Money for nothing and homes for free!

Apr 17, 2015

- By Bill Bonner

Bill Bonner
Gualfin, Argentina

Dear Diary,

The stranger things get, the stranger they are.

We were invited to lunch with our closest neighbors. We decided to go on horseback, training for a long ride coming up this weekend. It took 5 hours to reach next door. Then, another 5 hours to get back.

"Nothing was worse than the wine business in Argentina last year," said Raul, over lunch. Raul operates a vineyard in the neighboring valley. "We got paid about $2.50 per bottle and it cost about $3.50 to make a bottle."

"Hey..." we replied. "We grow grapes. We sold our white grapes for 18 cents a kilogram. At that price, they are barely worth picking."

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We'll be out of on the high plains Monday and Tuesday...

A friend proposed a long horseback trip. We agreed on 4 days, 10 hours per day, out to the "puna" - where the air is thin, the temperatures drop to minus 20 degrees Celcius...and the wind blows the spots off the cows.

Today, Maria, Jorge's wife brought over some spare clothes...including long-johns that she thought your editor might wear.

"It gets colder than you can imagine," she warned. Maria is our age. She's coming too. We'll let you know how it works out.

We would also like to preface today's Diary remarks with a clarification. We don't have anything against old people. And we don't have anything for high GDP growth rates either. But the two don't go together. ..

Some of this opinion comes from looking in the mirror. New products? New technology? New businesses? The older we get the less interest we have. When we learn a 'new' song on the guitar, for example, it is likely to be one written half a century ago. When we sit down to watch a movie, we're as likely to pick out an old Leslie Nielson "Naked Gun" episode as a new Hollywood release.

There are different stages in life...with different interests. One of our readers explains it:

We are in the Vanaprastha stage. Maybe that's what we're really doing out on this remote ranch, seeking god.

Is there anything wrong with that? Not that we know of. But it is not the way to boost GDP.

One reader pointed out that the 'problem' is not too many old people, it's too few young people. He has a point. More young people would be buying more new gadgets and gizmos...starting new business...buying houses and trading up...and generally helping to keep the money spinning.

But why do we care if the money spins? Why can't it stay still?

Ah...there's an even better question. Is a higher GDP better than a lower one? Not necessarily. We'd be just as happy to see things slow down a bit. But that's geezer talk, isn't it? So, let's move on...

In the markets, nothing much happened yesterday. Still, things got weirder and weirder. Things that should cost something are going for nothing. Things that are essentially worthless - like the shares of companies that make no money - are selling for fortunes.

Why? Because, if you can borrow a billion dollars and the bank pays you to take it, how much is that money really worth?

Yesterday, we were flummoxed. Today, after fasting and prayer...we are as confused as ever.

In Europe, mortgage rates are frequently floating...and frequently, the sea they float upon is one that goes up and down with the short term interest rates. Those rates are sinking so low that some homeowners are getting their houses for practically nothing. If, for example, you buy a house for $1 million...and you have an interest rate that is pegged to the inter-bank European 1-month lending rate...depending on the spread, you are likely paying a mortgage of around $250 a month. So how much is that house really worth? Is it worth $250 a month - about the same as a room in a rundown slum house in Baltimore - or is it really worth a million bucks?

Zero Hedge relayed a report from the New York Times about people who are getting their houses for free. What's the angle? They just don't pay for them.

    There are tens of thousands of homeowners who have missed more than five years of mortgage payments, many of them clustered in states like Florida, New Jersey and New York, where lenders must get judges to sign off on foreclosures.

    However, in a growing number of foreclosure cases filed when home prices collapsed during the financial crisis, lenders may never be able to seize the homes because the state statutes of limitations have been exceeded, according to interviews with housing lawyers and a review of state and federal court decisions.

But getting a house for free is small potatoes. How about getting $2.5 trillion for free?

That's the amount, so far, of US Treasury debt bought by the Fed. Okay, the banks owned it. Now the Fed owns it. Big deal?

Yes, a big deal, because when the Fed owns it the interest that the US government pays is returned to the government. In other words, the interest cost is zero.

And what about the principle? In effect, it is is vanishes, goes with the souls of the dead to a world we the living can never enter.

The point is clear: the government got $2.5 trillion for nothing. But the meaning of it? Impenetrable.

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

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