Without so much credit... - The Daily Reckoning

Without so much credit...

Jan 13, 2015

- By Bill Bonner

Bill Bonner
Rancho Santana, Nicaragua

Dear Diary,

Stocks down 96 points on the Dow yesterday. Gold popped up $17.

Let us return to the scene of the crime in Paris, just one more time. Maybe we'll see a clue the authorities wanted to miss.

As long as America's accounts had to be settled in gold, neither new credit supply...nor the old fashioned money supply...were free from constraint. Both could go out and about town and have a good time. But when the party was over, they both had to go home and face an unforgiving and unyielding spouse, gold, to which they were bound in marriage.

Too bad. But the marriage broke down - after repeated infidelities - and was finally annulled by Richard Nixon in 1971.

The new credit-based money system was very different. It was free and fun loving. It could stay out all night, for as long as it chose, and not get in trouble with anyone.

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Wall Street, no slouch when it comes to making money, saw the potential almost immediately. Stirring its innovative and larcenous spirits, it figured out how to make use of the new liberated currency a hundred ways from Sunday.

The latest evidence, for example, tells us that it has just done a job on auto loans.

No need for panic, of course. Auto loans are not mortgage loans. And an exploding bubble in auto finance is not likely to knock down the whole economy. There are less than $1 trillion of auto loans outstanding. Still, auto loans, student loans, oil slick loans, emerging market loans, peripheral European loans - a trillion here, a trillion there. Pretty soon, you're talking real money!

The Wall Street Journal reports on the deteriorating subprime auto loans:

    More than 8.4% of borrowers with weak credit scores who took out loans in the first quarter of 2014 had missed payments by November, according to the Moody's analysis of Equifax credit-reporting data. That was the highest level since 2008, when early delinquencies for subprime borrowers rose above 9%.
More than a third of the auto-loan market are now said to be subprime. Many of these loans will be uncollectable.

But let's not get distracted. We're talking about the perversion of a whole economy over a long period of time.

Since the '70s, more and more financial transactions owe their existence to 'money' that no one ever earned or saved - these new, loose dollars. Thirty five trillion dollars is our estimate of 'excess credit' created since the '70s. This is the amount of credit beyond what we would have if the ratio of credit to GDP had remained the same. Instead of credit to GDP at 140% -- where it had been for decades - the ratio rose to over 300%, where it is today.

This spending boosted activity of all sorts - including the ambitions of the government. The feds collected taxes on capital gains and incomes that would never have existed otherwise. When even that was not enough, the government borrowed money itself to cover the holes in its budget...and made promises that it couldn't possibly keep.

Government grew by offering more and more protection from more and more evils - from the North Koreans, Cubans, communists, marijuana, North Vietnamese, Iraqis, Afghanis, jidhadis, sickness, unemployment, poverty, illiteracy, discrimination...from lack of access to credit mortgage, rural telephone and electric service, broadband internet to whatever seemed popular or threatening at the time.

In France, government spending rose to 57% of GDP. In America, the percentage is lower, but it rises sharply when education and health care expenses are added - two industries that are still largely 'private" but heavily controlled by government. And when you add the cost of all the healthcare and retirement promises made by the US government to its voters, according to Professor Lawrence Kotlikoff, US federal debt exceeds to $212 trillion.

Not only was the economy perverted by this huge, whole industries were corrupted. Janine R. Wedel, writing in the Washington Post, explains that doctors have been suborned by the pharmaceutical business, retired generals have been bought by weapons manufacturers, and even economists' judgment - such as it was - has been bent in the direction of Wall Street:

    ...of 19 top academic economists tracked by a University of Massachusetts Amherst study. These economists promoted specific financial reform proposals in the media and advised governmental bodies such as congressional committees in the run-up to and just after the 2008 financial crisis - without disclosing their links to private financial institutions.
Without so much credit the world would still exist. But it wouldn't be the world we know today. Financial bubbles would still exist, even without the gigantic bubble in credit. But they would be smaller and less frequent. And Wall Street wouldn't be bidding so lustily for economists if it had to live on its pre-credit expansion earnings. Wall Street sells credit; as the market for loans increased so did the Street's profits - rising from barely 10% of corporate profits in the '60s to as much as 40% in 2007.

The US Empire would exist too -- even if the credit bubble never happened. But the Empire depends on debt financing. Without it, America would not be so eager to throw her weight around.

More to come...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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4 Responses to "Without so much credit..."


Jul 16, 2015

Bill - what exactly are you advocatibg other than pointing out probkems with current monetary system? Tell us 1 or 2 solutions to the challenges you are seeing in the system. Truth of the matter is that, going back to the gold standard in not practical due to several reasons (limited physical gold production and the uneven geographic distribution of gold deposits being the major ones).

Please provide some inputs on how to right the economic systems - we are equally tired of hearing about 'zombies' (you may have used that word a million times - thx) without any suggestions on an alternative framework



Jan 15, 2015

The situation in india is different. hardly one-two percent take loans and normally are conservative. The internal demand will save india from impending depression if the oil prices remain between 40-60 dollars for one more year

Like (1)

P C Chacko

Jan 14, 2015

Instead of writing history book and taking more about the past (past is a stale checque)please write in short what is to be done today and tomorrow

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yogendra pal singh

Jan 13, 2015

Indian situations do have few facts in common with U.S.A. Mind set of people is different. India have taken lot of time to realize that all aspect of life runs on material& money. On each step there is inertia/resistance to change.

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