Socialism is for Simpletons
RHINEBECK, New York – We spent the weekend up north… where people put “Feel the Bern” bumper stickers on their Subarus. In a tavern in Rhinebeck – where we are writing – the “socialist” slap seems to have lost its sting. There is a reverential portrait of FDR near the bar.
“He’s the only candidate who makes any sense to me,” said a local. “You can’t trust Hillary. And the Republicans are all nuts.”
He seems to make a lot of sense… provided your horizon ends roughly at the edge of your plate.
He’s right. You can’t trust Hillary. The Republicans may all be nuts. And socialism “makes sense”… in a simpleton kind of way. Most voters want more stuff. Sanders offers to take stuff from other people and give it to them. That “makes sense,” doesn’t it?
Too bad. Because as Maggie Thatcher pointed out, you soon run out of other people’s money. But the voters of Dutchess County don’t seem to be concerned. Back to the markets…
Japan Drops the Big One
“Thank Goodness That’s Over,” proclaimed Barron’s on Friday, as the Dow added nearly 400 points. But is the bear market really over? What sent the Dow soaring was a surprise rate cut – this time by the Bank of Japan. This left short-term rates in Japan at negative 0.1%.
As we covered in the December issue of our monthly publication, The Bill Bonner Letter, in addition to the War on Poverty, the War on Drugs, and the War on Terror, there’s also a War on the Credit Cycle. It is a war to prevent a correction in the credit market. Credit has been increasing for the last 33 years – largely thanks to the feds’ undying support.
Before the link between the dollar and gold was severed, credit was rationed by a market. When savings are abundant and borrowers are few, supply and demand dynamics caused the price of credit to fall. This lowered the cost of capital, discouraged saving, and allowed businesses to undertake projects that, at higher interest rates, would not have been possible.
Thus stimulated, economic activity increased… businesses expanded… wages rose… spending increased… corporate profits, and the stock market, usually went up… and interest rates rose as more and more borrowers competed for fewer and fewer available savings.
Higher rates pinched off the credit expansion and encouraged people to save more money. Stocks, now competing with higher yields in the bond market and on bank deposits, went down again. That is how the credit cycle is supposed to work. It naturally corrects – in both directions.
Smarter Than God
But then along came the post-1971 “fiat” dollar…and with it came a credit system that no longer needed savings… central banks that were determined to hold down the cost of borrowing, no matter what… and PhD economists who believed they were smarter than God.
Since the big change in the money system, markets have been pushed into the background; the feds now decide how much you pay for credit. Twice this century, markets have fought back. And twice, the Fed has beaten them with a fire hose of rate cuts, bailouts, and bond buying.
On Monday we showed you an important chart from Deutsche Bank. It revealed how closely gains in the S&P 500 had tracked the ballooning of the Fed’s balance sheet since the start of QE in late 2008.
Naturally, investors have gotten used to the idea that central banks have got their backs. So when the Bank of Japan announced it was dropping short-term interest rates into negative territory for the first time ever, investors got the message. On Friday, the U.S. stock market put in a strong rally. The Dow ended the day up 396 points – or about 2.5%.
Plenty More “Ammo”
We’ve been getting a lot of feedback on our note about Sarah Palin’s use of language. Our favorite was this from a dear reader:
“Having fun” in writing about Sarah Palin? Then you have a lot in common with my ex-husband on what you think is fun. I am not sure I like you much better than him, either…
Completely understandable… and to the point. We feel we must alert new readers: Here at the Diary, we are not always so clear… or so direct.
When we were younger, we had answers – clear, quick, and confident. Now, all we have is questions. And we’re not even sure which ones to ask. Is Sarah Palin really the dumbbell she appears to be?
We don’t know the answer. More than one wily scoundrel has been elected to office by pretending to be a “man of the people.” Does Bernie Sanders have any economic ideas that haven’t been proven idiotic? Is the bear market on Wall Street over? Darned if we know that either…
But we are pretty sure that the feds’ War on the Credit Cycle is not over. In fact, it has barely begun. This is a war that the feds can’t afford to lose. The Deep State – the “shadow government” that really rules the U.S. – depends on more and more credit to keep expanding its power and drawing wealth away from the public.
The tentacles of the Deep State are reaching far…
Yes, the Fed famously “used up all its ammunition” in driving rates to zero. But it has plenty more weapons such as negative interest rates… “helicopter money”… and banning cash from circulation to prevent us from stuffing it under the mattresses. And the Deep State has plenty of allies.
So far this year, the president of the European Central Bank, Mario “Whatever It Takes” Draghi, announced that there would be “no limits” to how far he would go in his fight against the credit cycle. Draghi has already pushed short-term rates in the euro zone into negative territory. It joined Switzerland, Denmark, and Sweden in the world of “NIRP” (negative-interest-rate policy).
We’ll drown you in euros, unbelievers!
Now, the Japanese have followed suit. More war ahead…
Charts by: TradingEconomics, StockCharts
Chart and image captions by PT
The Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.at the Diary of a Rogue Economist, written for
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
One Response to “The War on the Credit Cycle Has Only Just Begun…”
Most read in the last 20 days:
- Gold - Ready to Spring Another Surprise
Sentiment Extremes Below is an update of a number of interesting data points related to the gold market. Whether “interesting” will become “meaningful” remains to be seen, as most of gold's fundamental drivers aren't yet bullishly aligned. One must keep in mind though that gold is very sensitive with respect to anticipating future developments in market liquidity and the reaction these will elicit from central banks. Often this involves very long lead times. Blackbeard's...
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...