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Easy Money: Even History's Dreams Rhyme
5 NOVEMBER 2015
- By Bill Bonner
Through the door there came familiar laughter
I saw your face and heard you call my name
Oh my friend we're older but no wiser
For in our hearts the dreams are still the same
- Those Were the Days, Gene Raskin
Yes, they were good years. 1980-2015. We laughed. We cried. We got married. We raised children. We bought houses. We made money.
Whose life has not been improved since the end of the 70s?
Reagan's 'Morning in America', then the Clinton years, and finally George W Bush's 'Fin de Bubble' - who is not older and better off...or at least older...than he was when the period began?
Should we just stop there...happy to have had such a wonderful time together? Should we merely thank Divine Providence...or the profane feds...for our granite countertops, our stock prices, our families, and our fortunes?
Or, should we look in the closets and under the rug? Or, just maybe, we should check the balance sheet?
A man would be a fool to question his happiness in marriage; would he be so foolish to wonder about the bliss afforded by a 35-year bull market?
Today, the Dow opened at 17,867 points - not far from an all-time high. And approximately 16,900 points higher than it was 35 years ago.
The press was unanimous as to what happened yesterday: 'US Stocks Slip on Yellen's Testimony'. What was it about her testimony that caused investors to think that their stocks may be less valuable at 4pm than they had been at 9am?
'Yellen hints at December rate hike.'
Investors are no dopes. They know the fix is in. The value of a stock is no longer determined by honest commerce - making and selling things. Now, it is a feature of finance - specifically, how much the Fed charges member banks for overnight loans. And this number - as tiny as it is - can have a big effect.
Set at the 'wrong' level, and much of the capital value built up over the last 35 years could vanish - as much as $50 trillion worth, by our calculation.
We mentioned earlier this week 'how we got where we are.' We referred to more than three decades of easy money...leading to a big increase in the world's monetary base. In rough terms, it rose by an average of $500 billion per year every year for the last quarter of a century.
Allan Sproul started joined the Fed in 1920. He stayed in banking until 1969, becoming president of the powerful New York Federal Reserve Bank in the 1940s. When he died in 1978, he must have thought he had seen it all.
'As gilt edged securities, both public and private, rise in price under pressure of the abundant money supply,' he wrote in 1946, 'Funds flow ever-increasingly into lower-grade securities and into equities, and into commodity, real estate and other markets.'
Too bad he couldn't live for another few decades. We'd like to see his face now. The funds have flowed in a torrent into stocks, bonds, and real estate, just as he predicted.
That flood of EZ money created the delta of plenty in which we live today. Unfortunately, it's not likely to continue, because funny things happen when you do funny things to money.
That is the lesson from Vivek Kaul's masterful three-volume history, Easy Money. Vivek, chief economist in our Mumbai office, goes all the way back...way beyond the Carter Administration...to the beginning of money, to cowrie shells and cocoa beans.
Actually, anything can be used as money. In Colonial Maryland and Virginia, tobacco was widely used as money. And in WWII prison camps, once again, tobacco - cigarettes - was the currency of choice.
Vivek traces the development of money and banking from its origins all the way through the crisis of 2008 and beyond. If you want to know how we got where we are, Vivek's trilogy is a must-read.
[Editor's Note: We are currently offering Vivek's Easy Money trilogy for FREE. See here for details.]
Particularly interesting is his telling of the Crash of '29 and the subsequent Great Depression. So much was happening, so fast...with so many meddles and interventions...that it must have been impossible to follow events, even if you were right in the middle of them.
And even now, after eight decades, after the story was told by giants - Galbraith, Keynes, Friedman, and Rothbard - each with his own point of view, it is still hard not to get lost in the details.
Something happens in the markets...the feds react clumsily...it leads to unforeseen consequences...which causes more market action...leading the feds to do something even more asinine.
In Vivek's account, the comedy is never overt, but the farce is unmistakable. One bumble leads to another...throughout the Great Depression. Finally, WWII comes along and a whole new round of mistakes begins.
Vivek set out to describe how today's world of money got to be what it is. He shows how simpleminded, self-serving theories, along with the usual low-bred chicanery and larceny, have caused countless headaches over centuries.
In that sense, there is nothing particularly special about our generation or the boom of the last 35 years. The dreams of 'easy money' are still the same.