The effects of less fabricated money...

Nov 11, 2014

New York, New York

Dear Diary,

Stocks are trading at a new record. The Dow went up yesterday. Works of art hit a new record too. Here's the Bloomberg report:

    An almost 6-foot-tall Jeff Koons white plaster sculpture of a woman holding three Hermes Birkin bags sold for $4 million last night at a charity auction in New York, 60 percent more than similar works fetched in the past.

    The sale of "Gazing Ball (Charity)" followed last week's tally of $673 million for Impressionist and modern art sold at Manhattan auctions, setting the stage for a potential record season if high prices continue this week.

    "I'm long-term bullish on the art market," Rajiv Chaudhri, president of Sunsara Capital LLC in New York and an art collector, said at the event at the Four Seasons restaurant in New York. "Prices will keep moving up. There is still so much private wealth being created. Art is the ultimate asset."

Mr. Chaudhri is probably wrong about several things. Private wealth is not being created...it is being fabricated. Art is not the ultimate asset, but probably a poor and unreliable one. And the art market is probably not going up the way he imagines. When the money drains away, the aficionados will be punished. They'll be stuck with it!

Still, he's right about one thing. There's a lot of money around.

Yes, rich people have gotten a lot richer in the last few years. The top 1% now own 35% of America's wealth. The bottom 80% only has 11% of it.

Where did all this money come from? We've seen estimates for the effect of QE on America's balance sheets. Over the last 5 years QE has added between $2.5 trillion...to as high as $9 trillion. Now, with so much loose change in their pockets, the rich can bid for Jeff Koons' confections...Manhattan condos...or whatever they want. But that still leaves the question, where does the money come from?

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You already know the answer - from the central banks. And you know where they got it - from nowhere.

Central banks have created oceans of liquidity. Like water, it had to go somewhere. In the event, it went into stocks, houses, art...and many other things. And now that the QE program is officially on "pause" in America, the Japanese and the Europeans are taking over.

"ECB council backs 1 trillion eurozone rescue," was the headline in the Financial Times as last week came to a close.

    "Mario Draghi has secured unanimous support from the European Central Bank's governing council to inject 1 trillion euros to rescue the Eurozone economy from stagnation..." continues the report.
And that comes on the heels of remarkable reports from Japan. The Bank of Japan has a new governor, Haruhiko Kuroda. Apparently, he is even more reckless and retarded than the prime minister, Shinzo Abe. Mr. Kuroda has upped central bank buying of government bonds to 80 trillion yen annually. And part of the deal includes direct purchases of Japanese stocks.

'Hey...you want a wealth effect? I'll give you a wealth effect...!'

The Japanese are always the trendsetters, at least in the world of suicidal financial policies. So, it probably won't be long before the US central bank gets back into the money printing business. Most likely, they'll wait for the stock market to crack. Then, they too could begin buying stocks directly.

The US stock market will fall because there is less and less fabricated money holding it up. The $3.6 trillion in QE pushed up stock prices 130% over the last five years. But QE is, as we said, now on 'pause.' And the money printing operations in Japan and Europe will probably not leak fast enough into the US to provide to keep the water level high. Instead, liquidity will drain away...gradually...and then suddenly.

Not only has QE stopped, so has the big boost that the US used to get from its trade deficits. At its peak, America's current account deficit reached upwards to $800 billion. That money - largely credit financed -- went out of the US to buy foreign-made goods. Local central banks had to print their own money to buy up the dollars...and then had to reinvest these dollars back in the US. This was like QE before there was QE, says Richard Duncan. The US got a flood of liquidity from overseas money-printers. This is what inflated the stock market bubble of 1999 and then the housing and financial bubble of 2008.

But that's gone too. The current account deficit is only about half what it once was. And as America's oil industry coaxes more and more crude from the ground, there will be fewer US dollars headed overseas to buy energy and a lower current account deficit as a result. This will mean less buying of US assets by the foreigners...and 'excess liquidity' to float asset prices. The energy boom will not buoy up asset prices; it will help sink them.

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

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