OUZILLY, France – We came back from South America poorer but wiser.
For the first time ever, we have had to face the reality of politics; up until now, it was never more than an abstract, theoretical matter.
We read about the French Revolution, the Bolshevik Revolution, and the passage of Obamacare.
We knew politics was corrupt and repulsive. But except for a brief stint on the board of governors of our local church, we had nothing to do with it.
Now the wolf is in our own backyard… so close that we can smell its hot breath and hear the clicking of its pearly teeth as it snaps at our heels.
More as it develops…
But wait… money sometimes goes “full politics,” too.
Take poor Kenneth Rogoff at Harvard.
He wants a dollar with a voter registration card, a U.S. flag on its windshield, and a handgun in its belt – the kind of money that supports the Establishment and votes for Hillary.
Writing last month in the Wall Street Journal under the headline, “The Sinister Side of Cash,” he noted that “paper currency, especially large notes such as the U.S. $100 bill, facilitate crime: racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism.”
Of course, large notes do make it easier for criminals to operate. Like cellphones. And sunglasses. And automobiles with air-conditioning.
But that’s what money is supposed to do: make it easier for an economy to function. You use it as you please.
Yes, dear reader, we are back to our regular beat. Money. But what’s this? Finally, we’re beginning to see some action.
You’ll recall that the markets have been eerily quiet… with less movement in stocks than we’ve seen in the last 100 years.
Perhaps it was the calm before the storm. The Dow fell nearly 400 points on Friday. We don’t know. It could be the calm before the storm. Or it could be the calm before more calm.
How It All Ends
There’s something fundamentally tranquilizing about having a central bank that gives out the word that it’s got your back.
The Bank of Japan is buying bonds AND stocks (by way of exchange-traded funds)… pushing up prices for both.
Under its €1.7 trillion ($1.9 trillion) QE program, the European Central Bank bought so many government bonds, it ran out of new bonds to buy. So, this summer, it added corporate bonds to its shopping list.
According to Reuters, it will soon run out of corporate bonds, too. Then it will have to follow the Bank of Japan’s lead… and wade into the stock market… if it wants to keep its QE program going.
And in the U.S., the Yellen Fed continues to jive and diddle… teasing investors with the threat of “normalizing” interest rates, but having neither the desire nor the fortitude to act.
We’ve been wondering how it ends. Bear markets are facts of life. But if the central bank has set its face to stopping them, then what?
Central banks – in the current system – can create unlimited amounts of fake money. They can use this money to buy real financial assets.
Theoretically, they could buy all the world’s stocks and bonds. And theoretically, they can leave the feds with almost complete ownership of the planet’s capital.
The rich get richer (selling their assets to the feds at inflated prices). The poor get poorer (as the misallocation of capital increases… price signals are distorted… and real wealth is wasted).
What goes wrong?
Everything. As in politics, the gap between theory and practice is as wide as the Sargasso Sea.
The Next Crisis
Even with the largest bidder in the world on their side, investors can still panic.
That would mean a big drop in asset prices, high-profile bankruptcies, and a new crisis.
Things move fast. The feds may step in with more QE buying, but they may be a dollar short and a day late.
A 20% drop in stock prices is equal to a loss of about $5 trillion in the U.S. alone.
The bond market is roughly twice the size of the stock market, so add a 20% drop there and you’re talking real money – a total loss of $15 trillion… which could easily happen in a few days.
Now, imagine a drop similar to the 2008-09 plunge…
In round numbers, equities lost 50%. Today, there’s about $60 trillion worth of stocks worldwide, so that would be a $30 trillion loss.
If the bond market fell in sync, you’d be looking at another $60 trillion or so… or a total loss of market capital of $90 trillion.
What would the feds do?
Yes, they would buy stocks and bonds. But they would buy at market prices. Owners would still take big losses.
And the feds wouldn’t stop there.
We are now almost eight years into the central bank’s various “stimulus” programs; they have coincided with the weakest recovery on record.
After taking account of inflation, incomes for most Americans are lower today than they were in 2007.
Clearly, reducing the cost of credit doesn’t work – even with yields on roughly $13 trillion worth of bonds in negative territory.
Fire Up the Whirlybirds
So what’s next?
When the next crisis hits, central bankers will rush back into their tool rooms and bring out something new. It will no doubt include “helicopter money.”
This is the term economist Milton Friedman used to describe direct giveaways of newly minted money without any corresponding increase in the government’s budget deficit.
Huge new infrastructure projects will be announced. Tax credits, tax cuts, minimum guarantee incomes – we don’t know what the feds will come up with.
But watch out…
With the carrot will come the sticks. The feds will impose measures to crack down on tax cheats, tighten the noose on black-market operators, and shut off funds to causes they don’t like.
They’ll use their money helicopters to “drone” you. That is, they’ll make sure you do with your money as they please.
Mr. Rogoff’s nutty suggestion to restrict cash could become law.
BY CHRIS LOWE, EDITOR AT LARGE
European QE hasn’t exactly been a stellar success.
By evaporating income on bonds, QE is supposed to push investors into the stock market… and push up prices.
But it hasn’t worked out as planned.
Today’s chart is of the Euro STOXX 50 Index. It tracks the region’s 50 biggest and most commonly traded blue-chip stocks.
And it’s down 18% since the start of euro QE (mid-March 2015).
Did the Bond Bubble Just Pop?
Last week, U.S. Treasury prices plunged… pushing yields to their highest level since the end of June. Was it just the beginning of the end of the 35-year bubble in bonds?
Triggers for a Global Economic Meltdown
All signs point to a coming global meltdown. And a legendary international investor says one particular country is at the epicenter of several potential crises that will spark this worldwide disaster…
The Case for Natural Resource Stocks
Value investing veteran Jeremy Grantham has turned bullish on natural resource stocks. He says commodity prices will rise due to growing demand and the finite supply of cheap resources.
We’ve gotten a lot of emails in response to Friday’s Diary on the coming crisis in corporate debt.
It’s not the fact the dollar isn’t “backed” that is the problem. The problem is those who we have entrusted to manage the money supply, which they continually increase much faster than the rate of growth of the economy.
The relationship between the money supply and the price of goods is ECO 101. And so it is presumably within the understanding of pretty well everyone in politics and the administration. This leads me to conclude that those in politics and the administration are deliberately controlling the money supply to the detriment of the majority of the population… who apparently never did study economics or they would understand that they are being ripped off.
– Duncan H.
The federal debt can be eliminated through the minting of $100,000 coins by the U.S. Mint, since the government decides what its coins are supposedly worth. As the billions of debt comes due, simply pay the principal in the coins.
– Fred M.
Fantastic essay on fiat money!
– Mark B.
You’ve certainly hit the nail on the head, Bill. There may be a solution to the insanity.
In fact, I have come to believe that this is as exquisite solution. There is a publication in Quebec, Canada, called the Michael Journal. It is actively promoting something it calls "social credit" [money issued by society, as opposed to money issued by the banks].
It is such a revolutionary concept that it seems insane when you first encounter it. But once you begin to get the full picture, it is really genius (in my understanding). Check it out and see what you think.
– Ronald K.
Just read Bill…the unvarnished truth. The emperor has no clothes.
– Johnny W.
In Case You Missed It…
Currency expert Jim Rickards is absolutely convinced that the U.S. dollar will begin to crash before the end of the month. And that it will send gold prices soaring. Before touching gold, Jim says you should read The New Case for Gold. In it, he shares his top gold advice, including why storing it at home could be a huge mistake.