Have the Fed policies corrupted society?
11 AUGUST 2014
The Dow came back a bit on Friday, up 185 points. Gold lost $1.50.
We spent the weekend painting old windows, while observing the customs and culture of young adults. Several of our children have come to visit, bringing friends with them. We end up with a group of a dozen or so 20-somethings.
One of the young men here reminds us of French film star Alain Delon in the '60s. Tanned. With dark hair swept back. Dark eyes. Wearing a silk scarf.
One of the young women looks as though she could be a film star too. Dark, curly hair. Beautiful eyes. Flirtatious. Perhaps 'flighty' too.
Our first observation is that these young people get up late. We rarely lay eyes on them before noon. And sometimes, late night parties and jet lag combine to produce a bat-like schedule, where they sleep all day and come out after the sun goes down.
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Last night, they all went down to the pond and made a campfire. They were still there when we went to bed.
"Oh...come sit down...how nice to see you for breakfast," we said to one this morning. "Glad you got up early."
"Uh...no...I was just talking with Henry. Now I'm going to bed."
"You mean, you've been up all night?"
We have been exploring how the feds' funny money policies have corrupted our society in remarkable and unexpected ways. Could these strange sleeping habits be a result of artificially low rates? Unable to get a purchase on the idea, we conclude that not everything is a feature of monetary policy.
Still, it is amazing how much of what we take for granted is really a consequence of this exceptional monetary system. In fact, we devote this month's issue of our new "Bill Bonner Letters" to discussing scams, hustles and hoodwinks of the EZ money era. After we finished writing the letter for this month, EB Tucker, our chief researcher, sent us yet another example:
Remember Dionne Warwick's late night informercials offering the answers to all life's problems for a $3.99/min psychic consultation?
And here's another one, also from the Wall Street Journal:
That was the Psychic Friends Network.
Now it's entering Peer to Peer lending! It bought 321Lend, Inc. this month.
The article says 2013 was a $5bil year for P2P lending and there's huge upside.
The longer the fed keeps rates at 0% the more "investors" will be willing to fund loans to sketchy borrowers.
Governments and companies around the world are borrowing cash they won't have to repay for at least three decades, seizing upon this year's unexpected fall in interest rates to lock in cheap financing for as long as possible.
Global sales of sovereign and corporate bonds that mature after 30 years have reached $142.5 billion this year as of Tuesday, a 22% rise from the same period last year and a 55% jump from the same period in 2012, according to data provider Dealogic. Their growth far outpaces sales of government and corporate bonds due in 30 years or less. Those bond offerings totaled $5.236 trillion so far this year, a 4.6% increase from the same period in 2012.
Why the rush to ultra-long durations? Borrowers want to take advantage of low rates. For their part, investors want to get a little more yield. Typically, the longer the term, the higher the rate. Because time multiplies risk. The farther into the future you go the more likely it is that your borrower will go broke. In the short-run world of super-low rates and super-easy money, few debtors go belly up. In the long run, all of them do. The credit cycle turns against them. Financial shocks bash them. And geo-political disasters catch them unawares.
In a world of zero interest rates, investors stretch for yield. It is just a matter of time, we presume, until they pull a ligament.
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