Wednesday, May 22, 2024

Bill Bonner, "The Credit Dollar"

"The Credit Dollar"
The government of the world’s most prosperous nation - the US - 
cannot pay its own way; it finances nearly a third of its spending - on credit.
by Bill Bonner

Dublin, Ireland - "CNN: "The Dow Jones Industrial Average closed above the 40,000 mark Friday for the first time in its 139-year history. Wall Street has been boosted in recent days by renewed hopes of rate cuts from the Federal Reserve that would loosen monetary conditions for consumers and businesses."

We sing the praises of the US economy. It has made millions of people very rich. It has accommodated millions of immigrants, who still pour over the border looking for a better life. It built shopping malls coast to coast. And, for excitement, the Kitty roars...

You probably have better things to do than to think about the strange world of ‘meme’ stocks. But they - along with dot.coms... cryptos... NFTs... Nvidia... and campaign speeches - show us how weird and wonderful our economy can be. Earlier this year, meme stocks - stocks that seem to have little real value but still exert some magic appeal - had fallen from the headlines. Then, suddenly, “Roaring Kitty,” an influencer with 1.3 million followers, sent forth a picture of a gamer leaning forward in his chair. That was all it took. Aficionados interpreted it as telling them that it was time to buy. AMC, a chain of movie theaters, rose 308%. GameStop, an electronic game retailer, rose 271%. And then, easy come, easy go. By the end of last week, the stocks had crashed again.

This kind of market action has little to do with capitalism. Meme speculators were not guided by an ‘invisible hand’ to make others’ lives better. They were not funding more theaters at AMC or creating more games at GameStop. They were just having some fun - with money.

Henry Ford showed how real capitalism used to work - on cash, not credit. In 1914, he doubled the wages of his workers in his Piquette Street auto plant. At $5 a day they were now among the best paid of America’s working class. And with a price tag of about $700, they could buy one of Ford’s Model Ts for the equivalent of about 140 days on the job. The common working man bought his two main assets - his house and his auto - with his savings and remained largely debt free.

Today, Ford’s best-selling vehicle is the F-150 pickup with a base price of $36,000. Three out of four buyers pay “on credit.” And without credit - car loans and mortgages - few people could afford either a house or a car.

Last year, Newsweek reported on a new wage settlement for Ford workers: "New recruits at Ford are in line for a 68 percent hike in their starting salaries, positioning their hourly rate at more than $28 ($58,240 annually). However, the crown jewel of the agreement is the change planned for Ford's lowest wage earners. Throughout the contract's span, low-wage employees can expect their compensation to soar by 150 percent."

According to these numbers, it now takes longer (more hours spent on the job) for the autoworker to buy his ride than it did 110 years ago. Why? Despite the achievements of Alan Greenspan, Mark Zuckerberg, Roaring Kitty et al, is there something wrong?

The government of the world’s most prosperous nation - the US - cannot pay its own way; it finances nearly a third of its spending - on credit. And the public bought everything from autos to cheeseburgers on credit. Now, who’s going to pay its $65 trillion in debt? Tomorrow’s public? With what? More credit?

The answers to these questions are at the heart of our hypothesis. We’re wondering how come the US has run up so much debt... how come its economy seems to serve the rich, very well, but not the rest of the population... and how come it now seems to be headed for at least a crisis, and probably a catastrophe. Looking ahead, what we’ll see is that when the US switched from cash to credit it mistook the new credit dollar for a bird-in-hand dollar. But credit is not cash. And what we will find out, eventually, is how much the credit dollar, in the bush, is actually worth. More to come."

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