$8 Trillion Transfer
RHINEBECK, New York – It is a beautiful autumnal day here in upstate New York. The trees are red, brown, and yellow. Squirrels hop across the lawn, collecting their nuts. Unseasonably warm the last few days, rain showers are moving in from across the Hudson, driven by a chilly wind.
But today, we talk about money. After all, that’s our beat here at the Diary. Money. Money. Money. We’ve seen how the feds created fake money after ditching the Bretton Woods gold-backed money system in 1971.
And we’ve seen how this fake money perverted, distorted, and corrupted our economy, our government, and even our family lives. We pause here to recall how it even dodged the Constitution.
“Money matters” are supposed to be decided by the people’s representatives in the House, and then discussed and approved by the Senate. After all, it’s voters’ money.
But the Fed – without so much as a by-your-leave or a thank-you note – took it upon itself to decide the fate of more than $8 trillion. That is a rough estimate of the amount not paid to savers over the last eight years as a result of the Fed’s ultra-low interest rate policy.
The total transfer is much greater – since stock, bond, real estate, and other asset prices all rose in response to the trillions of dollars of new credits the Fed was putting into the system. This enriched their owners and made those who didn’t own them relatively poorer.
Wall Street Bonus Plan
The Fed worked out its own income redistribution plan – from savers to borrowers – without even any public discussion. Had it been put before the House for a vote, it might have been called the “Rich Get Richer Program.” Or maybe the “Wall Street Bonus Plan.” Or perhaps the “Mislead Consumers, Investors, and Businesses by Mispricing Credit Act of 2009.”
How can you not like this free money shower? It all depends on when you get the new money – if you get it at all.
Cartoon by Lisa Benson
You can imagine how this kind of legislation would go down in the nation’s capital.
But fortunately for the rich, Wall Street, the Deep State, and the entire debtor class, the plan needed no votes from the people’s representatives, neither in the House nor the Senate.
Nor did the president of all the Americans ever have to sign the final legislation. All it needed was the approval of the 12 unelected members of the Fed’s decision-making body, the Federal Open Market Committee – and the deal was done.
In his recent article in The Economist (the subject of yesterday’s Diary), President Obama acts as though the Fed’s plan – which he must have approved, though we don’t recall him saying so – was a great success.
Everybody has their own facts. But we wonder in what looking glass Mr. Obama found his. He sounds as though the economy was like a house plant that he inherited when he moved into the White House. By his account, it was wilting when he found it; he gave it water… and it flourished.
But GDP growth during the eight years of the Obama administration averaged half the rate of the Clinton years and only one-third the rate of the Kennedy and Johnson years.
Economic expansions since the end of WW2 – over time, economic statistics have practically been tortured to death to produce results flattering the government and its central planning minions; and yet, output growth has steadily worsened for decades. Obama’s much-heralded recovery was the weakest of the entire post WW era – click to enlarge.
And if we calculate “real,” or inflation-adjusted, economic growth under Obama’s two terms according to the methodology used during the Reagan administration, we see that Obama’s growth disappears completely!
We’ve been writing about it for the last 15 years… puzzling over it… trying to connect the dots to see what was really going on. But only recently have we turned the light on the real culprit: the money system.
Fake money caused fake and fragile growth. In effect, the feds’ fake money created a hothouse economy – protected from the real world by artificial money lent at artificially low rates. You see plants that look lush and green, leafy and fulsome. But they couldn’t survive a single night outside in the real world.
That is the “macro” picture – the big picture. But it’s important for investors to think about. Because macro has a way of turning micro. The big, wide world tends to have a crushing effect when it falls on your stocks and bonds.
The fake dollar distorted everything. If you own a $100 stock, for example, behind it is a company whose sales were artificially inflated by fake money. Its customers thought they were richer than they really were – thanks to fake asset values.
Its borrowing costs went down because of the Fed’s fake interest rates. Its profits went up, thanks to higher sales and lower costs. Even the value of its shares are a mirage – puffed up as they are by share buybacks – funded, of course, at near-zero rates.
And when the cycle turns – when credit markets tighten – the hothouse glass cracks. And then shatters. The gentle climate of mutually supported fakeness turns to bitter-cold reality. Higher interest rates put pressure on the whole system.
Customers lose their houses, their jobs, and their cars. Store parking lots are empty. Their cash registers are silent. Sales go down. Profits tumble. Stock prices collapse. Unable to pay their corporate debts, the companies default. Bond prices – for all but the best bonds – fall. Spreads widen.
A heads-up: The first cracks have already appeared. Since its low this warm summer, the yield on the 10-year Treasury note – a key bellwether for borrowing costs across the economy – has risen almost 52%.
We may – finally, after 35 years – have seen the bottom in bond yields, the end of the bull market in bonds that began in 1981. The wind may be picking up. Make sure you have a scarf.
Charts by: St. Louis Federal Reserve Research, Econsnapshot, StockCharts
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.
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 Fed’s “Hothouse” Is in Danger”
Most read in the last 20 days:
- 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...
- US Financial Markets – Alarm Bells are Ringing
A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
- 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....
- 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...
- 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...
- 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...
- 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...