crash in the first place!

Stated differently, the obligation of the airlines in the face of the Virus Patrol madness is to join the fight against the regulators, not demand indemnification from future taxpayers, born and unborn.

Indeed, that same principle is even more salient with respect to the so-called small business PPP (paycheck protection program). The latter has already indiscriminately and capriciously dispensed $525 billion to more than 5 million small businesses, and the Donald’s promise of a quick $135 billion booster shot is all the more wicked. Peak Trump: The Undrai... David A. Stockman Best Price: $12.72 Buy New $43.07 (as of 11:40 UTC - Details)

Again, it’s not about their workers. The overwhelming share were eligible for the state UI programs already; and, as we indicated in Part 1, for perhaps $100 billion or less, the so-called contract, gig and part-time workers not typically covered by regular state UI programs could have been funded under the temporary Federal program.

But what has happened now is that the once and former shocks troops of political support for free markets, small government and fiscal rectitude have been turned into sniveling supplicants of the Bailout State.

Indeed, ordinarily the small business lobbies would be screaming to high heaven about their impending doom owning to the regulatory fiats and customer base impairments brought on by the Virus Patrol; they’d literally be demanding Dr. Fauci’s head, just as they did back in the day when the OSHA bureaucrats were riding roughshod across the land.

But politically, they have apparently been bought off by the aforementioned one-half trillion dollars of walking around money. After all, the nationwide high-frequency data provided by the Opportunity Insights Economic Tracker shows that nearly 25% of small businesses in operation last January have still not re-opened and there has been little improvement in the trend since July 4th.

Yet what can be heard in the corridors of Washington is little more than the silence of the lambs. The overwhelming share of small business America has been bought off by the PPP and has joined the ranks of coast-to-coast supplicants who are marching resolutely toward the nation’s fiscal demise.

Meanwhile, all these trillions of Everything Bailout monies have not repaired what actually ails the American economy: Namely, a government ordered supply-side contraction which caused total labor hours employed in September to remain 6.5% below year ago levels. The Anti-Capitalistic ... Mises, Ludwig von Best Price: $5.00 Buy New $3.95 (as of 04:45 UTC - Details)

Needless to say, that is the handiwork of Dr. Fauci and the Virus Patrol, not a faltering of that invisible Keynesian ether called “aggregate demand”. Perhaps better than ever before Say’s Law is speaking loudly: Cause production to be reduced or shutdown, and, yes, incomes and spending will fall.

But the cure is also self-evident and would commence the very minute the Virus Patrol is put out of business and the CDC is returned to its proper function. That is, of educating the public on how they can strengthen their own immune systems and take precautionary steps to minimize the health risks posed by this super-flu – rather than officiously pretending to stop the spread of a contagious virus than cannot be contained owing to the intimately social nature of human society.

Beyond that, the loss of GDP which has already occurred and which will linger for months and years even if the economy is reopened with alacrity cannot be recaptured by “stimulus” in this case or in any other spell of alleged shortfall from the purported Potential GDP.

The whole notion, in fact, is a dangerous chimera, as we will further amplify in my next article.


Reprinted with permission from David Stockman’s Contra Corner.