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The Great American Credit Collapse

Please remember this warning when you go to the ATM to get cash — and there is none.

While we were thinking about what was really going on with today’s strange new money system, a startling thought occurred to us. Our financial system could take a surprising and catastrophic twist that almost nobody imagines, let alone anticipates.

Do you remember when a lethal tsunami hit the beaches of Southeast Asia, killing thousands of people and causing billions of dollars of damage? Well, just before the 80-foot wall of water slammed into the coast an odd thing happened: The water disappeared.

The tide went out farther than anyone had ever seen before. Local fishermen headed for high ground immediately. They knew what it meant. But the tourists went out onto the beach looking for shells!

The same thing could happen to the money supply…

There’s Not Enough Physical Money

Here’s how… and why:

It’s almost seems impossible. Hard to imagine. Difficult to understand. But if you look at M2 money supply – which measures coins and notes in circulation as well as bank deposits and money market accounts – America’s money stock amounted to $12.6 trillion as of last month.

But there was just $1.4 trillion of physical currency in circulation – about only half of which is in the US. (Nobody knows for sure.)

What we use as money today is mostly credit. It exists as zeros and ones in electronic bank accounts. We never see it. Touch it. Feel it. Count it out. Or lose it behind seat cushions.

Banks profit – handsomely – by creating this credit. And as long as banks have sufficient capital, they are happy to create as much credit as we are willing to pay for. After all, it costs the banks almost nothing to create new credit. That’s why we have so much of it.

…click on the above link to read the rest of the article…

100 Years of Mismanagement

April 21, 2016

100 Years of Mismanagement

Lost From the Get-Go

There must be some dark corner of Hell warming up for modern, mainstream economists. They helped bring on the worst bubble ever… with their theories of efficient markets and modern portfolio management. They failed to see it for what it was. Then, when trouble came, they made it worse. But instead of atoning in a dank cell, these same economists strut onto the stage to congratulate themselves.

Keynes The scalawag himself. Keynes provided governments with the “scientific” fig leaf fore interventionism that economists had previously denied them. The cost in terms of economic and technological progress is incalculable. Photo via MIT Press

“The Greatest Depression that could so easily have happened in 2009 but did not is the tribute that the world owes to economics”, wrote Arvind Subramanian in The Financial Times.

Arvind Arvind Subramanian: congratulating mainstream economists (a sub-set of society that includes him) for failing to foresee a mess their own advice has produced. The chutzpa of this guy is really admirable. He is of course correct that it is difficult to make forecasts (in fact, economics as a science has nothing to do with making predictions), but anyone who didn’t see the 2008 crisis coming had to be blind as a fricking bat. Even housewives could see it coming, but a very long list of prominent professional economists and “policymakers” evidently couldn’t. Fine, but these are the same people that insist that they know what to do about it. That is decidedly not so. They have now produced what will turn out to be an even greater mess. Photo credit: Bijoy Ghosh

We were lost from the get-go, trying to interpret the sentence. It is as tangled and puerile as the staggering conceit behind it. Then, Mr. Subramanian sets up the stage props:

…click on the above link to read the rest of the article…

Why All Central Planning Is Doomed to Fail

April 15, 2016

Why All Central Planning Is Doomed to Fail

Positivist Delusions

[ed. note: this article was originally published on March 5 2013 – Bill Bonner was on his way to his ranch in Argentina, so here is a classic from the archives]

We’re still thinking about how so many smart people came to believe things that aren’t true. Krugman, Stiglitz, Friedman, Summers, Bernanke, Yellen – all seem to have a simpleton’s view of how the world works.

Simpletons A bunch of famous people with a simpleton view of how the world works…who not only seriously think the economy can and should be “planned”, but arrogantly believe they are the ones who should do it. It’s a bit like the crazy guy who doesn’t know he’s crazy.

They believe they can manipulate the future and make it better. Not just for themselves… but also for everyone else. Where did such a silly idea come from?

After the Renaissance, Aristotelian logic came to dominate Western thought. It was essentially a forerunner of positivism – which is supposedly based on objective conditions and scientific reasoning.

“Give me the facts,” says the positivist, confidently.

“Let me apply my rational brain to them. I will come up with a solution!”

Beyond the Herald’s Cry

This is fine, if you are building the Eiffel Tower or organizing the next church supper. But positivism falls apart when it is applied to schemes that go beyond the reach of the “herald’s cry.”

That’s what Aristotle said: Only a small community would work. Because only in a small community would all the people share more or less the same information and interests.

…click on the above link to read the rest of the article…

A Fatal Flaw in the System

April 11, 2016

A Fatal Flaw in the System

The Hard Rocks of Real Life

BALTIMORE – The Dow dropped 174 points on Thursday, the biggest fall in six weeks. Not the end of the world. Maybe not even the end of this year’s bounce-back bull run. As you’ll recall, stocks sold off at the beginning of the year, too. Then, investors were buoyed up after central banks got to work – jimmying the credit market on their behalf.

5o1rhrdw59wk Photo credit: Andrei Shumskiy

The Fed swore off any further “normalization” until later in the year. Central banks in Europe, Japan, and China all took bolder and more reckless action… with the Bank of Japan following some European banks by going into “full retard” mode with negative interest rates.

DJIA, 10-minute candles; the red rectangle bounds Thursday’s market action. A rebound attempt on Friday failed to go very far – click to enlarge.

Now, according to the narrative popular in the financial press, investors are beginning to worry that central banks are not very effective after all. As to that last point, they’re right; central banks can only do so much. They made the situation what it is. Now, they can only make it worse. How? By adding more of what made it bad in the first place. All they can do is add more debt to a world already drowning in it.

If anyone knows of a different way this story might unfold, we’d like to hear it. But for all the puzzling and preposterous guesswork and wondering, it is still the same tale: Debt builds up; debtors can’t pay; they go broke. It happens all the time.

In a healthy economy – with real money and honest banking – people make mistakes. They go broke. The bankruptcies are absorbed and disposed of in good order. Assets go on the block. Hungry investors and entrepreneurs snap them up… and put them to good use.

…click on the above link to read the rest of the article…

Going Into Debt to Invest Into Debt…

April 7, 2016

Going Into Debt to Invest Into Debt…

Bankers Hate It When You Hold Cash

In an extraordinary turn of events, last week we were contacted by our local bankers. Since we were turned down for a mortgage in 1982 (our business finances were thought to be “too shaky”), we have had little truck with them. We pay cash. They mind their own business.

cash-reserves1 Too many Benjamins! Photo credit: Andrew Magill / Flickr

But for the first time we can recall, not just one but three suits came to visit. Personable and intelligent, they were worried when they saw how much cash we were keeping on hand. No kidding. They came to visit to propose ways we could “put it to use.”

“You really should take some of that cash and invest it in municipal bonds” was the motion on the table.

“What if the municipalities can’t pay?” we asked.

“Don’t worry about that. Historically, the odds of default are extremely remote,” one of them answered.

“But what if interest rates turn up? Wouldn’t the default rate go up?”

“Well, maybe. But we keep the maturities short and invest only in the most creditworthy municipalities. The risk is very low.”

“Oh… but what if we just need some cash.”

“No problem. We’ll give you a line of credit.”

“Let me get this straight. You’re proposing to put me into debt so that I can keep my money invested in somebody else’s debt?”

“Uh… well… yes… and we’ll charge you less interest than you will earn from the municipal bonds.”

“Wait. You can earn a fee for putting my money in bonds… and earn another fee for lending me money… and I still end up ahead?”

“Yes. We just try to find ways to help clients with their financial needs.”

“Oh.”

peopleofpuertoricopublicimprovbondvig If unlucky, you’ll end up with one of these… Image via scripophily.net

…click on the above link to read the rest of the article…

Rotten to the Core

April 6, 2016

Rotten to the Core

Poison Money

BALTIMORE – We live in a world of sin and sorrow, infected by a fraudulent democracy, Facebook, and a corrupt money system. Wheezing, weak, and weary from the exertion of trying to appear “normal,” the economy staggers on.

David-Simonds-zombie-high-011 Staggering on…. Image credit: David Sidmond

Last week, we gained some insight into the ailment. Something in the diagnosis has puzzled us for years: How is it possible for the most advanced economy in the history of the world to make such a mess of its most basic bodily functions – getting and spending?

By our calculations – backed by studies, hunches, and deep research – the typical American man (it is less true for women) earns less in real, disposable income per hour today than he did 30 years ago.

He goes to buy a car or a house, and he finds he must work longer to pay the bill than he would have in the last years of the Reagan administration. How is that possible? What kind of economic quackery do you need to stop capitalism from increasing the value of workers’ time?

What kind of policies and circumstances are required to stiffen its joints… clog up its innards… and rot its brain? Globalization? Financialization? Bad trade deals? Too much red tape? Too many cronies? Too many zombies?

nonsequitor_cartoon_comic_first-economist We can identify at least one source of the quackery…

All of those things played a role. But our answer is simpler: poison money. The bigger the dose… the sicker it got. When you say you “have some money,” you usually believe that there is, somewhere, an electronic database in which it is recorded that you are the owner of some amount of currency.

You have $100,000 in your account, right? Does it mean that there is a little cubbyhole somewhere, with your name on it, in which you will find a stack of 1,000 Ben Franklins? Nope. Not even close. No cubbyhole. No stack of money. No nothing.

…click on the above link to read the rest of the article…

Who’s Anti-American?

March 25, 2016

Who’s Anti-American?

Maryland!
The Old Line bugle, fife, and drum,
Maryland!
She is not dead, nor deaf, nor dumb.
Huzza! She spurns the Northern scum!
She breathes! She burns! She’ll come! She’ll come!
Maryland! My Maryland!

– Maryland’s State Song

Sam J’accuse… Illustration by James Montgomery Flagg

Guilty as Charged

BALTIMORE – Yesterday, one dear reader wrote in to say we were “cynical” and “anti-American.”

Today, we rise to defend our reputation… such as it is. Cynical? Nah… We’d need a big dose of positive thinking and earnest optimism to be cynical. According to the Oxford English Dictionary, people who are cynical are “suspicious,” “doubting,” and “skeptical.”

We’re way beyond that. We’re pretty sure that the system is rigged… and rotten. Elections are exercises in solemn deceit. And the Fed’s management of the economy is a mixture of delusion and self-serving scam. We don’t have much doubt about it. That’s just the way it is.

As for “anti-American,” our accuser needs to clarify the allegation. Is he talking about the Deep State? The empire? Or is he talking about the 50 sovereign states… and the Old Republic? Or the language? The culture? Reality TV… the Kardashians… NASCAR racing… Old Faithful and the mighty Mississip’?

No one can be anti-America; America is too many things to too many people. But if he’s talking about the federales who control half our national output… tie us in knots with Obamacare, National Labor Relations Board rules, and all their other dopey programs… and stomp around the world trying to justify their trillion-dollars-a-year security budget…

…if he’s talking about Hillary, Bernie, The Donald, the Bushes, et al… and all the 535 members of the U.S. Congress… and the 2,783,000 zombies on the U.S. payroll…

…click on the above link to read the rest of the article…

Alice in Wonderland

March 23, 2016

Alice in Wonderland

Everything Is Nonsense

If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?

– Alice’s Adventures in Wonderland

Mad_Hatter_0011 A public service message from the Mad Hatter – bad news is bad. Ominous, even. Hat help us all! Illustration credit: Bob Kane

BALTIMORE – The Dow rose the fifth week in a row last week, ending with a 120-point jump on Friday. This has put the index firmly in the black for 2016. Well, this is a showdown, isn’t it?

Either us… or the great mass of investors – one of us is wrong. In the weeks to come, we’ll find out who (notice to new readers: It could go either way). But wait a minute…

Our old friend Rob Marstrand, who writes at Of Wealth.com, explains why the great mass of investors has little to do with it. Apparently, corporations have nothing better to do with their money than buy their own shares.

“There’s a dirty little secret in the U.S. stock market. Corporate America is paying out more cash to shareholders than it earns in profits. This means there’s nothing left to invest in business growth. It also means debt levels are going up, increasing risk…

Analysis by Bloomberg shows that those companies are on track to spend $590 billion a year on buybacks in 2016, at the first-quarter rate. That would be even more than the last point of peak buybacks – at the previous market top in 2007, just before the last crash. Put simply, companies are spending record amounts of cash on buybacks at precisely the wrong time (as usual): when stocks are extremely expensive.”

…click on the above link to read the rest of the article…

Interest Rates Are Never Going Back to Normal

March 21, 2016

Interest Rates Are Never Going Back to Normal

Grotesque Mutants

BALTIMORE – Let’s see… U.S. corporate earnings have been going down for three quarters in a row. The median household income is lower than it was 10 years ago. And now JPMorgan Chase has increased its estimated risk of a recession to about one in three.

Mutants From the grotesque mutants collection Image via residentevil.com

These things might make sober investors wonder: Is this a good time to pay some of the highest prices in history for U.S. stocks? Apparently, they don’t think about it…

Last week U.S. stocks rose again, after the Fed announced that it would go easy on “normalizing” interest rates. The Dow rose 156 points on Thursday, putting it in positive territory for 2016.

Dow Jones Industrial Average, daily – boosted by loose Fed talk – click to enlarge.

Hooray! Investors – at least those who passively track the index – are even for the year. And with more central bank fixes, maybe they’ll be able to keep their heads above water for the rest of 2016. Good luck with that!

You may recall our prediction: The Fed will never return to a “normal” interest rate. Why not? Many Wall Street analysts say the Fed’s move to bring interest rates to a more normal level – after seven years of ZIRP (zero-interest-rate policy) – was “too early.”

We think it was too late. The Fed has already distorted too much for too long. Its EZ money policies have created a hothouse of speculation, mistakes, and misallocation of resources.

The financial plants that grew up in that environment – grotesque mutants that require huge doses of liquidity – cannot survive a change of seasons. But these plants are big. And powerful.

Washington… the health care industry… housing… Wall Street… They control the U.S. government, the bureaucracy, and major economic sectors – notably the $1 trillion-a-year security industry.

…click on the above link to read the rest of the article…

Why Negative Rates Can’t Stop the Coming Depression

March 11, 2016

Why Negative Rates Can’t Stop the Coming Depression

A bird in the hand is worth two in the bush.

– Anonymous.

In our upcoming issue of The Bill Bonner Letter, we explore the strange territory of “NIRP” – negative-interest-rate policy.

About $7 trillion of sovereign bonds now yield less than nothing. Lenders give their money to governments…who swear up and down, no fingers crossed, that they’ll give them back less money sometime in the future.

Is that weird or what?

Into the Unknown

At least one reader didn’t think it was so odd.

“You pay someone to store your boat or even to park your car,” he declared.

“Why not pay someone to look out for your money?”

Ah…we thought he had a point. But then, we realized that the borrower isn’t looking out for your money; he’s taking it…and using it as he sees fit.

It is as though you gave a valet the keys to your car. Then he drove it to Vegas or sold it on eBay.

A borrower takes your money and uses it. He doesn’t just store it for you; that is what safe deposit boxes are for.

When you deposit your money in a bank, it’s the same thing. You are making a loan to the bank. The bank doesn’t store your money in a safe on your behalf; it uses it to balance its books.

If something goes wrong and you want your money back, you can just get in line behind the other creditors.

The future is always unknown. The bird in the bush could fly away. Or someone else could get him.

So, when you lend money, you need a little something to compensate you for the risk that the bird might get away.

…click on the above link to read the rest of the article…

Always Watched, Always Monitored, Always Recorded

March 2, 2016

Always Watched, Always Monitored, Always Recorded

Trade Slump

BALTIMORE – When we left you yesterday, we were discussing the War on Cash – the push by governments to abolish physical currency. It is a fraud. The idea is not to fight crime or boost the economy, as its proponents claim. It is part of a bigger campaign by the Deep State to take more control over your money… and your life.

We’ll return to our theme in a moment. But first… an update on the markets and the economy. It came out last week that world trade did indeed fall in 2015. It was the first time this had happened since 2009.

CAT The decline in sales of “yellow machines” has turned out to be a meaningful signal… Photo credit: Caterpillar Tractor Company

Starting at the end of last year, we began following the trains, trucks, ships, and sales of “yellow machines” – backhoes, loaders, bulldozers, etc. – and watching them all slow down.

Sure enough, they were telling us something important. Reports the Financial Times:

“The value of goods that crossed international borders last year fell 14% in dollar terms.”

Most notably, a decline in world trade means China is not exporting as much merchandise as before. This, we guessed, would mean a greater outflow of foreign exchange reserves from China’s central bank… and make it more difficult for it to prop up the exchange value of the renminbi.

The dollar value of global trade has slumped to the depths of the 2008/9 crisis low

A country accumulates foreign exchange reserves when it exports more than it imports. In the case of China, dollars, euro, etc… flow into the country in exchange for Chinese-made goods. This foreign currency builds up as reserves at the central bank. It can then dip into this stash to buy its own currency and prop up its value.

…click on the above link to read the rest of the article…

The Fatal Flaw That Has Doomed Our Economy

February 22, 2016

The Fatal Flaw That Has Doomed Our Economy

What Went Wrong?

BALTIMORE – We are searching for an insight. Each time we think we see it… like the shadow of a ghost in an old photo… it gets away from us. It concerns the real nature of our money system… and what’s wrong with it. Here… we bring new readers more fully into the picture… and try to spot the flaw that has doomed our economy.

Let’s begin with a question. After the invention of the internal combustion engine, people in Europe… and then the Americas… got richer, almost every year. Earnings rose. Wealth increased. Then in the 1970s, after two centuries, American men ceased making progress.

1859: Frenchman Etienne Lenoir builds a double-acting, spark-ignition engine that can be operated continuously. The internal combustion engine is born.

Despite more PhDs than ever… more scientists… more engineers… more capital… more knowledge… more Nobel Prizes… more college graduates… more machines… more factories… more patents… and the invention of the Internet… after adjusting for inflation, the typical American man earned no more in 2015 than he had 40 years before.

Why? What went wrong? No one knows. But we have a hypothesis. Not one person in 1,000 realizes it, but America’s money changed on August 15, 1971. After that, not even foreign governments could exchange their dollars for gold at a fixed rate.

The dollar still looked the same. It still acted the same. It still could be used to buy booze and cigarettes. But it was flawed money. And it changed the whole world economy in a fundamental way… a way that is just now coming into focus.

…click on the above link to read the rest of the article…

When Cash Is Outlawed… Only Outlaws Will Have Cash

February 18, 2016

When Cash Is Outlawed… Only Outlaws Will Have Cash

Control, Tax, Confiscate

BALTIMORE – Harvard economist Larry Summers is a reliable source of claptrap. And a frequent spokesman for the Deep State.

To bring new readers up to speed, voters don’t get a say in who runs the country. Instead, a “shadow government” of elites, cronies, lobbyists, bureaucrats, politicians, and zombies – aka the Deep State – is permanently in power.

22_summers_560x375 Larry Summers – the man with a plan for everyone. An economist whose economic theorizing is truly abominable crap (more on this in an upcoming post), a reliable, crypto-fascist, bought and paid for evil intellectual in the service of the Deep State. His “policy proposals” all have one thing in common: they are apodictically certain to restrict economic progress and individual liberty. Photo credit: Fabrice Coffrini / AFP / Getty Images

Put simply, it doesn’t matter which party is in power; the Deep State rules. Want to know what the Deep State is up to now? Read Larry Summers.

“It’s time to kill the $100 bill,” he wrote in the Washington Post (another reliable source of claptrap).

The Deep State wants you to use money it can easily control, tax, and confiscate. And paper currency is getting in its way.

France has already banned residents from making cash transactions of €1,000 ($1,114) or more. Norway and Sweden’s biggest banks urge the outright abolition of cash. And there are plans at the highest levels of government in Israel, India, and China to remove cash from circulation.

Deutsche Bank CEO John Cryan predicts that cash “probably won’t exist” 10 years from now. And here is Mr. Summers in the Washington Post:

“Illicit activities are facilitated when a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds, as would be the case if the $20 bill was the high denomination note.”

…click on the above link to read the rest of the article…

Convenient Beliefs

February 15, 2016

Convenient Beliefs

“Massive Deterioration” – Worse Than 2008

BALTMORE – “Stocks still not finding bottom” warned a headline at Investor’s Business Daily. On Thursday, the Dow ended down 255 points – or 1.6%. The index is down by almost 9% since the start of the year.

“These developments, if they prove persistent, could weigh on the outlook for economic activity…” proffered a nervous-looking Janet Yellen in her testimony on Capitol Hill. She was signaling to investors.

Yellen_cartoon_02.27.2015 Smoke signals…

“Don’t worry about us,” she may as well have said. “If we can get away with a big U-turn, we’re not going to raise rates anymore.”

On Tuesday, Maersk Group, the world’s largest container shipping company, said it was suffering a “massive deterioration” in its business.

“It is worse than 2008,” its CEO, Nils Andersen, told the Financial Times. But this is not even near the bottom for the world economy. Hedge fund manager Kyle Bass warns that the other shoe is a big one… and it hasn’t dropped yet.

A Maersk container ship…the line is feeling the pinch – the Baltic Dry Index has collapsed to just 291 points (from approx. 11,800 at the 2008 peak) and container shipping rates have declined sharply as well. Photo credit: Michael Kooren / Reuters

China’s economy is heavily dependent on capital investment. It puts its money into building factories, highways, offices, apartment blocks, railroads, ports, and airports. What do all these projects require? Rebar!

Concrete is reinforced with steel bars. As the pace of building slows, the price of rebar goes down. In 2008, a ton of rebar cost about 5,500 renminbi ($836). Now, it costs barely 2,000 renminbi ($304) – the lowest price in at least 15 years.

Shanghai steel rebar futures, weekly in RMB – click to enlarge.

…click on the above link to read the rest of the article…

The Deep State’s Top Choice for President Is…

February 13, 2016

Businessman holding a white billboard with a question mark on it

The Deep State’s Top Choice for President Is…

RANCHO SANTANA, Nicaragua – We’re traveling home to the U.S. from our recent meeting with members of our family wealth advisory, Bonner & Partners Family Office. So, we’ll make this short.

The Dow sold off again yesterday. At midday, it was down nearly 400 points. Then it recovered to end down only 178 points – or about 1%.

As we’ve been warning, this market is extremely vulnerable. Watch out.

Meanwhile… who’s the crony?

Democrat front-runner Hillary Clinton is the Deep State’s top choice for president.

She has already received $21 million from Wall Street for her campaign. That’s 280 times more than Bernie Sanders.

This is why Sanders and Donald Trump are doing so well in the polls. People are catching on to how the system works. They know they are being taken for fools.

According to a recent CNN poll, 69% of Americans are either “very angry” or “somewhat angry” about “the way things are going” in the U.S.

And according to a recent NBC/Wall Street Journal poll, the same percentage – 69% – are angry because the U.S. political system “seems to only be working for the insiders with money and power, like those on Wall Street or in Washington.”

Among young voters, according to a well-watched video, “syphilis is more popular than Hillary.”

But Clinton is the crony favorite, supported by Wall Street and the Pentagon.

In the old days, the conservatives believed the U.S. government was the devil at home and an angel abroad. The liberals believed the government was an angel at home and a devil overseas.

Hillary believes that government always wears wings – at home and abroad.

The Rise of the Outsiders

The young and the plain folk know it isn’t so.

They put on uniforms. They salute the flag. They do their military service. They pay their taxes. But they know something is wrong.

…click on the above link to read the rest of the article…

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