No such thing as a free lunch... who says so?

Feb 24, 2015

- By Bill Bonner

Bill Bonner
Buenos Aires, Argentina

Dear Diary,

Yes, we were in London, taking care of business. Now, we're back in Buenos Aires.

We've tried medication. We've tried prayer. We've tried heavy drinking - all in an effort understand how our crazy money system really works. And where it leads. You'd think it would be easy. It's just Central Banking 101, no?

Well, no. It is squirrely...and diabolically subtle; we doubt anyone really understands it - especially those who are supposed to control it.

The basic unit for the system is a type of money that the world has never really had before - the post-1971 dollar. It's pure paper money...worth only as much as people think it is worth...and managed by people who think it should be worth less and less as time goes by.

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Who are these people? Who do they work for? You might say they are "public servants." But that implies they are working on the public's behalf. Nooooosireee... They are employees of the banking cartel, owned by private banks. These banks have a license to print money - to create money out of nowhere and lend it into existence, earning money from the transaction. It is no surprise that their share of US corporate profits has jumped to 4 times what it was before the new money was introduced.

What a business! Their cost of goods sold? Next to nothing. A few strokes on a keyboard...and millions...billions...heck, trillions of dollars can be created.

They just have to be careful not to go overboard. Money is only valuable as long as there is not too much of it. The market can absorb a little counterfeited money, but there's a limit.

That limit has been greatly increased, thanks to...

  1. A worldwide over-capacity of output, financed by previous lending, and

  2. A huge glut of low priced labor, also largely brought forth by the credit expansion of the last 30 years.
Without these unique circumstances, central banks' extremely irresponsible policies - ZIRP and QE - would probably have caused inflation to rise to the double-digit range already...maybe higher.

The authorities must feel like a college student who's found his professor's exam questions. He knows he's going to get away with something. And now, since there are still about 1billion people who live on $1 or less per day, central bankers expect to get away with a lot more. Not only that, they're lauded as heroes for it.

And now there's no further need to worry about how much money they print or how much money the government borrows. They will buy the government's bonds...put them in their vaults...return the interest payments...and the whole thing will be forgotten.

In effect, they are doing something that previous central bankers could only dream of doing - printing money without causing inflation. Politicians, too, will enjoy this once-in-a-lifetime opportunity for recklessness. They will be able to do what none could do before - borrow money without having to worry about ever paying it back.

We have not seen it in the press yet, but it should be coming soon. Commentators and kibitzers are bound to urge Germany to lighten up:

"Why should Greece have to repay those loans, anyway? Where did the money come from? It didn't come from German taxpayers. It came from nowhere, like all the rest of the world's money. And so what if it isn't repaid? What difference will it make? None."

Our friend, macro-economist Richard Duncan, whose analysis of liquidity levels helps us understand the real effect of QE, believes the central bank will and should buy up 100% of government bonds...and then simply set fire to them.

Too much government debt? Problem solved!

Hallelujah. Hallelujah. Nirvana for public finance has arrived. Heaven has come for politicians. Who says there is no such thing as a free lunch?

We doubt that either the public or the politicians has yet fully come to terms with this. We've just realized it ourselves. But eventually they'll start lining up. Budget restraint will be yesterday's worry...and government deficits and debt will be, effectively, written off and forgotten. The feds will be eating breakfast, lunch and dinner on money that never, ever existed...and never will be paid back.

But wait? Is that too good to be true?

Yep. Of course.

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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