The US financial industry should have been spanked hard

Jun 4, 2014

Normandy, France

Stocks off a little yesterday. Gold flat.

Around the world, stocks have been doing well. Even Russian stocks are moving up fast.

Why? Maybe the fact that world debt levels are hitting mega highs has something to do with it. Over $100 trillion was the last estimate we saw and rising rapidly.

Meanwhile, what worries me? Why bother? Volatility is very low. The VIX measures investors' worry level. When they don't react to the news, it suggests that they have their money where they feel comfortable with it. They're not fearful. And not necessarily greedy, either. They are just complacent, sure that nothing bad will happen.

The source of that complacence is not hard to find. Governments and central bankers are all working night and day to make sure nothing changes. As we keep saying, the US financial industry should have been spanked hard in the crisis of '08. Instead, like a spoiled rich kid after a traffic accident, the financial industry got bailed out of jail, and was given the keys to a new car...with a bottle of whisky under the seat!

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When the price of money goes down the banks' profit margins go up; by moving to zero interest rates, the Fed gave them higher earnings. And by guaranteeing the debt of the weakest institutions, the Fed gave big bonuses to the worst managers.

Now, the alcohol is taking effect. All around the world markets stagger. Economies slur their words. Investors have severe memory loss. Businessmen can't tell up from down. And the poor consumer gets a headache every time he checks his bank balance.

We have tried to chronicle the oddities of today's zero-interest world. Everywhere we look we see something strange...something that shouldn't exist in a sober world.

The talking heads and bleeding hearts are up in arms about 'inequality.' But the real cause of inequality, as we have illustrated, is largely the feds' bubbly credit booze. Some people have access to the free money. Others don't.

Those with the access tend to be in the financial industry or the financial elite of the country. It is no wonder the rich get richer; the game is rigged.

We saw that most recently in the housing market. Supposedly, housing is going back up. But when you look at the market more closely you find that houses that sell to the 1% are soaring. Sales volumes and prices for the 99% -- the overwhelming majority of the population - are flat or falling.

Likewise, the averages distort the real picture in earnings and household wealth too. Huge increases for the 1% pull the averages up. But the typical person...and the typical household...are actually slipping backward.

As we reported yesterday:

    Since the feds took gold out of the currency - in 1968 - the typical man has lost about $3,000 of income every decade, when the numbers are adjusted for the "official" inflation rate. Adjust them to a more realistic measure of inflation, and the loss has been closer to $5,000 a decade.
Even on the official numbers, since the end of the recession of 2009, the typical household has lost $5,000 in wealth.

Low interest rates have made it possible for corporations to borrow more money than ever before. There's now more corporate debt outstanding than mortgaged-backed securities.

And guess which corporations benefit most from these low rates? The weakest borrowers, of course. They are the ones that normally pay most for credit. It's as if they had the worst driving records and pay most for car insurance. Now, with all rates squeezed like passengers in a Japanese subway car, the unwashed travelers are cheek by jowl with the well-run, prudent, and well-funded borrowers.

The curiosities continue all through the marketplace...with dozens of barely-profitable billion-dollar companies that wouldn't exist at all were it not for nearly-free capital.

Okay so far...

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

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