The difference between capital and credit

Apr 7, 2015

- By Bill Bonner

Bill Bonner
Gualfin, Argentina

Dear Diary,

The US employment report came out on Friday. The feds and their cronies on Wall Street spent the weekend trying to put a bag over its head.

Mohamed A. El-Erian had a quick reaction:

    The U.S. employment machine notably lost momentum in March, with just 126,000 new jobs added -- far fewer than the consensus expectation of around 250,000 -- and with revisions erasing 69,000 from the previous two months' total, according to the Labor Department. The lackluster result ends an impressive 12-month run of job gains in excess of 200,000.

    Having vastly lagged the types of gains that could be expected on the basis of historical models, wage growth edged slightly higher in March. With a gain of 7 cents an hour for March, the annual increase in average hourly earnings now amounts to 2.1 percent. Any positive impact on consumption, however, was offset by the slight decline fall in the average workweek.

Yes, the employment numbers were ugly. They confirm the other evidence coming in from hill and dale, industry and commerce, households all across the nation and all the ships at sea: this is no ordinary recovery. In fact, it's no recovery at all. It is strange and unnatural, like the victim of a quack plastic surgeon.

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But the damage was not an accident. No slip of the hand or equipment malfunction produced this horror. It was the result of economic grifters plying a fraudulent trade.

The Dow rose 118 points in Monday trading. This modest increase was neither the result of honest investing nor any serious assessment of the economic future. Instead, it was attributed, by Bloomberg, to scammery from the Fed:

    New York Fed President William Dudley said the pace of rate increases is likely to be "shallow" once the Fed starts to tighten. His comments were the first from the inner core of the Fed's leadership since a government report showed payrolls expanded less than forecast in March. While data signaling rates near zero for longer have previously been welcomed by American equity investors, concern is building that economic weakness will worsen the outlook for corporate profits.
Get it? 'Shallow' rate increases? Translation: savers will get nothing for their forbearance and discipline for a long, long time. Instead, the money that should be rightfully theirs will be transferred to the rich...and to gamblers and speculators...as it has for the last 6 years.

Back to Mr. El-Erian who, having seen the evidence of this botched operation, then goes goofy on us. He calls upon the authorities to 'do something:'

As if they hadn't done enough already! The feds were the ones who injected the credit silicon, hardened the upper lip and created the Monster of '08. And then, when the nearest of kin started wretching into the hospital wastebaskets, they went back to work. Now, the economy is more grotesque than ever.

But here's Mr. El-Erian, asking for more:

    ...how much more the U.S. economy could -- and should -- achieve if it weren't for political dysfunction in Washington and a "do little" Congress that preclude more comprehensive structural reforms, infrastructure spending and a more responsive fiscal policy.
And he's not the only one. One of our favorite knife men, Larry Summers, is in the Financial Times, offering to perform more nip and tuck on the whole world economy.

It was Summers, as Secretary of the Treasury, who helped stitch this Frankenstein world economy together. He and his fellow surgeons are responsible for its unsightly lumps and inhuman shape. Their trillions of EZ credit dollars leaked all over, causing bulges almost everywhere. Does China have too much industrial capacity? Does the world have a glut of energy? Are governments far too deeply in debt? And corporations? And households? Didn't nearly every central bank in the world try to stimulate demand with cheap credit...thus laying on a burden of debt so heavy that it now threatens the entire world economy?

Mr. Summers, waves his scalpel in the air and can't wait to get the patient back on the table. He worries that the US should have given the IMF more money, which would have "bolstered confidence in the global economy."

He thinks the world's problem is that "capital is abundant, deflationary pressures are substantial and demand could be in short supply for quite some time."

Poor Mr. Summers can't tell the difference between capital and credit. Capital - what you get from saving money and investing it wisely - is an economy's real muscle. EZ credit - what the quacks pump into to flabby tissue to try to make things look more fetching - is what has turned the economy into such a freak.

Alas, failing to give more money to the IMF may mean "the US will not be in a position to shape the global economic system," says Summers.

That would be a real pity.

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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