10/15/10 Buenos Aires, Argentina – Keynes was right about one thing…
Peace talks broke down last weekend. Observers had expected the IMF meeting on the weekend to result in the equivalent of the Peace of Amiens or the Surrender at Appomattox. But Treasury secretaries and central bankers went home, unpacked their bags, and resumed their premeditated mischief.
The dollar went down. Why would anyone pay 100 cents for an old, worn out greenback when the Fed promises to create trillions more of them, brand spanking new? Europe and Japan resumed firing with their new QE guns. Asian nations sent out snipers to intervene in the currency markets directly. And China and the US resorted to “trench warfare,” reported The Financial Times, neither apparently ready to give up an inch; that is, neither was prepared to allow its currency to buy more today than it did yesterday. In America, China has become an election-year bogeyman. The electorate seems convinced that any nation that stockpiles $2 trillion worth of America’s I.O.U. greenbacks must be up to no good.
So, the war goes on. But it is an ersatz war. All the combatants really want the same thing – to debauch their currencies at the expense of savers and creditors. Sooner or later, they’ll conspire to get the job done. A full 93% of US financial professionals believe the Federal Reserve Bank is on the case. It is expected to launch major debauch in November. Investors have run up almost all asset classes in anticipation. The Dow passed 11,000 on Friday. Soft and hard commodities hit new highs. And if, on a given day, gold does not set a new record, it is probably because the markets are closed.
What a remarkable period in financial history! We can hardly believe our luck. Absurd things are happening. John Maynard Keynes was wrong about practically everything. But he was right about this:
There is no subtler, surer means of overturning society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a way that not one man in a million is able to diagnose.
And we get to see it live. And probably dead. The US dollar fell under the control of the debauchers, partially, in 1913…when America’s central bank was formed…then fully, in 1971, when gold backing for the dollar was completely eliminated. In the 100 years before the Fed was formed, the dollar lost not a penny of its value. In the almost 100 years since, it has lost almost all of them. If the greenback were to lose another 5% of its 1914 value, there would be nothing left at all.
Such slow larceny bothered no one. As long as the dollar slid gradually, and peacefully towards worthlessness it seemed almost natural, even healthy. Central bankers could mix with polite company and hold their heads up. None was arrested, as far as we know. None was so tormented by his crime that he had to be restrained or sedated. But now central banks are committing their felonies in broad daylight. Economists argue for more. But investors are confused and worried. Today, they buy gold. Tomorrow they may buy shotguns.
But what else can the managers do? After increasing for 61 years, the volume of credit in the US – and hence, the volume of sales – is no longer expanding. This leaves householders with debt to pay down and exporters with no alternative but to fight for market share. What to do about it? Lower the value of the currency! But in a correction, the natural thing is for prices to go down with a decline in demand. So, money tends to become more upright just when the managers would most like to see it slouch.
The poor central bankers. They are victims of their own delusions of competence. They have never actually managed anything successfully. When the economy is expanding, they exacerbate the boom. When it is contracting, they slow down the correction. And now, they fight a currency war not of their own choosing, but of their own making. The war is their response to the correction, which results from the bubble, which was caused largely by the managers themselves.
And now they’re looking for a hotel where they can do it again. It was at the Plaza Hotel in New York in 1985 that they managed their Treaty of Versailles. It ended the currency war of the early ’80s…and prepared the way for an even bigger war later on. Back then, Japan was the go-go economy. Like China today, Japan was the world’s leading exporter. It wanted to keep the yen low. The US meanwhile, was losing market share. James Baker and the other US managers threatened sanctions. Japan gave in. By early the following year, the yen was 40% higher against the dollar and Japan’s GDP growth rate had been cut in half. But the managers fixed that problem as they fix them all. In Japan, they cut rates 4 times in 1986, creating a flood of hot money. Four years later, Japan was the envy of the entire world. In January of 1990, the Nikkei Dow hit a new record – 4 times higher than it was when the Plaza Accords were signed. Then, the bubble popped. You don’t need to be reminded of what happened next. The Nikkei crashed. Real estate crashed. Everything crashed. The economy went into a 20-year tailspin, failing to create a single new job in two decades. Neither stocks, nor real estate, nor the economy ever recovered.
No one wants to follow the Japanese down that road. Ben Bernanke manages the dollar, desperately trying to avoid it. And Premier Wen of China said it would be “a disaster for the world” if Western nations tried to force China in that direction. He’s right. But he needn’t worry about it. Disaster is coming anyway. The managers will make sure of it.
Regards,
Bill Bonner
for The Daily Reckoning
Bill Bonner
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.
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Say to wisdom “You are my sister,” and call understanding your kinsman; Proverbs 7:4
It might help if you introduced your sister to Bombs Away Ben.
I still don’t know what to do.
The shotgun thing sounds good though.
So Bill is saying that Ben is a money-rapist.
Maybe if that was his actual title, the People would take more notice of his activities.
Bill said: Why would anyone pay 100 cents for an old, worn out greenback when the Fed promises to create trillions more of them, brand spanking new?
Well yes, why indeed would world investors exchange their Euros and Yen and such for this declining American dollar?
And yet they do so.
And why do American corporations lock up their money in U.S. treasuries for 10 years at a yield of 2.5%.
That is equivalent to paying $78 dollars today in return for a payment of $100 in ten long years with no dividend in between. (Yes I know a treasury is pay $100 now and get $2.50 per year in interest and $100 back in ten years, but I said equivalent to, it’s the same 2.5% return).
But if Americans expect inflation why in god’s name pay out $100 now and lock in a paltry 2.5% return for ten years? If inflation only averages 2.5% per year the real return will be zero.
And what about foreigners who take the risk that the U.S. dollar will fall against their own currency. Why in god’s name are they buying U.S. ten year treasuries?
But they are buying…
Not only are they buying buit they keep pushing up the amount they are willing to pay and pushing the yield down. ANd the Fed has not been a buyer recently.
The fact that they’re buying suggests that they are betting that the American dolalr will in fact retain its value. They are betting with their wallets on this fact. Betting huge dollars on it.
Can anyone come up with some answers as to why they do that?
(I mean besides the “highly intelligent” posts from those who say hey Investors Friend you are clueless and stupid.)
Bill Bonner laments that since 1914 the American dollar has lost 95% of its value.
About this he constantly whines, belly-aches, and flaps his gums (or flaps his typing fingers). Often he does all three at once, which is quite a skill in itself.
But just how bad is a 95% loss of value in the dollar in 96 years? It sounds omnious, but how about a little math to illustrate it?
You will notice it has not stopped Bill Bonner from getting rich. He constantly jets between Baltimore, Paris, Florida and Argentina. He has a family office to look after all his loot. He’s done okay by the old paper greenback, in spite of inflation and (horror of horrors) no Gold Standard all his working life.
Now let’s calculate how much inflation it takes for it to cost today a $1.00 what cost a nickle in 1914. (A 95% loss in purchasing power)
The answer is 3.17% inflation per year on average.
Try it, $0.05 times 1.0317 to the power 96 = $1.00
Now how harmful is that loss in purchasing power?
Well consider if you have money you will likely in short order a) spend it or b) invest it to make a return.
Imagine a guy with $1000 in 1914 invests money in a trust fund to be given to say his great grandson 100 years later.
Well as long as that money returned at least 3.17% on average return after all costs and taxes on the investment then that $1000 in purchasing power is still intact today in 2010.
If that $1000 earned 5% on average per year over 96 years (not a hard thing to do) it is now worth $108,186 in nominal dollars and about 5% of that or $5409 in 1914 dollars. So far it does not look like this terrible 3.17% annual inflation, this teriible 95% loss in purchasing power had done any great harm.
Now imagine that the $1000 from 1914 has managed to earn 10% per year (a stretch but do-able). Now it would be worth $9.4 million in nominal dollars in 2010 or almost exactly $1.0 million in 1914 dollars. Oh, the horrors!!
The point is my friends that inflation is not bad as long as it is moderate and especially as long as investments return more than inflation.
That is the math folks…
Only if old grandpa was dumb enough to hide his $1000 in a time capsule in 1914 has inflation been a problem.
Now of course hyper-inflation is a different story and is ruinous.
But to suggest, as some of you will, that 3.17% inflation is runious because hyper inflation is ruinous is equivalent to suggesting that eating one candy bar is death just because perhaps eating a 100 per day for years on end would be.
And so Bill you can stop whining, belly aching and flapping those typing fingers and calm down. A little inflation is not such a bad thing. There, there, Bill, you can go back to counting your loot now. Rest assured Bill, your money will increase in purchasing power over the decades, inflation or not, as long as it is invested properly.
OK “the investors friend”, I’ll bite. It is hard to imagine life much different than what one has ever known. It is certainly hard for me to imagine the world without the United States as the financial, cultural, and military power that it has been my whole life. It is not any longer hard to imagine a world in which traditional investments are untrustworthy. Where to put your money then? In the USA . And why not? No man is an island. If the USA goes down, what investment doesn’t go down with it? The whole idea of investment is embodied in America. Maybe gold bugs and other ruthlessly realistic types seek, like Mad Max, to survive in whatever world in which they find themselves. But most people yearn for more: something of beauty and truth; something of freedom and peace. I think a rephrasing of the question is the answer to the question. Why does the world continue to cling to American style freedom and prosperity? Why do young people risk death to stow away in container ships or cross vast deserts to come here? Why does money risk destruction caused by the utter stupidity and/or corruption of our “leaders” come here? Even more importantly, why do we Americans elect people like we do and allow them to ruin our beloved America? Christians from all over Africa are gathering as I write this in Washington DC to pray for America. After all America has done for Africa they now see America in peril and want to pray for her survival. Some of their concern may be self interest, some is surely love and respect. I thank them for their prayers and join them in prayer for my country. Will you who read this join in prayer? And for the sake of our nation will you VOTE in November for freedom and prosperity? (if nothing I wrote here makes sense to you, please don’t vote because you will probably vote for Nancy Pelosi)
“Disaster is coming”.
In the end, it is not the quantity of job that one has accomplished, rather, it is how much work one has done correctly, each day, each minute or even each second. Also, it isn’t the volume of wealth one has accumulated over his lifespan, but, more significantly it is the multitude of crime and sin one has spawned on his route to glory.
It is not uncommon to see spendthrifts
generously empty purportedly a substantial part of their wallet in getting the familiar chorus of charity in play. Let us be reminded. Facilities of slow larceny is always open for interested parties to apply. It is only preposterous, ludicrous to remit one’s fiat money to redeem his crime or sin.
I would like to contact Mr Bill Bonner.
Thank you
So lets just stand around and let that rat keep printing money. What is difficult to understand why we are letting him keep doing it? Best idea I have read is for everyone to get a shotgun.
The only thing, ONLY THING, that can bring the USA from the brink, is saving.
Saving to pay the debt, to invest, to educate.
QE2 Ben make sure nothing of the sort can or will happen.
If people save, how will his beloved banks ever going to make profit? Especially the kind of profit they are entitled to by the Constitution?
The Investors Friend asks:
“And why do American corporations lock up their money in U.S. treasuries for 10 years at a yield of 2.5%”
Really? Which ones besides banks? Most US corps are cash strapped. Any that buy bonds buy them as a short term investment to park excess cash (*laughter*) because the yield is better than anything else, then sell them when they need cash.
I’m sure even The Investor’s Friend understands that you can sell a Treasury at any time and not have to hold it until maturity.
T.I.F. might even know what QE is.
Far from being cash strapped, the buyers of treasuries at record low yields are obviously awash in cash. So awash that they will accept an abysmal return on their money.
Q.E.D.
In my post above that looks at the 95% loss of purchasing power in the dollar since 1914 (and claims it was not such a bad thing) I made one error.
I said
Now imagine that the $1000 from 1914 has managed to earn 10% per year (a stretch but do-able). Now it would be worth $9.4 million in nominal dollars in 2010 or almost exactly $1.0 million in 1914 dollars. Oh, the horrors!!
Oops I did that math in my head (bad idea) $9.4 million in nominal 2010 dollars is worth $470,000 in 1914 dollars which was still a heck of a good return on that $1000 invested for the 96 years.
Any reaction to this?
By the way my post above took 5 days to appear here, (posted October 16, appeared here Oct 20)I think they must have shipped it off to Argentia first for Bill to look at and he was busy riding a bull for a few days, oh well, better to ride it than write it.
Could someone enlighten me whether or not this site is just a poorly disguised gold marketing entreprise???
One cannot be doom and gloom or exuberant all the time. Markets, countries’ economies, personal wealth and health ebb and flow over time. One must adapt an investment and life strategy that fits the times. On average the market is up 60% of the time and down 40% of the time. One cannot predict with certainty when these times will occur but a prudent investor can certainly establish investment stratgies to minimize risk and profit over time. Don’t get caught up in the emotion and wallow in self pity. Take responsiblity for your own life and investment plan. Eliminate your debt and be a slave to no one. Your best return on your money is to get out of debt NOW.
Perhaps creating trillions of dollars and putting them out in the market place is not such a terrible idea,it is like living in virtual reality. If it all takes place in the mind or the collective consciousness, why not get rid of the fear of what we have created which is something out of nothing and just go with it. Look at the growth that took place in all sectors of the world based on credit backed by money that did not really exist. Maybe mankind was getting a taste of divinity and just could not believe that he could create so much by walking on water before he realized what he had done and started to sink. Maybe these are not really bubbles but more like an expanding currency that defys mans understanding!just a thought!