Free Reports


Sep 13, 2016


OUZILLY, France - We came back from South America poorer but wiser.

For the first time ever, we have had to face the reality of politics; up until now, it was never more than an abstract, theoretical matter.

We read about the French Revolution, the Bolshevik Revolution, and the passage of Obamacare.

We knew politics was corrupt and repulsive. But except for a brief stint on the board of governors of our local church, we had nothing to do with it.

Now the wolf is in our own close that we can smell its hot breath and hear the clicking of its pearly teeth as it snaps at our heels.

More as it develops...

Criminalising Cash

But sometimes goes 'full politics', too.

Take poor Kenneth Rogoff at Harvard.

He wants a dollar with a voter registration card, a US flag on its windshield, and a handgun in its belt - the kind of money that supports the Establishment and votes for Hillary.

Writing last month in the Wall Street Journal under the headline, 'The Sinister Side of Cash', he noted that 'paper currency, especially large notes such as the US $100 bill, facilitate crime: racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism'.

Of course large notes do make it easier for criminals to operate. Like cellphones. And sunglasses. And automobiles with air-conditioning.

But that's what money is supposed to do: make it easier for an economy to function. You use it as you please.

Yes, dear reader, we are back to our regular beat. Money. But what's this? Finally, we're beginning to see some action.

You'll recall that the markets have been eerily quiet...with less movement in stocks than we've seen in the last 100 years.

What gives?

Perhaps it was the calm before the storm. The Dow fell nearly 400 points on Friday. We don't know. It could be the calm before the storm. Or it could be the calm before more calm.

How It All Ends

There's something fundamentally tranquilising about having a central bank that gives out the word that it's got your back.

The Bank of Japan is buying bonds AND stocks (by way of exchange-traded funds)...pushing up prices for both.

Under its 1.7 trillion euro QE program, the European Central Bank bought so many government bonds that it ran out of new bonds to buy. So, this summer, it added corporate bonds to its shopping list.

According to Reuters, it will soon run out of corporate bonds, too. Then it will have to follow the Bank of Japan's lead...and wade into the stock market...if it wants to keep its QE program going.

And in the US, the Yellen Fed continues to jive and diddle...teasing investors with the threat of 'normalising' interest rates, but having neither the desire nor the fortitude to act.

We've been wondering how it ends. Bear markets are facts of life. But if the central bank has set its face to stopping them, then what?

Central banks - in the current system - can create unlimited amounts of fake money. They can use this money to buy real financial assets.

Theoretically, they could buy all the world's stocks and bonds. And theoretically, they can leave the feds with almost complete ownership of the planet's capital.

The rich get richer (selling their assets to the feds at inflated prices). The poor get poorer (as the misallocation of capital increases...price signals are distorted...and real wealth is wasted).

What goes wrong?

Everything. As in politics, the gap between theory and practice is as wide as the Sargasso Sea.

The Next Crisis

Even with the largest bidder in the world on their side, investors can still panic.

That would mean a big drop in asset prices, high-profile bankruptcies, and a new crisis.

Things move fast. The feds may step in with more QE buying, but they may be a dollar short and a day late.

A 20% drop in stock prices is equal to a loss of about $5 trillion in the US alone.

The bond market is roughly twice the size of the stock market, so add a 20% drop there and you're talking real money - a total loss of $15 trillion...which could easily happen in a few days.

Now, imagine a drop similar to the 2008-09 plunge...

In round numbers, equities lost 50%. Today, there's about $60 trillion worth of stocks worldwide, so that would be a $30 trillion loss.

If the bond market fell in sync, you'd be looking at another $60 trillion or so...or a total loss of market capital of $90 trillion.

What would the feds do?

Yes, they would buy stocks and bonds. But they would buy at market prices. Owners would still take big losses.

And the feds wouldn't stop there.

We are now almost eight years into the central bank's various 'stimulus' programs; they have coincided with the weakest recovery on record.

After taking account of inflation, incomes for most Americans are lower today than they were in 2007.

Clearly, reducing the cost of credit doesn't work - even with yields on roughly $13 trillion worth of bonds in negative territory.

Fire up the Whirlybirds

So what's next?

When the next crisis hits, central bankers will rush back into their tool rooms and bring out something new. It will no doubt include 'helicopter money'.

This is the term economist Milton Friedman used to describe direct giveaways of newly minted money without any corresponding increase in the government's budget deficit.

Huge new infrastructure projects will be announced. Tax credits, tax cuts, minimum guarantee incomes - we don't know what the feds will come up with.

But watch out...

With the carrot will come the sticks. The feds will impose measures to crack down on tax cheats, tighten the noose on black-market operators, and shut off funds to causes they don't like.

They'll use their money helicopters to 'drone' you. That is, they'll make sure you do with your money as they please.

Mr Rogoff's nutty suggestion to restrict cash could become law.

BILL BONNER Founder, Agora Inc

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

Disclaimer: 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.

Recent Articles

The Great Leader Has Won the Cow-Teller Award and Now Wants a Case Study January 17, 2019
This is a spoof.
Mohammed "Munna" Aziz and the Summer of 1989 November 28, 2018
Vivek reminisces a nearly three decade-old summer, spent listening to a Hindi film song.
I'm Looking for Companies Not Influenced by Farm Loan Waivers and Minimum Support Prices November 16, 2018
Are there any good companies in the agrochemical space worth looking at?
Should You Abandon Your Investment Strategy in This Falling Market? November 2, 2018
It is in these volatile times, when investors' mettle is tested the most...

Equitymaster requests your view! Post a comment on "a". Click here!

9 Responses to "a"

Suhas Ramakrishnan

Sep 16, 2016

Good note! Thanks. I was wondering though about a scenario where the lending rates also gradually come down making the gap between renting and owning smaller. In the above example, hypothetically, if the interest rates fell 80% over time, and rents and property prices stayed where they were the EMI would equal rent.

In reality though, given our population is so young and growing the property prices look to stabilize at some reasonable affordable level and then start moving up gradually. Hence, the upward trending rent curve would cross the downward trending EMI and property price curves until a crossover point at which it will start making more sense to own a home.


Sarat Palat

Sep 14, 2016

With the increasing population and owning an house is considered one of the basic need in India, I doubt the price of flats will come down.


Dhanush Dhari Misra

Sep 14, 2016

Throughout my service career from 1964 to 2004 I have been approaching different banks and financiers like LIC and HDFC for a housing loan. I had housing plots bought from Government housing boards in different towns. However the banks and other institutions always found some reason to not to give me loan.

I got a loan from HDFC in 2006 after my retirement (in 2004) for a flat by a builder (Z estate), because the builder was in constant touch with HDFC to make sure that his customers are able to get the loan. After 10 years the rent has exceeded the EMI.

In contrast quite a few of my classmates and juniors who joined civil services including the state civil services (like Orissa Administrative Service, Bihar Administrative Service, Orissa Police, Bihar Police and Bihar Financial Service, not to speak of IAS, IPS etc.) at much lower salaries got housing loans within two to three years of joining the services. One class mate who became a Mining Officer in Orissa told me that he did not need the loan as he was building the house gradually from monthly income.

I believe my other friends in the civil services who did not take the loan, did not need it as they were "building the house gradually from monthly income."

In each and every case of my friends in civil services the rent of the newly built house was equal or more than the EMI. In many (may be most) cases the tenants were Government Undertakings which sometimes were the banks themselves.

So I feel Jaitley's dream is very realistic for the people who form impenetrable rings around the ministers and other policy makers to make sure that analyses like those of Vivek Kaul's diary do not reach them.


Anil Divate

Sep 14, 2016

I had heard that one of the causes of the real-estate crash in US was that since the EMI was only a trifle more than the rent, many people felt that it is better to buy than to take on rent.
Many of the new owners were a) people who did not have the capacity to accept even a 15%+ fall in the price of their house and b) people whose future income was uncertain to a significant extent.

The goal of the government should have been to make rents affordable.


Suresh P Vasudevan

Sep 14, 2016

Thanks Mr. Kaul for opening up my mind to the fact that our FM is a Financially Illiterate person. Blabbering, without basics is like giving a Political Speech, where all those who attend such meetings are their own, paid & brought, people, who are totally unconcerned of what the Neta is speaking.

Like (1)


Sep 13, 2016

What happens to the 7th pay commission effect?With added salaries and the cyclical effects on the economy what will happen to the real estate segment?

Like (1)

ramakrishnan k g

Sep 13, 2016

that was spot on.I remember the adverts of HDFC and others where the cost of EMi vs rent was the highlight !Reasonable prices was what started the boom somewhere around 2000.

Like (1)

Deepak Padher

Sep 13, 2016

Sir Ji,
Perfectly correct. I do agree with you.

One small suggestion - While calculating my NET EMI, I should subtract the Income Tax deduction ( 35 % ) from my EMI.AND also calculating net interest on FD , I must subtract income tax to be paid on interest ( 35 % ).

Is it correct ?


Like (1)

Bapoo M. Malcolm

Sep 13, 2016

Have been advising my clients for years to sell their houses and stay in rented premises instead. But there is this middle class thing about "Owning a 1 & 1/2 BHK". And then renting it out!

It is land prices that must drop first. Then flat prices will follow. But the available land is and will be kept locked up, for one reason or another. Expansion, by links to the hinterland, will remain only on paper. That keeps prices in the city as high as possible. Had predicted in 2006 about a fall in prices upto 25%. It's worse but that is because of builders' greed and that of land owners. If prices, in rupee terms, are the same as 10 years ago, it actually means they have fallen. But not enough.

As you rightly said, water finds its own level. But that can take years. So, the Adam Smith solution. Let the market take its course. Let the builders burn at the stake. Arun Jaitley is a politician, not an economist, at least in thinking and behaviour.

Put you in the same class, in public-comprehensive economics, as Ankleswaria Iyer. As I ask my students to read him, so will I with you. Thanks.


Like (1)
Equitymaster requests your view! Post a comment on "a". Click here!