"Original Monetary Sin"
After 40 years of Bubble Finance...
the Day of Reckoning is finally coming due.
by Bill Bonner
"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."
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