Tuesday, January 23, 2024

Bill Bonner, "The Fake Money Fandango"

Actual colors of your money. Look and see...
"The Fake Money Fandango"
The end of America's 'exorbitant privilege,' 
a comeuppance for China and more fiat-based fiascos...
by Bill Bonner

Baltimore, Maryland -  As we reported last week, there’s a time for everything. And the best time to sell US equities was in 2000, when you could get 40 ounces of gold for the Dow. Since then, it has been downhill for the flower of US industries – the 30 stocks in the Dow – which have fallen by half, in real terms (gold).

Every ship ends in a scrap yard or at the bottom of the sea. And by the 21st century the rust was apparent on the USS American Empire. It was time to head to its last port. But history, always looking for the sturm and drang of a good story, found a number of clownish captains willing to steer the great ship onto the rocks – Bush, Obama, Trump and Biden. And the voters, doing their part as citizens of a late, degenerate empire, stuck with the bumblers – electing Bush and Obama both to two terms each, despite their dereliction and manifest incompetence. And they now seem to want to re-elect Trump or Biden, no matter their age, intellectual impairments, or alleged criminality.

The thing that doomed the empire, more than any other, was its currency. When the US substituted a fake, paper-only, dollar in 1971, it set in motion a financial doomsday machine. For a long time, it seemed to Americans and foreigners alike as a blessing…an ‘exorbitant privilege.’ We didn’t have to make things; we could just print money. Since the dollar was the world’s ‘reserve currency’ other nations took it willingly and even lent it back to us by buying more of our paper, US bonds!

I.O.U.S.A.: But now, the great weakness of paper money is (once again) becoming apparent. Since it can be produced at will, it can also be lent out at will…but in a crunch, it gives way. When the US switched from an asset-backed money (dollars backed by gold) to a credit-backed system (dollars backed by an IOU from the US government ) it lost its anchor.

Gold is limited. And precious. People are careful with it. And when the wind picks up, it holds fast. Typically, in a correction or a crisis, prices fall and money becomes more valuable. People discover that they’ve made mistakes. Those who’ve put their faith in promises and speculations lose money. Asset prices fall. And those who have real money can buy up the distressed assets and get back to work.

In a fake money system, however, the money reserves at the heart of the system – ‘invested’ in US bonds – don’t become more valuable; they disappear. As Dan pointed out on Saturday, US banks have some $685 billion in unrecognized losses. These reserves were not really a solid asset, but a dubious credit, in which the world’s largest debtor promised to pay its debts with its own fake money. Now, in a pinch, they discover that they aren’t worth what they paid for them.

What can banks do? For now, it’s ‘don’t ask, don’t tell.’ They’re hoping the Fed will lower rates this year; then, things will go back to ‘normal;’ the value of their bonds will go back up. In other words, the only way a fake money system can hold together is for the Fed to create more of its fake money…and lend it out at fake rates. Inflate…and make the next crisis worse.

That is not just a problem for the US. It’s also a big problem for its fellow delusional, China. Americans thought they could buy things they couldn’t afford, using their new fake money. China thought they could sell products to people by lending them the money to buy them.

When Boom Turns to Bust: And now, the whole fandango has reached a new phase. Chinese factories turned out finished products at low prices; consumer prices, worldwide, fell. This left Chinese exporters with a lot of money – and an almost insatiable optimism about the future. They spent, they borrowed…they invested in more productive capacity, counting on the boom to continue.

Economies adjust to whatever conditions they’ve recently experienced. And after 40 years of the fastest economic expansion ever recorded on planet earth, many of China’s capital investments now depend on impossibly high rates of growth. Alas…the boom has come to an end, leaving the Chinese with unsold apartments, silent factories, empty trains…and billions of dollars’ worth of debt.

Here’s Charles Hugh Smith: "In broad brush, central banks got away with the illusion of permanently low inflation even as they pumped trillions in new currency into the global economy for one reason: China. In the course of a single generation, millions of Chinese peasants began punching a timeclock. This cheap labor filled the world with low-priced exports. But now… The pool of cheap, abundant Chinese labor has been completely drained. Wages in China have soared, along with inflation, and demographics is shrinking the labor pool even as the high expectations generated by 30 years of rapid expansion have diminished the labor force's willingness to perform low-paid factory work far from home and family.

And then…"…once the most productive uses of credit are satiated, the new money flows into unproductive speculation and financial skimming operations. At that point, all the new money flooding into the system drives inflation... And now, China – with billions (trillions?) of dollars’ worth of the ‘unproductive speculations,’ faces a credit meltdown. Its ‘money’ is disappearing along with its customers and its asset prices. What can it do, but replace the fake money with more fake money…just like the US?

This is probably not the end of China’s drive for full spectrum dominance of the world economy, but it looks like the end of the 1979-2021 boom. What will it mean for the US? Stay tuned…"

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