Cronies & their dependency on borrowed money - The Daily Reckoning

Cronies & their dependency on borrowed money

May 29, 2015

- By Bill Bonner

Bill Bonner
Geneva, Switzerland

Dear Diary,

We came to Switzerland to visit our money. Many years ago, we opened an account with one of the country's oldest and most prestigious banks. Occasionally - usually in spring, when we can find white asparagus with cream sauce in the restaurants- we come to say hello.

Yesterday's reunion was neither filled with joy nor with disappointment. Our portfolio - Swiss francs, gold, and a few stocks - has gone up 2.5% so far this year. Not bad. Not good. Satisfactory. But then, you don't use a Swiss account to make money. Or to hide money. Or avoid taxes. Those days are long gone. You put money in Switzerland in the single hope that it will still be there when you need it, say, 30 years later.

"I wouldn't be too sure," said our Swiss banker. "Our central bank has done more than any of them. It bought foreign assets in order to try to keep the Swiss franc down relative to the euro. Now, it has something like 500 billion worth of risky positions. Really, it's like the biggest hedge fund in Switzerland."

Like everyone else in the developed world, the Swiss have plenty of debt.

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We pointed to a house on the side of the lake. "How much is a place like that?"

It was a rather ordinary house, with no particular distinction, except that it must have had a nice view of Lake Geneva.

"About $10 million. But if you're borrowing money at're talking about a monthly mortgage of about $8,000. And some of these mortgages are going down to zero. I mean, if the bank borrows at a negative rate, they're happy to lend you the money for nothing. It's gotten really crazy."

Janet Yellen is said to be concerned. She is worried that if interest rates are held artificially low for too long, it will cause 'distortions' in the economy.

We have news for her; the whole world economy is already as twisted up as a pretzel.

Houses are very expensive here. Homeowners tend to have big, long-term mortgages at low rates. And like everyone else on the planet, they don't want their bonds to go down or their currency to go up.

Until recently, Switzerland fought its own battles in the 'currency wars', trying to keep the Swiss franc from rising so that Swiss companies could continue to sell their watches and machine tools to the rest of Europe.

Then, it gave up. Switzerland is a small country in the heart of Europe. When it learned that Mario Draghi was bringing out the big guns - a trillion dollar's worth of QE - the Swiss raised the white flag. No more would they intervene in the currency markets, they said. The Swiss franc soared. Our account moved up.

Today, on the shores of Lake Geneva, people seem as prosperous as ever. The streets are clean. The trains run on time. The clocks are set to the right hour. And when you go to a good Swiss restaurant, they offer you a second helping. In short, Switzerland appears to have done for itself what it did for our money - it hasn't changed.

But even Switzerland has been corrupted by the financial system. It too carries such a huge burden of debt, it can't think straight.

We've been trying to find something good to say about our own generation...America's 'baby boomers,' who have dominated life in the US at least for the last 30 years. But we keep running into the same problem. We have been so eager to protect our perks, power, and profits, we have perverted the entire system.

Capitalism takes you into the future...with innovation, failure, and surprise. You invest, you lose your money, you try something different and you stumble forward. Capitalism is constantly burying its mistakes and discovering tomorrow.

Cronyism, on the other hand, keeps you in the past. It is today and yesterday trying to stop tomorrow from happening. Bribing public officials (they are remarkably cheap... In terms of return on investment nothing else comes close). Restricting...regulating...controlling...central planning... Bailing out well-established businesses... Rewarding stockholders... Paying off voters, lobbyists, special interests... And distorting the political establishment itself, with its geriatric candidates and tired themes...

And guess what? Cronyism depends on the credit bubble. The future is where new wealth is created. When you try to stop or twist the future in to the shape you want, you prevent this wealth from ever happening. So, you switch from creating wealth now to taking wealth from the future so you can consume it now. That's how the credit bubble got so big...and that's why almost nobody wants to see it pop.

Cronies owe money. They borrow money. They depend on borrowed money for their budgets, their spending, their bonuses and their asset prices...their welfare checks and their special privileges.

They all depend so heavily on borrowing that few of them - whether in academia, media, business, finance or government - can't see the truth, let alone speak it. They are all paid not to see it. And if they do see it, they keep their mouths shut.

Who is left on the other side? Who is left to say something?

Tune in on Monday.

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

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