More Credit to “Contain the Depression”

by Bill Bonner.Posted Jul 11, 2012.

And oh yes…our new book is also going to explain why economists are completely incompetent. They claim to know things they could never really know…and to be able to do things they couldn’t do in a million years. As a result of their conceits and delusions, trillions of dollars have been clipped from the world’s GDP…billions of people are poorer…their lives shorter, meaner…with less stuff.

Economists were largely responsible — usually in their policy-making roles — for the huge credit bubble that took debt to GDP in the US from 112% in 1972 to 296% in 2008. They told the feds that they needed a “flexible” currency. What they got, of course, was one that was flexible in one way only — it stretched out…but never came back. Credit expanded 50 times in the last 50 years.

Then, when the debt bubble blew up in ’08-’09, economists stepped in again…this time to prevent the private sector from setting things right. Instead of letting a crash and quick depression wipe out the excess debt quickly, the feds engineered a “contained depression” which can go on for decades.

What contains the depression? More credit!

Deficits…bailouts…subsidies…and the lowest interest rates ever. You can look throughout the developed world; the highest interest rate offered by central banks for short-term money is only 0.75%.

And now economists are warning that the US tax economy could fall off a ‘fiscal cliff’ at the end of the year. Tax rates will go up. Automatic spending cuts will come down hard. This will allow the depression to break out of its cage…or so they worry.

“Stop, before it is too late,” they say.

Over at the Pentagon, for example, contractors are forced to worry that their next boondoggle might be cut off. Military cuts threaten Barack Obama’s program of “Strategic Guidance,” says an article in today’s Financial Times. In addition, one million jobs could be lost! The US would fall into real depression!

If only!

Since the crisis began, private sector debt has gone down…but only to 250% of GDP. That’s still more than 2 times what it was when the US still had honest money. Much of that debt must be “bad” — in the sense that it couldn’t withstand a financial crisis…or wouldn’t still be on the books were it not for the feds’ clumsy meddling. That’s why nature, in her wisdom, provides us with natural debt-cleansing episodes…also known as depressions.

More to come…

Regards,

Bill Bonner
for The Daily Reckoning

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010.

reeyaz

It would be better if they brought the interest rate to zero.It would be best that interest be abolished completely.
bigger

hey reeyaz,
don’t ask to borrow -anything- from me…ever. there’s a reason muslims don’t believe in interest and you know what that is
reeyaz

Muslims believe in the unadulterated Quran.If interest is forbidden in the Quran, we donot ask why ;we just do; till we die.If you think theres another reason,you are sadly mistaken.
http://www.investorsfriend.com The InvestorsFriend

CREDIT AND DEBT ARE WONDERFUL (REALLY!)

Credit and debt are how a modern economy shares real things like food, clothing and shelter.

If one richer person comsumes less real things than they could based on their salary, then they deposit their extra money (claim checks on stuff) into a bank. The bank then lends that money (claim checks) to someone who needs to consume but has not the money.

To suggest that there be no debt or even less debt is to suggest we not share the bounty and that the poor starve while the wealthy use their money to buy stuff they don’t need, rather than lending out that excess money
http://www.investorsfriend.com The InvestorsFriend

PEOPLE GOT POORER

Really? when house prices crashed, the amount of actual houses did not change. Price changes don’t change the total wealth of the earth

Money is not in itself wealth.

Wealth is real stuff, money is how we measure wealth. Money is not wealth.

Smart investors own stocks which are measured in money but which are not literally money.
http://www.investorsfriend.com The InvestorsFriend

VALUE OF A DOLLAR

A dollar has value ONLY because it can be excanged for real stuff like a pencil, a bottle of water a hot dog an apple etc.

Newsflash? The amount of real stuff that a dollar can buy declines slowly over time.

So what? This system has worked EXTREMELY WELL. Americans are only poor in relation to each other. In relation to 100 years ago they are almost universally rich.
The Investors Upside Down Mortgage

“Money is not in itself wealth.” If so, Treasuries and CDs aren’t either. Hmm… somebody flunked the UFE.

Odd how when my house price measured in money crashed, my mortgage measured in money somehow stayed level.
http://www.investorsfriend.com The InvestorsFriend

To Mr. Upside down…

1. Money, treasuries and stocks are claim checks on real wealth and are not wealth as such since they are abstract with no intrinsic value.

2. When your house price crashed, you lost.

Someone with cash in the bank however found that they could now buy two houses instead of one. They won.

Zero sum game since the number and quality of houses was unaffected by the price drop. To summarize, you lost, others won.
http://www.investorsfriend.com The InvestorsFriend

INVESTORSFRIEND’s FIRST LAW

Wealth (in total) can neither be created nor destroyed by the trading os existing houses for ever higher or ever lower prices.

Building new houses and renovating houses creates wealth. Selling houses at higher or lower prices transfers but does not create or destroy wealth in total.
Wags

“It would be best that interest be abolished completely.”
-reeyaz

This makes no sense. Without interest there’s no incentive to lend money.

A lot of people don’t know that a depression is a correction of a previous bubble. We should re-name them corrections.
Longnine009

Yet one more thing china does better. They don’t
give financial criminals huge bonuses they just
sort of shoot them.
CounterfeiterBenBernanke

Think I’m going to write in Bill Bonner for President this November. Wrote in Ron Paul back in 08.
KeeptheJobs

a million people losing jobs that manufacture things that opress and kill people.
puffthemoneydragon

“If one richer person comsumes less real things than they could based on their salary, then they deposit their extra money (claim checks on stuff) into a bank. The bank then lends that money (claim checks) to someone who needs to consume but has not the money”

That’s old school,,, banks don’t work like that these days. They do a double entry and abra kadabra… new money!
Longnine009

Bill Bonner for president? It’s a nice idea. But all we really have to do is
survive. The zombies are going to run
out of taxpayers to suck on, and creditors to hoodwink. Their house
of dung will collapse, they’ll eat each other, someone will shoot the last zombie standing and then it really will be “morning in America.”
Don Levit

Regarding Treasuries and wealth, Bruce Webb at Angry Bear believes Treasuries are better than cash, for Treasuries pay interest.
I vehemently disagree.
Treasuries are unfunded liabilities.
Even the interest is debt.
Don Levit
CT

What a song and dance the whole money show is. Debt, credit, interest, borrowing are total distractions of life. Or as many here think especially the friend of investors it is everything and without it we would just be the wild creatures we once were.
CT

Instead of the psychopathic well behaving consumers we are now.

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