- By Bill Bonner
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.
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:
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:
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.