Crack Up!

BALTIMORE – The Dow rose on Wednesday morning… after Janet Yellen made soothing remarks about a “gradual” return to normal interest rates. Then investors must have realized that returning to normal is not on the Fed’s agenda. The Dow finished the day down 99 points.

We haven’t seen normal central bank policy since the Nixon years. Normal is a currency backed by gold, not by PhD economists. Only briefly and episodically, over the last 2000 years, has the world flirted with pure paper or “fiat” money. Every time, the affair was over in a short time… and regretted for a long time.


1-Fate_of_CurrenciesThe result of the usurpation of money by government


Under a gold standard, credit comes from savings. Thus limited, interest rates typically stand somewhere in the 3% to 6% range. They do not roll around on the barroom floor with the spilt beer, drunks, and sawdust.

Real credit comes from money that is saved… taken out of the consumer economy so that it can be used for emergencies and capital investments. When it is paid back – usually out of increased output – the world is a richer place.

But try to trick the economy with phony credit – money that was never earned and never saved – and you are just asking for trouble. Said Jörg Guido Hülsmann, a senior fellow at the Mises Institute:


“In no period of human history has paper money spontaneously emerged on the free market. In all known historical cases, paper money has come into existence through government-sponsored breach of contract and other violations of private property rights.”


Guido_Huelsmann2Jörg-Guido Hülsmann – a staunch proponent of a free market in money (you can read his book “The Ethics of Money Production” for free here, pdf)

Photo via


Giving out more money always gives the economy a temporary lift. People think they are richer. They spend; they want more and more. But then what? Austrian School economist Ludwig von Mises said:


“The boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation – which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion, and thus bring about the crisis. The depression follows in both instances.”


Are you ready, dear reader?


2-Weimar-AThe final phase of the crack-up boom in Germany 1922-1923. A: paper mark/dollar exchange rate, B: nominal wages, C: unemployment rate, D: real wages – click to enlarge.


No Limits

No need to hurry. Because central banks are attempting to continue the credit expansion, without restriction. In other words, there’s a lot more nonsense coming down the pike. Twice this century, markets have tested the resolve of policymakers. “How far will they go?” Mr. Market wanted to know. “What dumb thing will they do next?” he wondered.

European Central Bank chief Mario Draghi spoke for all the world’s central bankers when he assured the financial elites there would be “no limits” to what he might do. We have had seven years of ZIRP (zero-interest-rate policy) in the U.S. Japan has been at zero for over 15 years. Now, a third of the world’s sovereign debt carries subzero nominal yields… That is before you account for inflation.


3-neg-yield$5.5 trillion in government bonds are sporting negative yields as of early 2016.


And for the first time since 2008, U.S. corporations are having trouble borrowing more money to increase dividends. Energy companies, tech companies, and the banks all are drifting to the edge of defaults and bankruptcies. Last Tuesday, shares in oil major BP fell 10%, after reporting an annual loss of $5.2 billion.

After making big bets on the energy sector, billionaire investor Carl Icahn’s investment vehicle, Icahn Enterprises, dropped to its lowest point in three years… down 68% from its 2013 peak. And shares in Deutsche Bank, Credit Suisse, and UniCredit – all big European banks – have more or less been cut in half.


Monetary Nuttiness

The Bank of Japan is now on its tenth QE program. Over the last two years, it has added 338% to Japan’s monetary base (made up of bank reserves and physical currency). Over the same period, the average household income has fallen by 7%.

Now, with the total failure of ZIRP, Japan is doubling down… with NIRP (negative-interest-rate policy). This has pushed the yields on 10-year Japanese government bonds into negative territory.


4-JGBJGB yields since 2011 – last week they briefly dipped into negative territory – click to enlarge.


The Japanese government now gets paid to borrow. Henceforth, there will be no need to raise taxes… or even to levy them at all. Borrowers are now effectively being taxed to park their money with the government.

Meanwhile, our sources tell us that a property in the Hamptons has sold for a record-breaking $110 million. The so-called Lily Pond Lane sale – of three properties on 6.4 acres with 284 feet of oceanfront – is said to be the fifth most expensive residential purchase in U.S. history. We don’t know. But our guess is that its place in the record books is secure… at least for a while.

Boom… bust… boom…none of this is normal – except when you are suffering an old fashioned, run-of-the-mill bout of monetary nuttiness. In that “orgy of speculation,” the sky is the limit.

Then the sky falls on your head.


the_sky_is_falling_by_penator-d62y9jtSometimes, the sky really is falling….

Illustration by Penator


Charts by:,, FT, BigCharts


Chart and image captions by PT


The above article originally appeared 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.



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