Original Monetary Sin
After 40 years of Bubble Finance... the Day of Reckoning is finally coming due.
(Source: Getty Images)
Bill Bonner, reckoning today from Baltimore, Maryland...
Eve:
“We may eat the fruit of the trees of the garden; but of the fruit of the tree which is in the midst of the garden, God has said, ‘You shall not eat it, nor shall you touch it, lest you die.’”
Serpent:
“You will not surely die. For God knows that in the day you eat of it your eyes will be opened, and you will be like God, knowing good and evil.”
~ Genesis 3:2-5
Bonner:
Yeah, right.
There are many different ways to understand what is going on. At the simplest level, there is a ‘correction’ in the stock market. At the next level down, there is a historic shift in the bond market.
Both markets are now selling off from some of the highest levels ever recorded.
But how did they get so high? That’s where we find another layer of meaning, understanding and confusion.
In an honest economy, wealth is created by providing real goods and services to others. The more real goods and services a society can produce, the richer it is. High prices are never a problem. They are just information – telling us where we need to invest more to get more output.
Stretchy and Sticky
But then, along comes a snake. He has an offer that is too good to refuse. In 1971, the US money system was changed. Milton Friedman led the way. He called it ‘monetarism,’ where the dollar would no longer be handcuffed to gold. Instead, the money supply would increase steadily and predictably (Friedman recommended 3% per year – roughly equal to GDP growth at the time.)
It sounded like a good idea, especially since it meant the US could welsh on its obligation to redeem foreign-held dollars for gold.
But it wasn’t long before people realized that this new money was stretchy… and sticky. They could use it like duct tape, to cover cracks, holes, gaps – in place of real wealth.
No need to match up income and outgo. No need to save.
Want to raise your stock price, for example? Just borrow some of this money and buy the shares. Thanks to the Fed’s super-low rates, you were often able to borrow below the rate of consumer price inflation… or below the rate of your own company earnings. Borrow at 3% for a stock that earns 4%... when inflation is running at 5%? A no brainer.
Or suppose you wanted a new house? No need to work and save so that you could afford it. Just borrow. And no need to ever pay off the loan. You could just refinance… over and over… and reduce your monthly payments each time.
Where the Money Was
Borrow… borrow… borrow – there was no apparent limit to how much ‘credit’ the new system offered. And the way to get ahead in this new ‘financialized’ world was to get into ‘finance,’ not into manufacturing. Gradually, the grand houses on Long Island and in Aspen came under new ownership. Gone were the families that made their fortunes by making mattresses and box cereal. In came the hedge fund managers, and private equity slicksters. Mothers, being no fools, told their babies not to bother going to Detroit to get a job with GM. Instead, they should go to Manhattan and get a job with Goldman Sachs; that’s where the money was.
But the money that was too-good-to-refuse was also too-good-to-be-true. Goods and services are hard to produce. Money is easy. Soon, there was a lot more money than there were goods and services. Yes, the system had a fatal flaw. The people running it weren’t gods after all. They were jackasses.
US GDP was just over $1.1 trillion in 1971. Now it is $24 trillion – a 21 times increase. But Federal Debt in 1971 was only $398 billion. Now, it’s over $30 trillion – an increase of 75 times. In other words, the supply of ‘money’ grew three times as fast as supplies of goods and services (GDP).
Tom Dyson, our investment chief, explained yesterday:
The system now requires a constant expansion of credit and debt to survive. The minute that debt stops expanding (or being refinanced at affordable rates) the system collapses in what economists call a “debt deflation.” Think of a hot air balloon that suddenly loses its hot air. It does not float gently to the ground. It plummets. It's as simple and unavoidable as that.
All In Due Course
Yes, the Fed has turned off the hot gas. It’s the end of “financialization.” The ‘inflate or die’ economy is dying.
But why now? After 40 years of Bubble Finance, you’d think the Fed would have figured out the trick to it.
Alas, there’s more to the story. Another level to study. More money than stuff? Prices rise. And now, with inflation rates many times higher than the Fed’s key rate… the controllers have lost control. They are ‘behind the curve’ – out of step and out of time.
And now they have no choice. They have to slow the economy down. The fake money must now return whence it came.
Money dies. Prices die. Businesses die. Debts die. Jobs die. And the whole money-mad economy begins to rot… from the extremities. Cryptos and NFTs fall off, like gangrenous toes. Then, the decay spreads… up the body to the interior organs.
The big question for us is: how far will the putrefaction go… before the Fed panics and goes back into ‘inflate’ mode?
That question will answer itself in due course.
Regards,
Bill Bonner
Joel’s Note: A big thanks to all of you who joined our member’s ranks this week, dear readers. As we’ve mentioned every day this week (don’t worry… the offer ends tonight, and so will our reminders)… today is the LAST DAY you can become a Bonner Private Research member at our special, introductory rate.
In a nutshell… at midnight tonight, the price jumps from $10/month or $100/year to $39/month or $390/year.
The goal of our project is to help a small but serious group of investors preserve their capital during the “due course” to which Bill refers, above. A higher price allows us to focus on delivering high quality research to those select few members… without having to use third part advertising or devote precious time and resources to all the things that go into running a large, sprawling, low cost publishing business.
Just our best ideas and research… direct from us… to you. Period.
If you’re on the fence or unsure whether membership is right for you, that’s fair enough. You might like to take a look at what some existing members have to say (click here… and scroll down to the comments under Dan’s note to existing members earlier in the week.)
P.S. There are always a few people who write in after the deadline to ask if we can make an exception and let them in at the lower price. They see the new price and think, “Oh, man… I shoulda got in while the going was good!”
Unfortunately, once we set the new price in the system, the old one disappears for good. We’ve tried to give ample reminders this week… so please, if you want in, don’t wait until tomorrow. By then, it’ll be too late.
The Ukraine/Russia conflict is basically 2 corrupt oligarchies, both former Soviet Republics fighting over Soviet Borders. Ukraine has no history as a state, it has been owned in various parts by virtually every state surrounding it over the centuries. This conflict was NATO/US/EU made, and the lies told to Russia about NATO not expanding East IF Russia allowed the reunification of Germany, confirmed by Der Spiegel some years ago.
http://www.spiegel.de/international/world/nato-s-eastward-expansion-did-the-west-break-its-promise-to-moscow-a-663315.html
The UK Daily Mail writer, Peter Hitchens also has pointed out how the West caused this, and how the US creator of the "Containment of the Soviet Union", George F Kennan, warned against treating Russia as the 'beaten USSR' simply because it took over the former USSR's roles and obligations.
https://www.dailymail.co.uk/debate/article-10540829/PETER-HITCHENS-blame-arrogant-foolish-West-Ukraine-crisis.html
There is a vast amount of academic research out there to confirm all of the above, much of it I read when helping a post-grad student with a dissertation on Putin and the Oligarchs. My job was to check that all the web links worked and to assign a date and time to my checks. The links were so fascinating I read them all. The irony of it all was Russia wanted to be friends with the West but we did what Biden's Son appeared to do in Ukraine - robbed them soft with the help of corrupt oligarchs.
Finally, if MSM articles don't convince, Author Richard Sakwa has written a book
Frontline Ukraine - Crisis in the borderlands.
Published by Bloomsbury Academic
It is a heavy read as it is basically and Academic text, but it explains what Ukraine was, is and the history behind the conflict.
Basically Ukraine is another Balkans area in Europe, and the myth that Ukraine = Goodies and Russia = Baddies is exposed for what it is, a myth.
The US would never have put up with what Russia put up with from NATO, the US would have started a war over it long ago if it had been the Warsaw Pact moving up toward US borders.
We should have accepted Russia's overtures decades ago, then we wouldn't be in the situation we are now , where we have pushed resource rich Russia into the arms of China. A situation we are certain to regret. The EU itself may not even survive the winter thanks to NATO/Clinton/Biden and its own stupidity.
Though a UK Brexiteer with no love for the EU, at least they aren't so stupid as to actually apply the sanctions they talk about. To do so would bring the EU down in months. The economic crisis Bill warns of may actually do that anyway, but so may the coming winter or even Germany's economy collapsing due to insufficient gas thanks to their insane green energy drive.
The US isn't the only western state in danger of economic catastrophe thanks to our leaders' stupidity.
Bill, Dan and Tom provide excellent insight into what is happening to money in this world as well as the complete disintegration of governments and the global elite and the affect it is having and may have on the average citizen not only in the US but around the world. $100/year is a bargain.