We begin by asking: how many TVs, luxury apartments, spaghetti dinners and parking places are there?
Answer: we have no idea. But not an infinite number. And every one of them has a price. Who gets them? The person with the money.
Next question: who has the money? We don't know that either, but $3.6 trillion were fabricated over the last 5 years...and every penny ended up in someone's hands. Follow the money. You will find out what happened.
On our desk are two great books. One is David Stockman's "The Great Deformation." The other is Vivek Kaul's "Easy Money." Both describe the same phenomenon, but from different points of view. Stockman was present at the creation, so to speak. He was Ronald Reagan's budget director when the Republican Party ran off the rails -- veering sharply toward deficits and activism. Stockman fought hard to stop it...battling Dick Cheney and the neo-cons...and he lost. He wrote a book about the wreck, "The Triumph of Politics." The title tells the tale. Politics won out over sound fiscal principles. "Deficits don't matter," said Cheney. Which means debt doesn't matter. And if debt doesn't matter...what kind of a world do we live in? But thenceforth, neither Republican nor Democratic administration stood in the way of the great credit bubble.
Stockman was soon out of a job on Capitol Hill. He went to Wall Street, where he witnessed, first hand, the other side of the Great Deformation. With an almost infinite amount of credit to work with, Wall Street quickly rose to the challenge. It peddled debt to everyone - governments, corporations, and households. Americans took the bait...spending, on average, about $1 trillion more per year than they earned, from Ronald Reagan's first inauguration until 2014. Their lifestyles - and Wall Street's earnings - came to depend on it. From about 10% of total corporate earnings in the '60s and '70s, Wall Street's share rose to 40% by 2007. Bonuses rose into the millions...as hedge fund managers and bankers pushed the old industrial tycoons out of their stately Greenwich, CT, homes.
Stockman knows the story intimately. He lived it. He tells it in detail in his book. About which more anon.
Let's turn to Kaul. We met him in India, where he is a writer with a deep knowledge and keen interest in political economy. In his book, he generously credits our visit with having "opened up a whole new world to me." This is a reflection more on the world he lived in than on our ability to open it up. He - a literate, intelligent, commentator for India's largest economic journals - was unaware that there was another way to understand what was going on.
We take it for granted that the financial authorities - in practically every major economy save Deutschland - are either numbskulls or knaves, and probably both. We have been observing their handiwork...poking at it...turning it over with a stick...and beating on it for 15 years. We forget that most people really have no idea of how it works. And why should they? Central bank monetary policy is as mysterious as the virgin birth or the exact chemical formula for spam, as far as they are concerned.
Kaul takes a longer and broader view of how it all came about. The feds - led by those in the US -- have created an immense bubble, with total worldwide debt now over $100 trillion. This was not done overnight. It was more than 30 years that the US federal government began running deficits year after year. It was almost 50 years that the dollar's golden anchor was given the heave-ho, leaving the whole world to float on a sea of paper money. And it was 65 years since the top of the last bond bull market.
These trends - so long, so deep, and so pervasive - have convinced most of the world that our financial world is 'normal.' Won't they be surprised when they find out how strange and transitory it really is!
"Various experts have come up with various reasons behind the financial crisis [of 2008-09]," writes Vivek. "Some feel the crisis was because Wall Street was greedy. But then the question to as is: when was Wall Street not greedy? And given this why didn't financial crises happen all the time?"
They didn't happen all the time because never before in the history of man have the entire world's finances been so distorted by debt. Debt is what Wall Street sold. Debt is what Washington wanted. And debt is how the elite transferred wealth from the public to themselves. Janet Yellen et al transferred $3.6 trillion from the public (where else could it come from?) to the very special elite. They are richer. The public is poorer. And it looks like she has gotten away with it.
But the crisis of '08-'09 was not the end of the debt bubble story. It was the beginning.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.