MD: At Money Delusions we quite frequently come across one of these beauties we just can’t pass up. The only way to deal with this kind of nonsense is to annotate it in place.
Bill Bonner’s Diary
“Free” Money Destroys the U.S. Financial System
By Bill Bonner
August 29, 2019 Print
MD: He begins with the obligatory flowery writing which is not relevant to the subject.
POITOU, FRANCE – Today, we are packing up, closing the shutters, putting away the lawn chairs and the croquet set.
Everything needs to be stored away; otherwise, rain, wind, and sun will do their damage. The wood cracks; the metal rusts; the curtains fade…
…It is nature’s way. And no matter what we do, nothing resists time.
In preparation for our departure, yesterday we got on our bicycles and rode around the countryside, saying goodbye to old friends.
Our first stop was a visit with a retired colonel, a man who had spent his life in the military – including engagements in the war in Algeria and peacekeeping operations in the Congo.
He is 80 years old and had cancer a couple of years ago; we didn’t expect to find him still alive. But he seems to be recovering and was cheerful and chatty.
“The Algerian conflict was a dirty war. We could have won the war militarily. But it was ruining the integrity of the army, turning it into a ruthless and unruly police force. I asked myself if I should resign. But I stuck with it and did the best I could. I don’t regret it.”
After a cold beer and warm conversation, we got back on our bikes and pedaled along the country road.
The next stop was to see a friend who used to work on our farm until he retired about 10 years ago.
He is in remarkably robust shape. At 79, he works in his garden every day and chops his own firewood.
But his oldest son was killed in a car crash last year – the second of his three children to die. Since then, he has seemed a bit like a broken man.
“How are you, Francois?” we asked.
“Okay,” was the answer from his mouth.
But his eyes told a different tale. He suffered.
After a few minutes and a glass of cold, freshly squeezed apple juice, we mounted up again.
A few miles farther on was the house of another retired couple.
Both are in their late ’70s. The woman is small, lively, energetic, and as friendly as ever. But her husband has multiple sclerosis. He no longer leaves the house, except to go to the hospital.
Still, his mind is alert, and he is keenly interested in China.
We took him a book from our library that we knew we would never read. It was written long ago in Chinese and now translated into French.
“In Chinese, there is no clear separation between writing and the ideas it conveys,” he explained. “Both should be true, beautiful, and timeless. To the eye… and to the mind.”
“Uh… yes,” we replied.
MD: Ok, hopefully we’re now going to get into out subject matter … money. Look for clues that he knows what money is. We don’t expect to find them… but it’s always fun to look for them in these pontifications.
But our beat is money. And in today’s money world, truth is rare; beauty can be found only in irony and mockery.
Yesterday, for example, the president of the USA came out with this:
Our Federal Reserve cannot “mentally” keep up with the competition – other countries. At the G-7 in France, all of the other Leaders were giddy about how low their Interest Costs have gone. Germany is actually “getting paid” to borrow money – ZERO INTEREST PLUS! No Clue Fed!
MD: So the president is clueless about money too. What’s new.
The president is disturbed because the Fed is not debasing the U.S. money supply fast enough.
“Everybody else is doing it,” he seems to say. “Why aren’t we?”
Of course, “we” are. Our Fed is lending out fake money to member banks at a rate that is about even with consumer price inflation.
MD: Change the word “lending fake” to “counterfeiting” and you have the proper description of what is going on
This “free” money does to the U.S. financial system about what a hurricane does to a South Florida swimming pool; it becomes a greasy swamp with an alligator in it.
MD: In a “real money” process, we know that money is in perpetual free supply. Traders like you and I can create it any time we want to … and we want to when we can see clear to a trading promise spanning time and space. There is no “financial system”. There is only a purely objective process.
But our guess is that other Leaders were not “giddy” about the storm, but puzzled. Why would investors take shelter in a 10-year Italian bond at less than a 1% yield?
MD: Notice the focus on so-called “investors”. In a real money process, everything is focused on traders like you and me. It’s about trading. It’s not about gaming the process for yield. And no “shelter” is needed. A real money process “guarantees” perpetual perfect balance between supply and demand for money itself … thus perpetual zero inflation and zero time value of money. The time span is not relevant.
There is the smart money. And there is the dumb money. But this money must be stark, raving mad.
MD: In a “real money process” money has no intellect. Money is a promise made by a trader. And a real money process does not allow a broken promise by one trader to affect other “responsible” traders. Defaults are immediately mitigated by interest collections of like amount. These collections are paid by irresponsible traders according to their propensity to default (i.e. risk).
Italy’s economy has been in a slump for more than 10 years. Its native-born population is expected to be cut in half by the end of the century. It owes more than 130% of its GDP.
MD: The “it” referred to here is the government. And the amount it “owes” is simply the amount it has counterfeited. It never had any intention of keeping its promises. No government does.
And its government bumbles from one unstable coalition to another… barely able to govern at all.
MD: That’s the modus operandi of all governments. It’s like the Harlem Globetrotters and the Washington Generals. They pretend to be in a basketball competition … but they work for the same guy.
You’d have to be nuts to lend money to Italy…
…unless you thought the fix was in.
MD: In this context, “lend” assumes new money is not being created. Rather, the control of existing money is being handed over to another party (the government) for some consideration (yield). So what does he mean here by “unless the fix is in”? He’s saying you don’t loan to a “deadbeat counterfeiter” unless the fix is in. I don’t know about you, but I only loan to a deadbeat counterfeiter when forced to … taxed… and I have zero expectation that the loan will be repaid…ever.
That is, buying Italian bonds – or German bonds, or French bonds… or USA bonds, for that matter – makes sense only if you are front-running central banks, counting on them to do something even nuttier than you did, buying your overpriced bonds at even higher prices.
MD: A good example is financial manipulators buying Venezuelan debt for pennies on the dollar. The holders had little expectation of being repaid. But the purchasers knew they could get the USA government to institute “regime change”. After that, the new regime would “make good” on the bonds. They do this by instituting a new money… i.e. they clean the slate.
Which is what Mr. Trump wants the Fed to do – rig up the credit market even more than it is now.
The Fed should print up more fake money, he believes, and lend it to his government at even cheaper interest rates. The idea is to get the economy running hot in time for the 2020 election.
MD: With a “real money process” governments are just traders like you and me. But we know from experience that they never deliver on their trading promises. Then their defaults equal their money creation…and interest collections against them equal these defaults. They can no longer create money. They are thrown out of the game. A real money process cares nothing about “the economy”.
Our guess is that this huge bubble in debt marks a major change in world economic power.
MD: A bubble happens when the preponderance of traders make promises they can’t keep. This happens often in a manipulated money process. After a period of “tight” money, the money changers move to an “easy” money policy. Traders, having been strangled for some period, can now breathe…and they begin trading over time and space … creating money. Then the manipulators tighten the money again (they call the loans). Trades that were sound become unsound … and trades that were depending on those trades become unsound … and on and on. One failed trade cascades into a string of failed trades. A real money process doesn’t exhibit this behavior. If a trader defaults, it doesn’t affect other existing trades. It just serves as an automatic negative feedback … imposing slightly larger interest loads on new irresponsible traders. Responsible traders have zero interest loads because they don’t default.
Americans forsook their gods – honest money, smallish government, balanced budgets.
MD: When did Americans every have honest money, small government, and balanced budgets? The whole idea of forming the USA union was to repay guys like Robert Morris.
Now, those gods forsake them.
Fake money has destroyed real capital, created chaos in the markets, caused trillions in malinvestment, slowed down growth, and resulted in appalling inequality.
MD: Remember, “fake money” is “counterfeit money”. A real money process tolerates no counterfeiting at all.
It has also corrupted the government; the feds use it to avoid making hard – but necessary – decisions.
Fake money finances their fake wars… rewards lobbyists, campaign donors, crony contractors… and has added more than $10 trillion in additional debt in the last 10 years.
And with so much cheap credit available, not a single candidate even suggests balancing the budget or curtailing wasteful spending.
Why make tough choices when you get free money?
The Fix Is In
Germany is actually “getting paid” to borrow, Mr. Trump reminds us.
But people only get free money when the fix is in. And the fix won’t stay fixed forever.
Today’s rigged-up bond bubble will be no exception.
When will it pop? How?
We would love to meet the person who knows the answers to those questions.
MD: Read a history book. It has “rhymed” in this regard innumerable times in innumerable places. It is the money changers principal tactic.
In the meantime, we wait… we watch… and we try to connect the dots. And we wonder: What really matters?
Our final stop yesterday was at the modest house of a woman whose husband had recently died after a long, losing battle with Alzheimer’s disease.
We sat with her for a few minutes and reminisced. We discussed the weather, the small tomatoes in her garden, and what was going on at the local church. But she had her husband on her mind.
“The last words he said were five years ago,” she explained, tears in her eyes. “He said ‘I love you.’”
MD: Beautiful writing Bill … but you’re clueless about money.