"Myth and BS"
Tales of monetary manipulation, from Pharaohs to Fed heads...
by Bill Bonner and Joel Bowman
Poitou, France - "Today, we continue our uphill slog. Destination: unknown. In any society, at any time, there is always a lot of myth and BS. Often, they become fact. It may have been a myth that Pharaoh, for example, was divine. He got sick and died just like other humans. And it may have been BS that the common laborers of the Nile Valley should devote their surplus labor to building gigantic monuments.
But the sphinx…and the pyramids…are real. Facts. In dried brick, mud, and stone. Huge. As basic as dirt. Worn by sun, sand, and wind. But lasting for thousands of years. And who’s to say the sweating, heaving hordes weren’t happy with their work? Did they look at the Great Pyramid with pride and pleasure…at a job well done? Or did they feel used, abused…manipulated…or even driven by the overseer’s lash, to resentment or rage? We don’t know. But it just reminds us how adaptable we are…how flexible…and how ready to believe anything.
True Believers: Ms. Stephanie Kelton is a believer. She was on a CNBC video yesterday. The economist has been schooled to think and act rationally, sensibly…to add 2 plus 2 and get 4, never 5 or 6. This ability must have made her think that that was all there was to it. She – and other economists of her ilk – are eminently capable of dealing with the US debt, she believes. Yes, it approaches $33 trillion. Yes, it is growing by $5 billion per day. Yes, the feds will have to borrow even more to keep the show on the road.
But no. It’s no problem. The money comes from the government, she says, making the classic mistake of confusing the bits of ‘currency’ produced by the feds with real ‘money.’ And she’s not the only one to confuse ‘credit money’ with ‘real money.’ Here’s the latest, from Newsweek: "Americans Struggle to Get Credit Increases as Debt Surges." "Households have noticed that access to credit has been a struggle compared to a year ago, a trend they will likely see continue going forward.
Expectations for future credit availability also deteriorated in August, with the share of respondents expecting it will be harder to obtain credit in the year ahead increasing," the New York Fed said on Monday. Overall, "households' perceptions about their current financial situations and expectations for the future also deteriorated."
And this from CNBC: "Fears over access to credit hit highest level in more than a decade, New York Fed survey shows. Respondents indicating that the ability to get credit is harder now than it was a year ago rose to nearly 60%, the New York Fed's Survey of Consumer Expectations for August showed."
What myth is this? What BS is behind it? Why do people want to borrow more…and go even further into debt? Shouldn’t they be concerned about having more money, rather than more credit?
Money is hard to come by. You have to work for it…or, if you are an investor, wait for it. But the feds can produce all the credit they want – immediately, and at ‘negligible cost,’ as Ben Bernanke put it. And they can keep producing it until the cows come home. They can use it for good things, too. Like feeding the hungry. Housing the un-housed. Transporting the un-transported. And entertaining the bored. They certainly don’t need no stinkin’ debt ceiling. They can run up as much debt as they want; it’s up to them. And inflation? Don’t worry about that either. The feds giveth; they can take away (via taxation).
Practice vs Theory: In short, there is nothing to worry about. Clever economists can keep the system from going off the rails. Central banks can create credit. Consumers can borrow. Jacques Rueff had seen the problem years before. He identified it in the quote we presented yesterday. It wasn’t that the guardians of the money supply weren’t smart. And it wasn’t that the system mightn’t work – in theory. It was in practice that the flaws would appear.
While the Fed governors could perfectly well keep the money supply growing at a prudent and reasonable pace, (Friedman suggested 3%, roughly equal to GDP growth) they weren’t going to do it. After all, they were just human, as Nietzsche put it, ‘all too human.’ They, like the Egyptian laborers…the Massachusetts witch hunters…Napoleon’s army marching into Russia….and Americans invading Iraq, were ready to believe anything.
Rueff: “I do not believe, as a matter of fact, that the monetary authorities, however courageous and well informed they may be, can deliberately bring about those contractions in the money supply that the mere mechanism of the gold standard would have generated automatically.”
The problem wasn’t necessarily the money itself; it was the people in charge of it. Humans. Once they are given the power to create fake money, it’s a bad habit. But a hard one to beat."
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Joel’s Note: Meanwhile, as the various theories of the pointy-headed academic class continue to collide with immovable reality… a couple more unsettling data points flit across our desk, these courtesy of BPR’s macro analyst, Dan Denning. First, inflation continues to bite. August CPI came in 3.6% higher year-over-year. Here’s the Bureau of Labor Statistics: "The all items index increased 3.7 percent for the 12 months ending August, a larger increase than the 3.2-percent increase for the 12 months ending in July. The all items less food and energy index rose 4.3 percent over the last 12 months. The energy index decreased 3.6 percent for the 12 months ending August, and the food index increased 4.3 percent over the last year."
Moreover, as Dan explained in recent notes to BPR members, these numbers have a cheeky tendency to be quietly “revised” upwards after the fact… usually when folks have moved on to other “breaking stories” in the never ending news cycle. Even so, core inflation at 4.3% is not nothing, and certainly it is much higher than the Fed’s own target rate of 2%. And this, after one of the most aggressive rate hiking campaigns in living memory. Hmmm…
Part of the driver here seems to be the other inconvenient truth Dan shared with us this morning… oil prices are at a 10-month high. “That’s good for our Trade of the Decade,” observes Dan, “But bad for CPI readings in the next few months as higher energy prices hit the index.” Of course, this should only affect prices impacted by the cost of energy… i.e., everything. “Not to worry,” says the grasshopper to the ant, “we’ll just dip into our Strategic Petroleum Reserve and… oh, wait…”
Our advice? Listen to Aesop… be like the ant. Winter is coming."
