Feds Go Full Retard - II - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 15 July 2014
Feds Go Full Retard - II A  A  A

Bonn, Germany

When we left off yesterday, we were explaining how the feds had un-learned the three critical lessons of more than 2,000 years of market history:

  1. Make sure the money is backed by gold (otherwise it loses its value)
  2. Don't let the government spend too much money (otherwise it will cause havoc)
  3. Don't try to centrally plan an economy...especially not with dictated prices (or you'll soon have a wealth-destroying mess on your hands)
Gold was taken out of the money by two measures - one in '68...the other in '71.

The US Federal budget was last balanced (not counting Social Security contributions) under Jimmy Carter. It hasn't been balanced since.

And after 1980, when the Republican Party became the party of big spenders, there was no hope of controlling federal deficits. Both the major parties were in favor of spending more than the government collected in taxes. The Republicans wanted to spend on an activist agenda overseas. The Democrats wanted to spend on an activist agenda at home. In the resulting compromise, they agreed to overspend on both.

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Meanwhile, prices were manipulated lightly before...then heavily after...the Panic of '87. Nixon had tried general price controls in '71. Those were quietly abandoned and quickly forgotten. But after the Panic of '87, Alan Greenspan began to manage the one, most important price in capitalism: the price of capital. Naturally, he and his successors managed it in a downward direction, until it hit zero in 2009. That's where the Fed's key rate has been for the last five and a half years.

As the price of credit went down, the price of assets went up. One bubble followed another. Techs in 2000. Houses in 2007. Now just about everything is inflating fast. Even consumer prices are beginning to show signs of bloating.

This inflation was more or less what the Feds were looking for. They wanted to mislead the economy into thinking that there was more 'demand' than there really was. They also wanted people to think they were richer than they really were.

On this last objective they were rewarded with rampant speculation, risk taking, complacency, and grotesque distortions. Putting more money in the hands of the moneyed classes...led the rich to feel a little cavalier about it. The fix was in and they knew it. And they quickly realized that speculating on further distortions was a better use of their time and money than in actually investing in the kind of plant, equipment and new ventures that would create more wealth and more demand.

This was the most retarded part of the feds' program. By making it appear that real capital had no value (wasn't the price of it near zero?), they gave investors little incentive to create more of it. Instead, speculators took their cheap money and used it for various forms of gambling and financial engineering. Buy-backs, buy-outs, LBOs, M&A...corporate debt rose as corporate managers figured out ways to get more fast money into their own pockets. One of the classics was to buy a corporation...then, .have the corporation borrow heavily (which even the junkiest business could do)...and then pay out huge fees to managers and manipulators. Lending standards are so lax...and lenders so forgiving, the sharpies can get away with almost anything. David Stockman elaborates:
    ... it is plainly evident that most of the massive expansion of business credit since the last peak has gone into...stock buybacks, LBO's and cash M&A deals- -not expansion of productive business assets. Indeed, total non-financial business credit outstanding has risen from $11 trillion in December 2007 to $13.8 trillion at present, or by 25%, yet real business investment in plants and equipment is still $70 billion or 5% below its pre-crisis peak.
None of this should be surprising. It's what you get when you lend too much money and rates that are too low. It's like selling diamonds too cheaply; pretty soon customers will be glueing to the backs of their blue jeans.

And the result? Less real demand. Remember Say's Law: real demand comes from real output...not just printing money. If you could boost real demand simply by printing money, we'd all be rich already.

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

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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