The most expensive proposal, yet...

Feb 9, 2015

- By Bill Bonner

Bill Bonner
Sao Paulo, Brazil

Dear Diary,

Nafea faa ipoipo?

Before we get to that, we note that the Dow fell a modest 60 points on Friday. Gold was unchanged.

Not to leave our dear Diary readers in doubt, we expect a crack...or even a crash...in stocks sometime this year. We don't, however, think that will be the end of the story. Instead, we suspect it will mark the end of one chapter and the beginning of another --- the final chapter in the credit bubble story that began in the early '70s.

It's a long story. And it's a big story.

Too bad it has been so overshadowed. Watergate...Vietnam...massacres from Hanoi to Bombay, Boy George and J-Lo. The plain people have time for the World Series and the Super Bowl...certainly not for the Super Bubble, even if it should be much more important to them.

Besides, the Super Bubble story has yet to be told. The best we can do is to give it to you in little bits and pieces, as we uncover them. Meanwhile...

In case your Tahitian is foggy, we give you a translation of Nafea faa ipoipo? : 'When will you marry?'

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It now has the distinction of being the most expensive work of art ever sold.

Painted by Paul Gaugin in 1892, it brought $300 million at auction on Friday.

What makes it so valuable? "Gaugin won't paint any more pictures," you may say. But that could be said of any dead artist.

"He was a great genuis," you may add. But if he was a great artist, he was no less of a great artist 10 or 50 years ago, when his paintings sold for a fraction of last week's price.

Yes, he is dead. And yes, maybe he was a genius...but what makes a run-of-the-mill work by a Frenchman with rigor mortis so valuable?

© Wikimedia Commons | Paul Gauguin's 1892 oil painting "Nafea Faa Ipoipo" (When Will You Marry?)

We propose a better explanation: the price has been refracted by the worldwide credit bubble. In other words, this is yet another thing that makes us say 'huh?'

All we can do is laugh. The rich get richer. Central banks see to that. They lend money they never had at extraordinarily low rates and push up rich peoples' asset prices. Then, what do the rich do with this magic wealth? Do they invest in new factories, hire people and make the world a more prosperous place?

Why bother? The world already has too much capacity - thanks to too much credit (and debt) already. Businessmen, investors, and speculators have been able to borrow with hardly a care. They've built factories in China, sunk oil wells in Texas, and produced cars out the wazoo.

Now, what can they do...but look for ways to impress each other?

Every day, the whole thing becomes more astonishing. Central banks buy assets from intermediary banks (QE). This puts more debt on the central bank balances sheets and makes more cash available for investors, speculators and art buyers.

For months, if not years, serious economists concerned themselves about what would happen next, when central banks had to deflate the bubble by selling their bonds back into the private market . That is the only way to reduce the base money supply and return things to normal. And things have to return to normal somehow, don't they?

Now, they scarcely bother to think about it. For normal is not coming anytime soon. Central banks are never going to sell their assets (bonds) back into the market. The air will not deflate out of the credit bubble. Not voluntarily. Instead, central banks will continue buying debt - principally from central governments - put it in their vaults and throw away the key. They know perfectly well that they can never unload so many bonds without causing a crash in the debt market. And guess what? The interest they receive from government bonds is paid back to the payer - the government itself.

In effect, the more central banks buy debt from governments, the more government debt goes down. Can you believe it? What an elegant solution to the government debt/GDP problem - just sell it to the central bank and forget about it! What a beautiful system. What a scam.

Central banks have already absorbed some $10 trillion in debt - mostly from governments. And most likely, it will never come on the market again. What will happen to it? It will go back whence it came -- vanishing into thin air.

What this means is still coming into focus. All we know so far is that things are getting farther and farther out of whack. Somehow, sometime, someday they will have to get back into whack. We wonder how much "Nafea faa ipoipo" will be worth then?

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

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1 Responses to "The most expensive proposal, yet..."

sanjay j

Feb 9, 2015

let me be a pessimist. due to this super bubble in case of mother of all crashes what will survive? W Buffet stocks? gold? real estate? developing country stocks? currency, nothing?

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