Fed Begins its March to Doom
14 DECEMBER 2017
RANCHO SANTANA, NICARAGUA - This is a big day in Washington.
First, the pols will welcome the new senator from the great state of Alabama.
As every sentient being on the planet now knows, Roy Moore lost. Too bad his opponent couldn't lose, too.
Second, and more pregnant with mischief, Fed chief Janet Yellen will appear before Congress. She will say the economy is doing well and that America's central bank, in its wisdom, can continue its program of "normalization."
That is, the Fed will try to undo the damage it has done by walking back gently from some of the lowest interest rates in history.
We have a suggestion: Ms. Yellen should dress in a black, hooded cloak and carry a scythe.
Then she could sing her lines in a low, menacing voice: "Oooooh, cannot ye see? Your time has come. And ye must come with me."
Ms. Yellen is announcing the forthcoming death of the biggest boom in history. What kind of boom was it? That is today's subject.
On the Job
We're down on the Pacific coast of Nicaragua to attend a family wedding.
Getting ready, there are about 30 workmen finishing up the landscaping and the new guest cottage.
Bang, whack, wrrrring... boom, boom, boom. Sunup to sundown, they're getting the job done.
Here's a photo of the guest cottage.
Bill's guest cottage on the Nicaraguan coast
Nicaragua is a great place for a vacation. But we're still on the job...
Today, a Brazilian reality TV show crew, following a group of young women surfers as they travel around the world, has set up its cameras on the beach in front of us.
They, and we, are watching the bikini-clad young women in the foaming surf.
What were we saying?
Oh, yes... We're still on the job...
Fake Money... Fake Wealth
A boom built on fake money creates fake wealth. Real wealth requires time, sacrifice, work, savings, and forbearance.
You can't fake it. You can't just print up some "money" and pretend to be rich.
But the latest figures tell us that Americans are richer than ever... with $97 trillion of household wealth - up from $18 trillion in 1987.
What kind of wealth is it? We wonder... Real or fake? Here today, but gone tomorrow?
The physical universe may run according to laws that can be discovered. Over the years, we learn more about how it works... and we are able to do more with it.
But the universe of man is subtler, more cyclical, and much more squirrelly. Built of crooked timber, it operates on myths and moral laws that can't be fully understood by the rational mind.
One generation learns; the next forgets.
People go to monasteries to try to figure it out. Like Leonard Cohen, they take an oath of silence and spend years trying to understand how it all works.
And then, when they come back, they say something enigmatic: "A wet bird never flies at night."
"What does that mean?" you ask.
"I don't know... Beats me."
The financial world is somewhere in between: part granite-hard laws and steel-like reality... and part hocus-pocus, hustle, and make believe.
Our job here at the Diary is to try to sort them out...
Fish or Fowl?
Over the last few weeks, we've looked at bitcoin.
What manner of beast is it? Fish or fowl?
We knoweth not. It pretends to be money. But as we learned from our math-whiz son yesterday, money is only something you recognize ex post facto.
Real money isn't a matter of declaration or intention; it's a matter of fact. If people use seashells as money... seashells are money.
But if a government says its paper is money, well... maybe it is and maybe it isn't.
And what about today's dollar?
It has bid up the price of stocks for the last 37 years. Bonds have been going up, too... for about the same length of time. And the economy has been growing with only infrequent interruption.
But this long boom has been built on what we call "fake money."
New readers ask: What's fake about our money?
Tomorrow, we'll haul the dollar up out of the depths, like a sea monster... and lay it out on the deck so we can get a good look at it.
Then we will see what this new money really is... before it starts to stink.
© Equitymaster Agora Research Private Limited