BALTIMORE – Another down day for the Dow on Friday left it in the red for the week.
Barron’s, in a lather, says it is facing the “Two Horsemen of the Apocalypse.”
Supposedly, the so-called Brexit – the vote in Britain this Thursday on whether to leave or remain in the European Union (EU) – and uncertainty over where the Fed will take U.S. interest rates are cutting down stocks faster than a Z-turn mower.
But Brexit is a side show.
As our contacts in London explained in last week’s issue of Bonner & Partners Inner Circle, Britain will do just fine outside of the EU. It will even thrive. [Inner Circle members can catch up here.]
As for the Fed’s fumbling, it is a consequence, not a cause, of falling stock prices.
The real threat to this market is more basic… more dangerous… and completely unavoidable. It is a “doomsday device” – hidden in plain view – in the feds’ fiat money system.
It took us a long time to understand how this works. For many years, we referred to the Fed’s EZ money policies as “printing money.” Finally, we realized that this metaphoric description of the Fed’s role probably hides more than it reveals.
The Fed is not printing money. If it were printing money, we’d have more money around… and higher consumer prices.
Instead, when the feds went to a “paper” money system in 1971, they did it very cleverly.
Yes, their new system is totally fraudulent and absolutely ruinous – just like an old fashioned money-printing scheme. But the fraud takes much longer to uncover… and the ruin is only obvious at the end.
It is a “bezzle”… where you only become aware that you’ve been had when it blows up.
Here’s the deal…
Instead of printing money itself, the Fed allows banks to create an almost unlimited amount of credit (providing they meet certain capital requirements).
Contrary to popular belief, banks don’t act as “warehouses” – taking in deposits and then lending them out again. Instead, banks create new deposits (aka money) when they make a loan.
All it takes is a few strokes on a keyboard, and account balances – along with the money supply – go up.
At first, this new credit-money acts much like printing-press money: It gives people money to spend that nobody ever earned. Everybody is happy.
But if you keep on creating more and more paper money, the fraud is soon obvious. Prices rise. People realize that they have no more purchasing power than they had before.
In the meantime, businesses and consumers have all made bad decisions, based on the apparent increase in “demand.”
After a while, all those mistakes have to be flushed out… in a recession or a depression.
By setting up this credit-money system, on the other hand, the feds avoided that problem… or at least, postponed it.
Between 1980 and 2016, for example, Americans spent $32 trillion in net, excess credit. That’s credit (and debt) above and beyond the historic relationship between GDP and debt.
That, too, would have increased consumer prices dramatically, but the Japanese… and then the Chinese… were busily making things much more cheaply.
This offset consumer price increases. And more important, much of the increase in credit-money went directly into Wall Street, instead of the Main Street, economy.
In a credit-money system, the sectors of the economy that are most creditworthy get most of the new money.
Who’s most creditworthy?
The rich. Big business. Government.
Prices soared, all right. But they were the kinds of prices people wanted to go up. Houses… businesses… commercial real estate… collectibles – talk about inflation; these things went through the roof.
Everything that can be financialized – priced and traded – became incredibly expensive. But the price of labor went nowhere.
Almost unbelievably, according to the Pew Research Center, today’s average hourly wage has roughly the same buying power as it did in 1973 – more than 40 years ago.
The system hasn’t done much for the common man, but it has helped the rich get richer. And now we know that the Deep State controls the U.S. government (and indirectly, the Fed and the financial system). So nobody really cares about the voters anyway.
What a system!
The banks are allowed to create money. They lend it to consumers until the household sector can’t take anymore. (This is what happened in 2008). Then they lend to corporations and the government.
One by one, each sector takes on too much debt and ceases to be creditworthy. Finally, only government can borrow… because it is the only sector that can print money!
We’re approaching that already in Japan, where the central bank buys about 100% of new Japanese government debt issuance.
If the feds had handed out paper money, prices would have gone up. But even in a recession, or a debt deflation, the cash would still be there. Printing-press money raises prices, permanently.
But a credit-money system is very different. Every new dollar that comes into the system is also another dollar of debt.
Now, American consumers, businesses, and government all drag behind them about $60 trillion in debt. It slows them down. It depresses economic growth. And most important, it is subject to the credit cycle… and to the “doomsday device” built into system.
A recession is coming in the U.S.
If it hasn’t already begun, it will probably set in within six months. When that happens, stock prices will fall.
This will have a similar effect as the 2008 crisis… when houses plunged. Ultimately, a company’s earnings potential and stock market equity provide the collateral for its debt. When the stock market falls, lenders disappear.
Then, the debt market tightens and the doomsday device explodes.
Debt is just the flip side of credit. As debt goes bad, credit disappears. And then the system that created so much credit-money will go into reverse, destroying the nation’s money supply.
The money supply (actually, the supply of ready credit) will shrink – suddenly and dramatically. And what should have been a minor, routine pullback in the economy will become a catastrophic panic.
Don’t go away!
BY CHRIS LOWE, EDITOR AT LARGE, Bonner & partners
Today’s chart is of Britain’s main stock market benchmark, the FTSE 100 (pronounced “Footsie”).
The FTSE 100 is flat since the start of the year.
And it’s 4.5% higher than it was on February 19, when British prime minister David Cameron announced the date for the Brexit referendum.
Brexit… Who Cares?
Brexit jitters have contributed to the recent bout of market volatility. But according to one Wall Street firm, investors who panic and sell if the Brexit wins will do so at their own peril.
Few Companies to Survive – and Thrive From – Low Oil Prices
The oil and gas industry took a real beating when oil prices plummeted. But a few companies not only survived the crisis… they are now primed to produce big profits…
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Today… the controversy continues over Bill’s comments about mass murder in the Bible.
A number of angry readers wrote in to cancel their Diary subscriptions and warn Bill that he should stick to financial commentary. (Catch up here.)
We asked you if you agreed. Here are some of your responses.
Keep at it, Bill. There are no sacred cows (pun intended). People will delude themselves day and night to find a story that gives them comfort in the vast unknown. They are not seekers of truth, but blind lemmings looking for a quick fix of “holier than thou.”— Christopher J.
Yours are usually the first emails I read each day. Sometimes I learn something; sometimes I am entertained.
Well, you certainly threw bait to the Taliban Christians, didn’t you? They came through with the typical bigotry, simple-mindedness, parochial attitudes, intolerance, etc. Just as you expected, no doubt.
I enjoyed it – great start to the day!— Patricia J.
Go ahead and use your column to wonder about, and comment on, whatever you please. If it’s wondering about God’s actions in the Old Testament, so be it.
I’ve wondered about that plenty myself. I had a religious teacher in the parochial high school I attended who declared that the God of the Old Testament wasn’t the same God of the New Testament. The God of the Old Testament was vengeful and angry, while Jesus tells us in the New Testament that God is all merciful, all forgiving, and loving.
That dichotomy is bound to make anyone wonder!— Dale A.
In reference to your question about Bill’s topics, the first thing I would say is, "Bill Bonner’s Diary is fairly titled."
I always enjoy his witty musings and personal experiences. But I find even greater value with added dollops of his globetrotting, macro perspective on current issues – economic and political.
Unlike the vocal opposition, I rarely disagree… and even then, I can appreciate Bill’s viewpoint. That’s why I subscribe. I already know what I think. I pay to read what Bill thinks because I’m open-minded enough to understand that I could be totally wrong. And new perspectives, especially sophisticated ones, are invaluable on life’s one-way ticket to eternity.
Keep on writing about whatever you want, Bill… I’ll be here, regardless.— Farah B.
I will follow you every day. Keep poking that wondering stick. It is so informative and entertaining.
Your mailbag on the subject seems to reinforce the saying: “Some people will run a mile from a fact and stand steadfast and fight to the death for a belief.”— Peter C.
Don’t worry about questioning the existence of God. I am with you on this one!
Too many people think they know what this God business is about. They all believe something different! These are probably the same people who would fly an airplane into a reinforced concrete tower, believing they would be rewarded with 72 virgins (or some other nonsense).
History is full of folly. As far as I can determine, we humans cannot know the unknowable. Keep on keeping on!— Michael H.
I agree. The carnage in the Old Testament is mind boggling. However, the story/account of Abraham in Genesis gives us a glimpse into the mind of God and how profoundly He is committed to allowing us to make our own choices, no matter how horrible, and yet still provide a way out for those willing to choose His Son, Jesus Christ.
Your work has been committed to the concept of free-market “choice.” There is no more profound a “free choice” advocate than the Lord God Almighty. He even built in the perfect “stop loss.”
No, I won’t cancel. I can’t wait to see what happens next.— William W.
I notice how many of the letters of support you get are qualified with the words, “I may not agree with everything you write” or something of the sort.
Well, I happen to agree with EVERYTHING you write… and not because I’m some kind of uncritical sycophant. Why then? You happen to be RIGHT about everything. And that’s one helluva track record… even if your ability to time markets is as lousy as the next guy’s.— Tom W.
Save the date!
What: Bill Bonner, Chris Mayer, and Porter Stansberry join forces to discuss their top investing strategies.
When: Tuesday, June 21, at 8 p.m. ET.
Where: Our RSVP-only website.