Free Reports

How the Fake Boom Ends

Dec 15, 2017

27

RANCHO SANTANA, NICARAGUA - As we outlined yesterday, Americans are richer than ever.

U.S. household assets stand at $97 trillion.

All over the world, "wealth" is surging, too... with the value of global stocks near a record high of $100 trillion.

But there's a hitch: We allege that this wealth was built on fake money. If we're right, is the wealth fake, too?

Cometh the Grim Reaper

As longtime Diary sufferers know, the Fed's ultra-low interest rates over the past eight years have created the biggest pile of debt in history.

Last week, the total U.S. debt hit a new record at $68 trillion... up from $29 trillion in 2000.

And yesterday, Fed chief Janet Yellen said she would take a stick to America's debtors, increasing the cost of carrying that debt.

Already, the Fed's rate hikes have boosted the interest cost of credit card debt by about $7.5 billion a year. That will rise by another $8 billion as future scheduled increases take effect.

Extrapolate to include all the nation's debt - consumer, business, and government - and every quarter-point rate hike costs $170 billion extra in carrying costs a year.

Add a whole percentage point... and you are up to $680 billion - about equal to the Pentagon's annual budget.

And so cometh, like the Grim Reaper, the end of the biggest fake boom ever. Inflated with fake money lent at fake rates... it will deflate when rates go up.

But "fake boom" is merely an allegation; we have to prove it. So let's begin by exploring the "money" that made it possible.

"Sound as a Dollar"

Prior to President Nixon ending the exchange of dollars for gold at a fixed rate in 1971, the U.S. had a dollar that was connected to gold and silver.

Not perfectly. And not always. But precious metals, particularly gold, were there... in the background.

And that old dollar was the money which had existed, more or less unchanged, since it was created in 1792.

That's when the U.S. government, with the Coinage Act, introduced a national currency backed by gold.

That is what the world came to know as "real money." You could trust it. "As sound as the dollar" was not an ironic expression; it described the solidity of America's currency.

Then, with hardly a by-your-leave, Tricky Dicky introduced a new dollar. It looked just like the old one. But it was an impostor.

This new dollar was not backed by gold or silver. It was a "Federal Reserve Note," with nothing standing behind it except the full faith and credit of the United States of America.

It was a debt instrument, in other words... not cold, hard cash.

Real Wealth

Real money is different from debt. It doesn't need to explain itself. It doesn't need to tell you where it's been or what it's been up to.

You take a gold coin as it is. No backstory or balance sheet is necessary. That's the way real money works: It closes transactions. You accept payment and the account is settled.

But debt is different. It comes with question marks: Who issued this debt? What is it really worth? Will I get paid?

Here is the key to understanding debt money, as opposed to real money: Real money is the fruit of past efforts - distilled and preserved for future use.

Debt money is a claim on wealth that has never been produced. And perhaps never will be.

As the quantity of real money increases, a society becomes richer and more financially stable. Because it's real wealth.

But as the supply of debt money increases, more people owe more and more money; the economy becomes more fragile... and eventually goes broke.

But if the authorities want to increase the supply of money, the only kind of money supply they can increase is the fake kind. Real money must be earned; like wealth, it cannot be printed.

Cart Before the Horse

That is true of bitcoin, too, by the way.

Like gold, either you "mine" it (using real-world inputs of energy and computer processing power), or you trade something for it.

The supply of bitcoin is governed by an algorithm and theoretically capped at 21 million. Central banks cannot create more bitcoins simply because they think there are not enough. (Whether bitcoin ever becomes real money or not, we wait to find out, along with everyone else.)

That is why gold is such good money. The supply of it increases more or less at the same rate as the economy. More gold usually means more wealth.

Fake money - whether it is the trillions of dollars of Fed debt... or the gazillions of IOUs issued by the central banks of Zimbabwe or Venezuela - operates in the opposite fashion. The more it increases, the poorer you get.

In an important sense, it puts the cart before the horse.

No More Free Lunches

After man's expulsion from the Garden of Eden, God made it clear that the days of free lunches were over.

"By the sweat of your brow shall you earn your bread," He said.

You have to work... you have to do something... BEFORE you get wealth.

You don't get your bread first.

But the feds increase the money supply before any new wealth is created. This Fed debt - in the form of Federal Reserve Notes - is a fraud; it breaches the laws of nature. It doesn't add to wealth. Instead, it is a claim on wealth that other people already own... or wealth that hasn't been created yet.

In practice, what it really does is call away the real wealth of some people to deliver it into the hands of other people with better connections to the central bank, aka the Deep State insiders.

Government is always a way for the few to exploit the many. The fake-money system is a major tool, helping them do it.

More to come...

Regards,
BILL BONNER Founder, Agora Inc
Bill

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

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "How the Fake Boom Ends". Click here!

2 Responses to "How the Fake Boom Ends"

PHATAK

Dec 16, 2017

It appears that one of your dear ones is sidelined. Forget it there are billion plus people n opportunities out of the Govt share concentrate on them they r your friends

Like 

K.M.Thomas.

Dec 15, 2017

Bureaucrats towing the politicians line is not something new in politics be it Indian or otherwise.It was always there earlier, however probably now it has become more rampant in the present day scenario. HMV-his master's voice bureaucrats,judges, armed forces officers, policemen,other offices of power,- practically in every walk of life this happens.This is because most of these officers in these high positions are willing to toe the line of their political bosses as they know fully well,their job postings, positions,and after retirement plum postings come only when they sing like a canary to their political bosses.Dangerous as it can be, it is a reality and most of the ruling class/ offices of power ,play to this extremely unfortunate tune.It is an absolute reality come to stay,an extremely dangerous one all the same,sad but absolutely true.

Like 
  
Equitymaster requests your view! Post a comment on "How the Fake Boom Ends". Click here!