Bill Bonner: How the fake money boom ends
From Bill Bonner, Chairman, Bonner & Partners:
RANCHO SANTANA, NICARAGUA – As we outlined yesterday, Americans are richer than ever.
U.S. household assets stand at $97 trillion.
All over the world, “wealth” is surging, too… with the value of global stocks near a record high of $100 trillion.
But there’s a hitch: We allege that this wealth was built on fake money. If we’re right, is the wealth fake, too?
Cometh the Grim Reaper
As longtime Diary sufferers know, the Fed’s ultra-low interest rates over the past eight years have created the biggest pile of debt in history.
Last week, the total U.S. debt hit a new record at $68 trillion… up from $29 trillion in 2000.
And yesterday, Fed chief Janet Yellen said she would take a stick to America’s debtors, increasing the cost of carrying that debt.
Already, the Fed’s rate hikes have boosted the interest cost of credit card debt by about $7.5 billion a year. That will rise by another $8 billion as future scheduled increases take effect.
Extrapolate to include all the nation’s debt – consumer, business, and government – and every quarter-point rate hike costs $170 billion extra in carrying costs a year.
Add a whole percentage point… and you are up to $680 billion – about equal to the Pentagon’s annual budget.
And so cometh, like the Grim Reaper, the end of the biggest fake boom ever. Inflated with fake money lent at fake rates… it will deflate when rates go up.
But “fake boom” is merely an allegation; we have to prove it. So let’s begin by exploring the “money” that made it possible.
“Sound as a Dollar”
Prior to President Nixon ending the exchange of dollars for gold at a fixed rate in 1971, the U.S. had a dollar that was connected to gold and silver.
Not perfectly. And not always. But precious metals, particularly gold, were there… in the background.
And that old dollar was the money which had existed, more or less unchanged, since it was created in 1792.
That’s when the U.S. government, with the Coinage Act, introduced a national currency backed by gold.
That is what the world came to know as “real money.” You could trust it. “As sound as the dollar” was not an ironic expression; it described the solidity of America’s currency.
Then, with hardly a by-your-leave, Tricky Dicky introduced a new dollar. It looked just like the old one. But it was an impostor.
This new dollar was not backed by gold or silver. It was a “Federal Reserve Note,” with nothing standing behind it except the full faith and credit of the United States of America.
It was a debt instrument, in other words… not cold, hard cash.
Real money is different from debt. It doesn’t need to explain itself. It doesn’t need to tell you where it’s been or what it’s been up to.
You take a gold coin as it is. No backstory or balance sheet is necessary. That’s the way real money works: It closes transactions. You accept payment and the account is settled.
But debt is different. It comes with question marks: Who issued this debt? What is it really worth? Will I get paid?
Here is the key to understanding debt money, as opposed to real money: Real money is the fruit of past efforts – distilled and preserved for future use.
Debt money is a claim on wealth that has never been produced. And perhaps never will be.
As the quantity of real money increases, a society becomes richer and more financially stable. Because it’s real wealth.
But as the supply of debt money increases, more people owe more and more money; the economy becomes more fragile… and eventually goes broke.
But if the authorities want to increase the supply of money, the only kind of money supply they can increase is the fake kind. Real money must be earned; like wealth, it cannot be printed.
Cart Before the Horse
That is true of bitcoin, too, by the way.
Like gold, either you “mine” it (using real-world inputs of energy and computer processing power), or you trade something for it.
The supply of bitcoin is governed by an algorithm and theoretically capped at 21 million. Central banks cannot create more bitcoins simply because they think there are not enough. (Whether bitcoin ever becomes real money or not, we wait to find out, along with everyone else.)
That is why gold is such good money. The supply of it increases more or less at the same rate as the economy. More gold usually means more wealth.
Fake money – whether it is the trillions of dollars of Fed debt… or the gazillions of IOUs issued by the central banks of Zimbabwe or Venezuela – operates in the opposite fashion. The more it increases, the poorer you get.
In an important sense, it puts the cart before the horse.
No More Free Lunches
After man’s expulsion from the Garden of Eden, God made it clear that the days of free lunches were over.
“By the sweat of your brow shall you earn your bread,” He said.
You have to work… you have to do something… BEFORE you get wealth.
You don’t get your bread first.
But the feds increase the money supply before any new wealth is created. This Fed debt – in the form of Federal Reserve Notes – is a fraud; it breaches the laws of nature. It doesn’t add to wealth. Instead, it is a claim on wealth that other people already own… or wealth that hasn’t been created yet.
In practice, what it really does is call away the real wealth of some people to deliver it into the hands of other people with better connections to the central bank, aka the Deep State insiders.
Government is always a way for the few to exploit the many. The fake-money system is a major tool, helping them do it.
More to come…
Crux note: Not long ago, Team Trump reached out to Bill’s network for advice on the economy. In response, Bill’s team sent this memo to the White House. The memo detailed an inevitable economic crisis – 30 years in the making – one far more severe than the crisis of 2007-2008. We recently made that memo public so readers can get all the details and learn how to start preparing. Read on here.