NEW YORK – “Not a bad view. That’s the mayor’s house right beneath us.”
We were on the 16th floor of a new apartment building, looking out over the East River. With us was President Reagan’s former budget advisor and Wall Street veteran David Stockman – a man who has been closer to the Bubble Epoch than almost anyone.
The Dow rose 183 points on Wednesday – or just over 1% – after starting the day in the red.
William Salomon in Salomon Bros. & Hutzler’s trading room in 1965. Salomon Bros. sold the first ever mortgage-backed bond on Wall Street in the 1980s
Photo credit: Arthur Brower / The New York Times
“I was there at the creation,” said David.
“After leaving government, I went to Salomon Brothers in the late 1980s. We were just starting to put together packages of mortgage-backed debt.”
Bubble finance has taken many shapes and sizes. Mortgage-backed derivatives. Private equity. Junk bonds. Student debt. Subprime auto loans. Stock buybacks. This debt was a curse to most Americans. But it blessed Manhattan.
The weekend’s Financial Times included real estate listings from New York City. There was a penthouse apartment for sale on the Upper East Side for $60 million. Luxury digs on the West Side were going for $30 million… another for $16 million.
You don’t make that kind of money parking cars… or making them. So, if you want to buy one of these places, you almost have to work in finance. Most people have no idea how the financial world works. They think investments go up or down and you make money depending on your luck or your skill – just like any other game. They don’t know the game is rigged.
Central banks make credit available to the big banks at preferential rates. The banks then earn a fat “spread” by making loans to government, industry, and households. They make money lending… and then, they make money again by packaging and selling the debt to investors, pension funds, and insurance companies.
Everything is fine until the credit cycle turns down. Then marginal debtors can’t pay and marginal (sub-prime or junk) debt loses value. Stocks and real estate go down, too. Everybody loses money. And everyone wants the Fed to “do something.” What can it do? Make credit even cheaper!
Stockman was present at the creation of the whole Bubble Epoch. In 1981, President Reagan appointed him to be his first budget director. Four years later, he quit in disgust.
“Funny, isn’t it? I was alarmed by a national debt of $900 billion. Yesterday, it went over $19 trillion. And nobody cared.”
President Nixon made the Bubble Epoch possible by going off the gold standard in 1971. No “golden anchor”: no limit on how much money and credit you could create. But the Bubble Epoch didn’t really begin until 10 years later under “The Gipper.”
Then budget director David Stockman (right) skeptically eyes treasury secretary Don Regan and the Gipper
Photo credit: Dennis Cook / AP
Stockman battled the big spenders in the Republican Party – and lost. After he was out of the way, Reagan ran some of the biggest deficits ever. Soon, debt was out of control everywhere – in government, industry, and private consumption.
“We must be nearing the end of this,” said Stockman. “I expect the whole world economy to plunge into deflation and recession.”
Charts by: StockCharts, St. Louis Federal Reserve Research
Chart and image captions by PT
The above article originally appeared as “Boomers Are Being Led Like Lambs to the Slaughter” at the Diary of a Rogue Economist, written for 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.
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
3 Responses to “The Era of Bubble Finance”
Most read in the last 20 days:
- Gold Price Skyrockets in India after Currency Ban – Part III
When Money Dies In part-I of the dispatch we talked about what happened during the first two days after Indian Prime Minister, Narendra Modi banned Rs 500 and Rs 1000 banknotes, comprising of 88% of the monetary value of cash in circulation. In part-II, we talked about the scenes, chaos, desperation, and massive loss of productive capacity that this ban had led to over the next few days. Indian prime minister Narendra Modi – another finger-wagger, as can be seen in this...
- Gold Price Skyrockets in India after Currency Ban – Part II
Chaos in the Wake of the Ban Here is a link to Part 1, about what happened in the first two days after India's government made Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes illegal. They can now only be converted to Rs 100 (~$1.50) or lower denomination notes, at bank branches or post offices. Banks were closed the first day after the decision. What follows is the crux of what has happened over the subsequent four days. India's prime minister Nahendra Modi, author of the...
- Gold Price Skyrockets in India after Currency Ban – Part IV
A Market Gripped by Fear The Indian Prime Minister announced on 8th November 2016 that Rs 500 and Rs 1,000 banknotes would no longer be legal tender. Linked are Part-I, Part-II and Part-III updates on the rapidly encroaching police state. The economic and social mess that Modi has created is unprecedented. It will go down in history as an epitome of naivety and arrogance due to Modi’s self-centered desire to increase tax-collection at any cost. Indian jewelry...
- A Note on Gold and India – What is Driving the Gold Price?
Hidden Motives It is well-known that India's government wants to coerce its population into “modernizing” its financial behavior and abandoning its traditions. The recent ban on large-denomination banknotes was not only meant to fight corruption. Obviously, this very bad Indian has way too much cash. Just look at him, he looks suspicious! Photo via thenewsminute.com In fact, as our friend Jayant Bhandari has pointed out, fresh avenues for corruption ...
- India's Currency Debacle – An Interview with Jayant Bhandari
A Major Crisis Last week Jayant Bhandari related the story of the overnight ban of certain banknotes in India under cover of “stamping out corruption” (see Gold Price Skyrockets In India after Currency Ban Part 1 and Part 2 for the details). Banned 500 rupee banknotes The problem is inter alia that the sudden ban of these banknotes has hit the Indian economy quite hard, given that 97% of all transactions in the country are cash-based. Not only that, it has...
- Will the Swamp Swallow Trump?
Permanently Skewed TRUMP HOTEL, New York – Trump’s rambling army – professionals, amateurs, camp followers, and profiteers – is marching south, down the I-95 corridor. There, on the banks of the Potomac, it will fight its next big battle. Lieutenants in Trump's army: Bannon, Flynn & Sessions Photo credit: Drew Angerer / AFP Here at the Diary, we do not like to get involved in politics. But this is a special time in the history of our planet – a...
- There Are Two Types of Credit — One of Them Leads to Booms and Busts
Stumped by the Bust In the slump of a cycle, businesses that were thriving begin to experience difficulties or go under. They do so not because of firm-specific entrepreneurial errors but rather in tandem with whole sectors of the economy. People who were wealthy yesterday have become poor today. Factories that were busy yesterday are shut down today, and workers are out of jobs. What has caused the bust? The modern-day economic orthodoxy continues to be unable to provide...
- All Aboard! Trump’s Express Train to the Future
Free Money! BALTIMORE – Last week, the Dow punched up above 19,000 – a new all-time record. And on Monday, the Dow, the S&P 500, the Nasdaq, and the small-cap Russell 2000 each hit new all-time highs. The last time that happened was on the last day of December 1999. Ironically, two events that were almost universally expected to trigger large stock market declines were followed by quite rapid and strong gains. Would the market have fallen if Hillary Clinton had won...
- Attaining Self-Destruct Velocity
Bad Monday Some Monday mornings are better than others. Others are worse than some. For one Amazon employee, this past Monday morning was particularly bad. No doubt, the poor fellow would have been better off he’d called in sick to work. Such a simple decision would have saved him from extreme agony. But, unfortunately, he showed up at Amazon’s Seattle headquarters and put on a public and painful display of madness. Good-bye cruel world! On this our planet,...
- Gold Bull Market Remains Intact – Long Term Fundamentals Outweigh Short Term Market Gyrations
A Strong First Half of the Year, Followed by Another Retreat In early 2016 gold had a big bull run. The precious metal rose close to 25% this year, pushed higher in a summer rally that peaked on July 10th. Gold experienced a bumpy ride over the remainder of the summer though, as investors became increasingly concerned about a potential rate hike by the Federal Reserve. Uncertainty returned to gold market and has intensified further since then. Initially, gold rallied sharply...
- Too Early for “Inflation Bets”?
The Trump Trade After 35 years of waiting... so many false signals... so often deceived... so often disappointed... bond bears gathered on rooftops as though awaiting the Second Coming. Many times, investors have said to themselves, “This is it! This is the end of the Great Bull Market in Bonds!” The long bond's long cycle – red rectangles indicate when the post 1980 bull market was held to be “over” or “over for sure” or “100% over”, etc. We have...
- About that Economic Inequality
Illusory Riches, Obvious Impoverishment I address this essay to two groups. One group is those among the liberty movement, who believe that there’s nothing wrong with inequality. These are often Objectivists, who unknowingly defend a regime that artificially suppresses working people. And suddenly, you feel much lighter... The other group is those among the Left who still call themselves liberals. They say they don’t like inequality, but nevertheless...