Have central banks added to the world's wealth?

Apr 2, 2013

Buenos Aires, Argentina

Markets were mostly closed on Friday. When they re-opened on Monday, investors seemed unmotivated. Neither the Dow nor the price of gold moved appreciably. Gold ended the day right on the $1,600 mark.

Not much to report, in other words.

Here in Argentina, most things were closed on Monday...and closed again today, too.

What do these Argentines think they are...French?

We wandered the streets. Here in the Palermo Soho section of Buenos Aires, there were thousands of people window-shopping, eating in restaurants, having a drink in an outdoor cafe.

Inflation is running about 30% a year. The government is proposing to use citizens' pension funds to pay off its creditors. You get 50% more for your money if you trade your dollars for pesos on the black market. And experts are predicting another big devaluation of the peso after the October elections.

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"The Argentine economy has been supported by strong farm sector prices," reports the local paper. "High agricultural prices should help support the peso and the Kirchner government."

People on the streets seem to have money to spend. And they are eager to spend it.

"Are you kidding," said an Argentine friend. "Nobody wants to save pesos. You get them. You spend them."

"I've seen this show before," said another friend. "I was here in Argentina in the '80s - when we had inflation of 1,000% per month. And I was in Moscow when the Soviet Union fell apart. Inflation hit about 800% in 1993. I see signs of a big take-off in inflation again. Watch out."

So far, the quality of life here must be among the highest in the world. There are dozens of restaurants within a five-minute walk. You can sit outside. The weather is nice. And prices are cheap, if you convert your money on the black market.

But the quality of life is more than just sitting in outdoor cafes drinking cafe con leche. Being able to work is important too...and so is being able to keep your money. You need to be able to save money...and then, you'll have enough money to be able to hang out in outdoor cafes!

The world is a rich place. It is so rich that it can afford more and more people who don't have to work and more and more people - like Ben Bernanke - whose work actually reduces standards of living for practically everyone.

The waiter who brings your morning coffee is providing a valuable service. The plumber who makes sure your water flows, is also giving you something of value. So is the autoworker who welded together your automobile.

All increase the real wealth of the planet.

But Bernanke? Is there any evidence than any central banker from the beginning of time until the 2nd of April, 2013, added a centime or a farthing to the wealth of the world?

Not that we know of!

Instead, Bernanke fiddles the money supply...jiggles interest rates...and generally diddles the economy. You might say that if it weren't for his jiggling and diddling and so on that the 'crisis would be worse' or even that 'we would have had a depression.' But you might also say that if he hadn't been diddling and fiddling with it, we wouldn't have had a financial crisis in the first place.

How about Nancy Pelosi or Graham Lindsey? Do they provide a useful service? Do they make the world richer...or better...in any way at all? Are they productive members of society, or blood-sucking parasites?

It seems obvious here: Argentine politicians do not add value. They subtract it. They spend money that is not theirs, wealth they never created. They drain away the real wealth of the world by transferring money from those who earn it to those who consume it. Then, it is gone.

Is it any different in North America?

'You get what you pay for,' said Milton Friedman. You pay for zombies; you get all you want - and then some.

What about tax lawyers? People on disability? Defense contractors?

Ah ha...you will say that defense contractors provide a useful service. Without their work, the US would be attacked and invaded.

In the 1930s, major industrial nations were on the march...and there was at least some remote danger that they could march against the USA. Japan did bomb Pearl Harbor, but never posed much of a threat to the continental US. Germany couldn't even conquer Britain, let along America.

The US spent 1% of GDP on defense, which was probably more than enough.

Today, the Pentagon consumes nearly 5 times as much. There are no hostile, aggressive nations endangering the peace of the world - as far as we know. So, for our purposes, we assume that the Pentagon wastes an amount equivalent to about 4% of GDP. That is, it takes wealth from the productive sector and destroys it. Maybe worse. By overspending on 'security' the US armed forces may actually make Americans less secure.

But wait...we're not going to spend our time complaining about the zombies.

Instead, we're going to come to the point...

    ...which is, that no matter how rich a place is, it can always be impoverished by careful government planning!

Argentina is a rich country. It has boomed in spite of itself. Thanks to a very productive agricultural sector, it earns enough revenue to keep the economy functioning and keep the government supplied with pay-off loot.

But as revenues rise, so do the number of people who want to be paid off. Unions, the poor, the rich... No matter how much they get, the authorities will find ways to spend more. This is how they caused a disaster in the '80s...again at the end of the '90s. Is Argentina ready for another financial crisis? Maybe.

The US is an even richer country...but not so rich that a determined government cannot ruin it. Maybe it already has.

Stay tuned.

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

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