Big Bang Theory

Mar 10, 2014

Baltimore, Maryland

Nihilo ex nihilo fit. Nothing comes from nothing. Thomas Aquinas and St. Augustine famously used the dictum to prove that the universe needed a "first mover," to get things going.

Even if the whole thing began with a Big Bang, they argued, it still needed a banger to bang it. Who? God.

We don't know. But our mouth dropped when we saw how the bangers over at the Federal Reserve have added $20 trillion in US household wealth since 2009 - setting yet another new record. The Wall Street Journal:

    American's wealth hit the highest level ever last year, according to data released Thursday, reflecting a surge in the value of stocks and homes that has boosted the most affluent US households.
The net worth of US households and non-profit institutions rose by $10 trillion in 2013 to more than $80 trillion total. From the depths of the crisis of '08-'09, US households added $20 trillion.

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Ex nihilo? Who cares. It's there. It's spendable.

And yet...what kind of wealth comes from nothing? Is it solid and real, like the earth, the moon and the stars? Or is it something else?

It is clearly something else. But what?

Let's begin by looking at where it comes from. Not from the hand of the Almighty, of course...

We are led to believe that the Fed's policies are designed to produce a generalized prosperity; the Fed keeps rates near zero so the whole economy will benefit. But it is not true. Only some prosper. The WSJ headline said so itself:

    US Wealth Rises, But Not All Benefit
The Fed's activist policies distort and corrupt the economy. First, prices are bent. Then, taking their cues from bad prices, bad decisions are made. Before you know it, everything is twisted in one direction or another.

As we noted on Friday, the Fed is largely to blame for the dinosaur houses we see all over America. Low rates and rising prices made people think that the more house you had the more money you would make. We didn't mention it last week, but factories in China, too, can trace their genesis to the Fed's low-down interest rate policy. Americans were lured to borrow and spend; Chinese manufacturers benefited. Record high earnings, record high margin accounts, record high junk bond issuance, record household wealth gains - all are products of Fed policies.

We quote from an as-yet unpublished book, "Paper Money Collapse." The author, Detlev Schlichter, was kind enough to send us an advance copy:

    [The financial authorities] can never enhance all economic activity evenly or 'stimulate' the economy in some all-encompassing, general way. Every injection of new money must lead to changes in resource use, to a redirection of economic activity from some areas to others, and change income and wealth distribution. Inflows of new money inevitably change the economy and must create winners and losers.
That $20 trillion extra is in the hands of America's winners. It is not real, new wealth. Little was added to real GDP...real incomes went down. Instead, it was merely a transfer of wealth. Owners of stocks and houses got richer. Wage earners and savers got poorer.

We have some advice for those on the receiving end of the stock market bonanza: take your money off the table before it disappears. After all, it is only a claim on real wealth, not real wealth itself. And that claim will expire worthless when the Fed changes its policies. The Fed giveth and the Fed taketh away.

Either the Fed will taper. Or it will eventually lose control of interest rates. And when they rise, all the broken records we have been citing become like broken bottles in a street fight. Somebody is gonna get hurt.

For the moment, the Fed governors are more powerful than God. Since the beginning of the universe, it took approximately 13,798,000,000 years for the market value of all the world's assets to reach $20 trillion. The Fed's big bang accomplished the trick in only 6 years, start to finish.

That does it for us. No more worshipping guy who has been dead for 2,000 years...or his dad, for that matter. In this Lenten Season, we bow to no man. But for the lady who runs the Fed, the whole economy bends, in whatever direction she commands.

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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2 Responses to "Big Bang Theory"


Mar 17, 2014

I was a fan of yours - until I understood what inflation targeting really is. Instead of pegging the currency to gold or silver, you peg it to the value of a basket of goods that the dollar can buy - the CPI. And so long as the value of those foods does not decline by more than 2% a year! then print as much money as you can. But once it gets over the 2% target then you have to take out the excess cash until inflation drops to 2%.



Mar 10, 2014

One of my most splendid reads of the day.

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