On Economy


Going Against the Grain  

Back in 2013, Botswana was alone among African countries in its vehement rejection of the fraudulent election in Zimbabwe that kept the aging dictator Robert Mugabe in power.

An article in Bulawayo 24 [Bulawayo and Zimbabwe’s online news resource … Ed.] goes on to note that some critics in Botswana believe that the government is not entirely consistent in applying its foreign policy ideals. However, that shouldn’t detract from the fact that it very often finds itself alone in Africa when it is voicing its disapproval of injustice elsewhere on the continent.



The Okavango Delta

Photo credit: Ross Serven

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The season of fasting is upon us. No more high living. It’s time to cinch up our belts … to put on a gaunt face and a smug look. Alone among friends and associates, we will keep Lent.

So neglected is Lent that even Google has forgotten about it. When we did a search it proposed “lentil soup.” Lent is meant to rehearse the 40 days and nights that Jesus spent fasting in the desert before going public.

We remember the lean days with prayer, meditation and self-denial. No alcohol will cross our lips from Ash Wednesday till Easter Sunday. (Except on Sundays. And saints’ days. And national holidays. And days that begin with the letter “T” or that have a date that is a prime number.)

Yes, dear reader, we will be true to the church calendar, with a few emendations of our own.



Photo credit: Tao Zhyn


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Boom-Bust Mechanics

We want to focus on a specific aspect of the current money supply expansion in this part. The topics of “price inflation”, as well as investment and production will be discussed in a follow-up post shortly.

Let us consider the mechanics of past boom-bust cycles in the US. In “normal” booms, banks expand credit to companies and households, with the former employing the funds mainly for investment and the latter for consumption. Banks that don’t have sufficient reserves will borrow them in the interbank market (Federal Funds market), where the Fed stands ready to satisfy any excess demand for reserves that threatens to push the overnight Federal Funds rate above its administered target rate. In short, monetary inflation is driven by bank credit expansion and accommodated by the central bank. To the extent that the Fed-administered target rate manipulates market interest rates below the natural rate dictated by society-wide time preferences, this seemingly “harmonious” inflationary process will promote ever more malinvestment of scarce capital as well as overconsumption. Eventually the central bank becomes worried that the credit expansion may push consumer prices above its arbitrary target for CPI and begins to hike rates – then the artificial boom falters with a lag and a bust ensues. The central bank thereupon lowers rates again. Lather, rinse, repeat.

 economyImage credit: mevans


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Victim of Good Fortune

The following is a two-part series. The views expressed may or may not coincide with those of Bonner & Partners. They may not even coincide with those of their author.

Sometimes right, sometimes wrong, always in doubt – we try on ideas like a grown man trying on a pair of shorts. We want to see how they look before we buy them. We leave it to you to decide for yourself which of the following ideas look most ridiculous.



Photo credit: U.S. National Park Service


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Corporate Leverage Gets Corzined …

A friend pointed us to a post by Macroman that discusses revisions to the flow of funds data published by the Fed that have apparently already been made a few months ago. Nothing about them seems remarkable, until one gets to corporate non-financial debt. Apparently, all that debt that has been taken on by companies in recent years has suddenly disappeared, as if by magic.



Photo credit: ThinkStock


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Overwhelmed Episcopalian

Today … why some of the smartest guys in finance are total morons. But first a report from the Rio Carnaval, where we spent last weekend.

A plumber would probably like it. A psychiatrist might say it is normal. And maybe a Roman Catholic could handle it. But there were too many quivering buttocks for an Episcopalian.

There must have been 10,000 of them – sweating … shaking … twerking … and vibrating – in the Sambadrome on Saturday night.

The costumes were as unrestrained, immodest and over-the-top as you might imagine. The idea seemed to be to attach as many sequins and feathers as possible. And almost everywhere, amid the gaud and glitz of the getup, were the shimmering cheeks.



Photo via unlike.net


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Introducing Money

Imagine three men living on a small island. Toni is mining the local salt mine, and apart from him there are Pete the fisherman and Tom the apple grower and their families. They have a barter trading system set up: Toni exchanges his salt for Pete’s fishes and Tom’s apples, who in turn exchange fishes and apples between each other.

One day Pete says: “I have an idea. Instead of fish, I will from now on give you pieces of papyrus with numbers marked on them”. Papyrus grows in great quantities nearby, but has so far not been of practical use to any of the islanders. Pete continues: “One papyrus mark will represent 1 fish or 5 apples or 2 bags of salt (equivalent to current barter exchange rates). This will make it easier for us to trade among ourselves. We won’t have to lug fishes, apples and salt around all the time. Instead, we can simply present the pieces of papyrus to each other for exchange on demand.”



John Law at a young age – the world’s first Keynesian economist

Painting by Casimir Balthazar


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Admirable Concern

We are in Buenos Aires, enjoying a rainy afternoon on Calle Gurruchaga in the Palermo Soho neighborhood. It is calm. It is pleasant. The food is good. The wine is strong. The women are good-looking. And the US government has our back!



Image credit: Sony Online Entertainment


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Lots of Noise

US stocks were flat on Tuesday. Gold fell $18 – almost back to the $1,200-an-ounce level.

Noise, noise and more noise.

When we were in São Paulo we were asked to give a brief speech to Brazilian investors. They wanted to know what we considered to be the most important things an investor should know.

What follows is more or less what we said. (Long-suffering Diary readers are invited to skip this, since they will find few new ingredients. On the other hand, you may find the new distillation more agreeable.



Photo credit: Aaron Logan


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The Strange Case of the Disappearing Debt

Every day, we think we see more clearly where this is going. And every day, we are staggered by it.

Our mind boggles. Our knees buckle. We hold our breath and reach for a caipirinha: For the first time ever, central banks are printing more money than governments can use.

That’s right. After central bank buying, net government debt sales will be NEGATIVE.

Yes, governments will still run deficits. Yes, they still will borrow trillions of dollars. But after central banks finish buying their debt this year, there will be less government debt on the open market at the end of the year than there was at the beginning.

Government debt will vanish … as miraculously as the central bank funds that appeared to buy it.

Is this a wonderful system or what?


vanishingCue fear strings …



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A Den of Corruption

A ruling class, no matter its spots or stripes, is everywhere given to over-privileging its own. And the stronger its hold on power, the greater is its accumulation of wealth relative to those outside the power circles.

I recently had occasion to update my thinking on China, its massive waste generation in the last 10-15 years, and Chinese Communist Party members as major beneficiaries of this massive waste, and therefore also the continued need for Xi Jinping to keep cleaning up the more blatant instances of corruption and wealth transfer.

The commodities boom of the 2000ds proved to be backed by a massive wave of over-production, waste and a social movement to self-enrichment by the privileged class of China. President Xi Jinping in many ways is now contributing to lowering commodity prices as a byproduct of his crackdown.


tien-an-men square

Photo credit: fmh


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A Raft of Coincidences

A glassblower’s shop. A used-furniture store. Luxury high-rise condos protected by double fences and electric wire. Neighborhood bars. Fancy restaurants. Sushi. Pizza. Bold glass office buildings.

The Itaim Bibi neighborhood of São Paulo seems to have been spared the zoners’ boring prescriptions. Offices, houses, shops all mingle promiscuously. A small house – modest, cheap, built in the 1950s – sits across from our hotel. It’s forgotten by time, surrounded by the commerce of the 21st century.

Another house on the Rua Floriano sits underneath an office complex. The owners refused to sell. So the developers built a huge, slick office tower right over it.

“It’s a great city,” says a colleague. “There are only a handful of cities like this in the world. London, Shanghai, Mumbai, Beijing. Paris is a small town in comparison.”

Little by little, we’re beginning to find our way around. But we’re not here for our own amusement. We’re not just drinking caipirinhas and ogling the Paulistas. No, that would be selfish. We’re here on your behalf, to learn. To study. To try to understand how this economy works.

It’s just a coincidence that it’s summer here. And that this weekend it’s Carnaval. And that we have a ticket to Rio in our pocket.



Photo credit: victorpalmer


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The Bad Analogy Debtberg

Last week, McKinsey Global Institute reported that the world’s total debt levels were twice what we thought – $200 trillion, or about three times the planet’s total output.

So, what a relief it was to discover… only a few hours later… that there was nothing whatsoever to worry about. Our concern was totally misplaced. It was nothing but a colossal misunderstanding or, as Nobel laureate economist Paul Krugman put it in the New York Times, a “bad analogy.”

So now, we can go back to our Portuguese lessons here in São Paolo without a care.


1-Global Debt Growth

Growth in global debt, per the latest McKinsey report on the non-deleveraging echo bubble era: Since Q4 2007, global debt levels have increased by a cool $57 trillion. Thankfully, Paul Krugman informs us that it “doesn’t matter”. Phew! Dodged a bullet there! – click to enlarge.


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Small Business Optimism Retreats

Today the NFIB (National Federation of Independent Business) data for January were released. Late last year, the small business optimism index climbed above the 100 level for the first time in eight years. However, this still compared quite unfavorably with what used to be the norm in recoveries during the “normal” bubble era prior to the 2008 crisis.




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The Final Chapter in the Credit Bubble Story

Before we get to that, we note that the Dow fell 60 points, or 0.3%, on Friday. Gold was more or less unchanged. An ounce of the yellow metal traded at $1,242 at last check.

Not to leave our dear Diary readers in doubt, we expect a crack… or even a crash… in stocks sometime this year. But that won’t be the end of the story. We suspect it will mark the end of one chapter and the beginning of another – the final chapter in the credit bubble story that began in the early 1970s.

It’s a long story. And it’s a big story. Too bad it has been so overshadowed. Watergate … Vietnam … massacres from Hanoi to Bombay … Boy George and J-Lo. The plain people have time for the Super Bowl, but certainly not for the Super Bubble … even though it is more important to them.



A famous – and horrendously expensive – painting by Paul Gauguin (Nafea faa ipoipo?). In fact, it just became the most expensive art work in all of history.


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