GUALFIN, ARGENTINA – “The U.S. Economy Is Back on Track,” read a Bloomberg headline over the weekend.
Apparently, inflation and consumer spending picked up last month.
We are so glad to hear it.
And last week, New York Fed President William Dudley said the U.S. central bank might begin lightening its load of bonds this year.
Or maybe not.
Or maybe they will add to it. Who knows. It depends.
The Fed stopped buying bonds via its quantitative easing (QE) program in 2014.
But the Bank of Japan and the European Central Bank (ECB) have kept up their QE programs, adding to the world’s money supply.
Last week, ECB assets rose to $4.1 trillion, making it the biggest single holder of unpayable debt in the world.
The Fed, the ECB, and the Bank of Japan are running neck and neck in this madcap race to bankruptcy. Together, these three central banks own about $12.5 trillion in assets.
What does this mean? Why is it important? Who cares when the Fed sells its bonds?
President Trump, interviewed by The Economist, claimed he had invented a key metaphor. Yes, he came up with the idea of “priming the pump… just a couple of days ago.”
He must have been pulling the reporter’s leg. The idea has been around since the 1930s; the president must have heard it before.
“Yeah,” he explained. “What you have to do is you have to put something in before you can get something out.”
The trouble is economies are not machines. There is no pump. And governments have nothing to prime it with anyway; you can’t prime a pump (if you had one) with water you don’t have, either.
But wait. Why not just borrow the money… spend it… and prime the pump that way? Isn’t that the tried-and-true formula?
Yes, that’s the formula. But let’s look at it more closely. When the feds borrow money, they must take it away from other uses. Then what do they do with it?
They spend it on the same things they always spend it on – boondoggles, giveaways, and pointless wars. These are designed to enrich the few at the expense of the many.
Net gain = zero. Or less.
But the feds keep at it. The three largest central banks have added $9 trillion of pump-priming liquidity since 2008.
This gush of money has produced the weakest “recovery” in history… and a U.S. economy that is now barely growing at all.
Let’s back up a moment…
When we speak of the Fed’s “assets,” we’re talking about (mostly) the Treasury bonds the Fed bought.
From an economic point of view, the transactions were hollow and meaningless.
A bank held a U.S. government bond. It sold the bond to the Fed for cash (in the form of reserves). Now it has cash equal to the value of the bond. No change in its balance sheet.
The Fed, meanwhile, has an additional asset (the bond)… which sits in its vault as lifeless as a grain of wheat in a pharaoh’s tomb.
The central bank had no real money to buy the bond. It created the money out of thin air by increasing reserve account balances at banks – which is where the story gets a little hard to follow.
This “money from nothing” is not the sort of “something” you need in order to get something out of it. The net effect was to raise bond prices and lower their yields so that borrowers won and lenders (savers) lost.
This is a bad idea.
Economic progress depends on saving, not spending. Saving real money is the “something” that provides the capital for new factories, new buildings, new services, new jobs, and new productivity.
But that’s not what the feds did. Lowering real interest rates, they discouraged real saving. And the real economy slowed down.
Meanwhile, artificially lower borrowing rates – and $9 trillion in new central bank cash – had a dramatic effect on the financial economy. What to do with all this money?
The banks and other large players had few choices.
What could they do with it?
Buy stocks! The stock market boomed.
So what would happen if central banks now withdrew this cash?
Imagine they now turn the liquidity valve in the other direction. Instead of buying bonds, they sell them. Instead of putting money into the system, they take it out. Instead of encouraging investors to buy stocks, they encourage them to buy bonds.
Then what happens?
What happens to world stock markets when the $9 trillion goes away?
What happens when the “something” the feds put in becomes the same “something” they take out… when they un-prime the pump… when they reverse the great stock market liquidity boom of 2009–2017?
Ai yi yi.
Nobody wants to find out… least of all the central bankers who made this mess.
BY CHRIS LOWE, EDITOR AT LARGE, Bonner & partners
Compared with stocks, gold is trading on the “bargain counter.”
That’s the message of today’s chart, which tracks the price of gold relative to the index level of the Dow.
When the line on the chart is rising, gold is becoming more expensive relative to the Dow. When it’s falling, the Dow is becoming more expensive in relative terms.
As you can see, the gold-to-Dow ratio hit a high in the summer of 2011 when the yellow metal hit a peak of more than $1,900 an ounce.
Since then, the ratio has been falling – meaning gold has been getting cheaper relative to the Dow.
It’s left gold at its cheapest level relative to the Dow since 2008.
— Chris Lowe
P.S. Gold is cheap right now relative to stocks. But renowned speculator Doug Casey says it won’t stay that way for long. Doug has spotted a rare investing setup in the gold market he believes could make you 10 times your money if you invest soon. And it’s gotten him so excited, he’s invested $1 million of his own money into small gold stocks. To learn how you can follow Doug’s lead and make a small fortune in the gold market, go here now.
Why Most Academic Market Research Is False
Last week, Bill warned that “accounting tricks” can cause unhealthy market valuations. Now the mainstream media is noticing something similar…
The Answer to Japan’s Labor Problem
Japanese companies are facing a shortage of workers. But now they’ve uncovered a solution: replace human workers with robots.
The Deep State Has Taken Trump Hostage
President Reagan’s budget director David Stockman believes Trump has been co-opted by the Warfare State. David lays it all on the line in this recent interview with Chris Lowe.
Today, one reader responds to last Friday’s Diary, “It’s Always Dawnest Before the Dark.”
I voted for Trump not because I liked him. It was because I was sick and tired of seeing decades of party hacks on both sides of the aisle never fixing anything. They just scratch each other’s backs. Congress was/is bought and paid for. It took them 30+ years to even make the tiniest gesture that tobacco just might be bad for you. Trump was the adrenalin-fueled bull in the china shop. Just the wrecking ball I had been waiting for.
Reforming with a sledgehammer is risky. It doesn’t always turn out well. But Robert’s Rules of Order will never fix things. Fortunately Trump is not a starry-eyed ideologue with a vision of a new world order. He is more of the Al Capone type. He came in guns blazing.
Keep smashing things Donny boy until you get sacrificed…
– Tom L.
Meanwhile, Bill’s recent essay on the War Between the States (aka the Civil War) continues to be a hit among readers.
(Remember, Diary readers can also catch up on Bill’s Civil War reading recommendations by reading this recent issue of Bill’s Book Club.)
Congratulations… You have managed to touch a nerve and flip my “rant switch.” Yes, the statist fairy tale justifying the American “Civil” War, that it was a crusade against slavery pure and simple, is just that – a fairy tale!
Granted, the fairy tale is probably true for the sliver of the population who were abolitionists and brave enough to volunteer for military service, but the original call to arms was to “save the Union.”
– Steve M.
In the first part of the nineteenth century, abolitionists in the United States were trying to end slavery in an orderly, nonviolent way. Slave-owning interests were resisting; using every method available to preserve their “sacred institution” of slavery.
When a new administration and legislature was elected, some Southern states determined they would rather leave the union than give up slavery. Technically, the civil war was about the states’ right to secede but the “right” the Confederate states were concerned with was the “right” for one man to own another.
– Viv H.
Thank you so much for your insightful appraisal of the War Between the States. Very few people have the courage or the knowledge to accurately portray a correct assessment of that conflict that has so erroneously been portrayed as a war against slavery. Self-governance and States’ rights as guaranteed by the constitution disintegrated when the North invaded.
– Clinton P.