"A Case of Shrinking Money"
Wall Street greed, old work boots, gypsy wagons...
and a disappearing money supply.
by Bill Bonner
“We are living in a world that doesn’t have enough money.”
~ Ray Dalio
Baltimore, Maryland - "We’re pausing today; we picked up a bad cold somewhere along the way. And we’re troubled. We’ve been away from the old farm in Maryland for most of the last 30 years. But it’s always a pleasure to come home. Like old friends, we find our boots…and our tools, right where we left them.
A Piece of the Boom: But the neighborhood has changed. How? Immigration. The immigrants come from New York and Florida…California and Wyoming. They are eager to get a piece of the boom in the Washington area, with some of the highest salaries in the country. And now, the character of Southern Maryland has completely changed. It is now a distant suburb of Washington, with probably fewer than one resident out of 100 who has ever caught a crab or even seen a tobacco plant. The new immigrants don’t seem to know where they are….and don’t care.
Wherever we go, we have a project waiting. Stone walls in Ireland. Fallen down adobe shacks in Argentina. A loft apartment in one of the barns in France. Here in Maryland, the project is a gypsy wagon that we began last Christmas, largely to occupy the grandchildren. It’s a simple construction. Mounted on an old hay wagon, the walls rise at an angle, up to a curved roof. We’ve been told that you can get normal corrugated tin roofing and bend it over the hump. We’ll find out soon!
Back to finance…in our view, the key difference between now…and the 40 years, 1980-2020, is money-printing. In our fake money system, new wealth is not earned…it’s created by lending. The Fed lends to member banks. The banks lend to hedge funds, smaller banks, corporations, whoever wants the money. The money supply gets bigger, but so does the debt.
The big borrowers are on Wall Street…financial players who use the cheap money to gamble and speculate. As long as the volume of money – the liquidity – was increasing, it was reasonable to expect asset prices to go up. And they did. The Dow, for example, rose from under 1,000 in 1980 to over 36,000 today.
Shrinking Dollars: Consumers borrowed too – for houses, cars, and credit card purchases. And the federal government was the biggest borrower of all – adding more than $27 trillion to its debt so far this century. All of this borrowing and spending increased the ‘money in circulation’ that was chasing, chiefly, assets. It meant higher asset prices. And higher asset prices made the elite much richer.
Then, in July 2020, the borrowing binge came to a screeching halt. Interest rates and inflation went up. Borrowing went down. And with it, the money supply shrank. Charlie Bilello: "The US Money Supply fell 3.3% over the last year, a record 11th consecutive month with a YoY decline. The US Money Supply has fallen 2% over the last 2 years, the largest 2-year decline on record."
Money is what makes the financial world go ‘round. Note that the money supply was supposed to grow about the same rate as GDP, in order to keep prices more or less stable. GDP grew around 3% per year since 1971. But M2 grew about 5%. And then, in the Trump madness it rose to 27% as the Fed ‘printed’ trillions to keep up with Washington’s deficits. This was the proximate cause of the wave of inflation that struck the US in 2022.
The Way it Works: Then, too late, the Fed changed course. No more EZ money. No more negative rates. The Fed’s key rate rose 500 basis points (five percent) – the biggest, fastest turnaround in Fed history. The money supply collapsed. From 27% annual growth under Trump, it is now bouncing off a low of MINUS 4.5% – an unprecedented decline. House mortgage payments roughly doubled. Interest on credit card accounts rose to 21%. And the feds now pay more than $1 trillion per year in INTEREST on the federal budget – the largest single item of federal spending apart from Social Security/Medicare.
What is troubling about this is that the money supply is no longer increasing. So what makes the world go ‘round, now? How can the economy go from strength to strength, even as liquidity drives up? Stocks sold off in 2022. But now they are rising again. Bonds suffered the biggest sell-off ever…interest rates are generally falling again. And here’s the Intelligencer:
"Wall Street Has Decided It’s Time to Get Greedy Again: The past five weeks were great ones on Wall Street. Since the end of October, the Dow Jones Industrial Average went on a furious rally, climbing more than 11 percent. The bond markets - which, for much of the year, had been reflecting a darker image of the economy - gave up much of their pessimism about inflation and went on a frolic of their own. The thinking behind all this was that, finally, the Federal Reserve would start cutting interest rates soon, and it was better to buy, buy, buy just about everything that could be gotten before it was too late... On Wall Street, it looks as though it’s finally - finally! - time to get greedy again."
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