Bill Bonner

QE2 is ending in June. But globally, QE3 has already begun. As usual, Japan is the pacesetter. As temperatures rose at its Fukushima reactor so did Japan’s monetary base – at the rate of 100% per week! What happens to all this new, hot money? No one knows, exactly. But today, at The Daily Reckoning, we have advice for everyone – central planners, politicians, and householders, too: if you have money, pretend you robbed a bank.

From the point of view of a modern economist, nothing stimulates better than a bank robbery. The money leaves the cold embrace of a bank vault; soon every pimp and bartender has his pockets full. Hot money gets around.

An article in Rolling Stone Magazine provides an illustration. It explains how one Wall Street wife, and one Wall Street widow, formed a company specifically to take advantage of the US government’s spending spree known as TALF. You’d think the feds had already done enough for the Mack family. John Mack runs Morgan Stanley. Had it not been for the generous support of the US government and the Federal Reserve, he might be parking cars. Instead, the feds bailed out the entire financial sector. First, it bought up Wall Street’s bad bets at inflated prices and then lent banks money at artificially low interest rates; they were invited to lend the money back to the federal government for a sure profit.

Business was so good at Morgan Stanley that the distaff side of the Mack household apparently couldn’t resist. In June, 2009, with her friend Susan, Christy Mack set up an investment company and put in $15 million. Then, they borrowed $220 million from the government. A brave move on their part? If you think so, you are as naïve as a turnip. The fix was in; the two used the money to buy non-recourse loans at deep discount. If the loans increased in value, they would make a profit. If they fell, the government would take the losses. Much safer and more profitable than robbing banks. Two months later, Mr. Mack, perhaps with a little assistance from his blond helpmate, bought a limestone carriage house in Manhattan, with a 12-space garage for the getaway cars.

If you don’t have your own little stimulus scam going, you may want to listen up. Your dollars, pounds, euros and pesos are going to lose value. Don’t trust the government’s inflation figures. An honest measure of the “inflation rate” is available thanks to a pair of professors at MIT. Their “Billion Prices Project” (BPP) doesn’t pussyfoot around. It trolls the Internet, records prices and reveals the most accurate measure of inflation ever. This new index shows the rate of consumer price increases for the last 12 months at 3.2%. This is more than half again as much as the Labor Department’s own tally – 2.1%.

Something is dreadfully wrong. Either a billion prices are in error. Or, people who buy US treasury bonds are. They accept a real yield (based on the BPP numbers) of barely 1.2% on a 30-year dollar-denominated, inflation-sensitive Treasury bond, while the dollar sinks and its custodians actively try to drown it. And, over the last six months, according to BPP, prices have been rising nearly twice as fast – at a 6.1% annualized rate. If these figures hold, bond investors already have a built-in negative yield. The inflation figure for the last 3 months is even higher, 7.4%, about 300 basis points more than the yield on the long bond.

Treasury prices have trended higher for nearly 30 years. Could they be ready to fall now? Maybe. Inflation is not like holding up a liquor store; it’s more like a major bank heist, the product of long planning by trained professionals. Whenever the nominal amount of available money increases faster than the real goods and services that money buys, you can expect rising prices.

In America, real private-sector output reached a plateau at the end of the 20th century. In the last 10 years, it has scarcely increased at all. Total private sector GDP was $9.31 trillion in 2001. Now it is $9.72 trillion. But while real output has been flat, the output of hot “money” has not. When they are not stealing it from the taxpayers, or borrowing it with no intention to pay it back, the feds are counterfeiting it. The Fed will have “printed up” about $1.8 trillion from the end of 2008 to the end of June, 2011 – partly to finance staggering federal government deficits of nearly $4.5 trillion over the three years. This led to an increase in the GDP, almost entirely from government spending, with 79% of household income growth from government transfer payments.

Meanwhile, the US monetary base has tripled in the last 3 years. These increases are not all immediately available to households as “money;” they are mostly still in bank vaults, waiting to be liberated. Then, watch out. Dollars will be too hot to hold.


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 ReckoningDice 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. 

  • hatteras00

    It looks like the MIT billion price project is only showing global inflation data, not country specific as it was, too threatening to the CPI from the fedheads I guess

  • Harv

    Regarding the Billion Prices Project, it’s one thing gathering a lot of data. And another using those data to create the most accurate measure of inflation ever.
    There’s no ‘smoking gun’ but on their website Messrs Rigobon & Cavallo state helpfully that “Our data include information on product descriptions, package sizes, brands, special characteristics.” I don’t know about you but for me that has the ring of hedonics about it. And the words hedonics and accurate don’t usually turn up in the same sentence where I live…

  • Leroy Wiggins

    It’s look great but laptop keep crashing!

  • rhodes

    all real christians and anyone who cares about our wolrd need to come together to end the federal reserve. Jesus threw the money changers out of the temple we must do the same! no central bank!

  • TC

    Bill, did the Mack household investment profit trickle down to your pocket? It’s supposed to you know. After all 300 million people believe it.

  • Clay

    First off, you are absolutely correct about QE3 being under way. I will admit that I overlooked the idea myself and I owe you!
    Next, The MIT project looks like it has been pulled, at least for now. This is a true shame. Removing this kind of innovation at this juncture in events can only make matters worse. America’s greatest deficit, other than monetary is outside the box thinking. The Billion Dollar Project is or at least would have been a game changer. Allowing retail competitors to easily keep track of opponents, to allow the easier access of info for the start up company to see the true competition they face ect… This would have been a revolution to the consumer. A true shame! The billion dollar project is a true example of the “POWER” of the internet and could have leveled the playing field for the small guy, but we can’t have that. The major redistribution of wealth will continue be stymied by those who feel threatened by it!

  • John

    People on the inside can easily buy government bonds and make a profit. Step 1, go to the Fed discount window and borrow a jillion dollars at 0.5%. Step 2 buy government long bonds at about 4%. Make 3.5% on the jillion dollars you borrowed.
    Another way. A foreign central bank prints up a jillion and exchanges it for dollars. Then it buys US government bonds at 4%. Make 4% on the transaction. With their accounting they will say they never loose money. After all when the bonds come due they get their money back. Never mind that the money buys less – that’s not part of the accounting.

  • Bennet Cecil

    We should use this opportunity to move to 100% reserve banking. Vanquish fractional reserve banking. End the Fed in 2013. 100 years of wealth destruction is enough. Banks should hold currency, silver and gold for depositors.

  • axbucxdu

    on April 29, 2011 TC said:

    Bill, did the Mack household investment profit trickle down to your pocket? It’s supposed to you know. After all 300 million people believe it.

    Is that the same 300 mill that are experiencing the trickle the Keynesians are pissing down our legs every time we buy groceries or fill up our gas tanks?

  • Joker

    “Wind Of Change In Real Term”. After, much ‘verboseism’ men are finally succumbed for not being able to resolve inter-human, bilateral, multilateral conflicts amicably, themselves. That also could signify doom. The wind is gathering momentum. Option of last resort, migrate all supreme courts around the world to paradise and relocate all Geneva international court of justice in heaven. Let’s settle all disputes and grievances in the new frontier.

  • Watery

    Wait a minute. It takes a bigger crook to beat a smaller crook. Maybe, QE is still meaningful.

  • FireBall

    Absurdity has the way. When we make a closeup examination, one may discover that many of the rocket propelled or chopper lifted oriental billionaire tycoons are religiously affiliated or locally and continentally politically connected. What powers the wealth. Real god driven thrust has yet to be determined. But, 2-legged godly materials exist with no doubt of strong connectivity and power supply, conspicuously.

  • John

    Bill Bonner said “When they are not stealing it from the taxpayers, or borrowing it with no intention to pay it back, the feds are counterfeiting it.”

    This is why I read Bill Bonner every day, cuts right through the B.S. and tells it like it really is. Keep up the good work Bill!

  • Walt

    What is going to happen when the dollar index dips below 72, I wonder. Head for the hills! Oh, well, just make sure you have food, silver (or gold if you like), guns for hunting, and warm clothing. You may have to hunker down in a scenario that you aren’t used to in modern day living.

  • Harv

    Regarding my earlier comment: I may have blundered. It seems that Rigobon & Cavallo don’t indulge in hedonic adjustments after all. At least according to the academic papers I’ve glanced at.
    However, it seems likely that the recent rough agreement with BLS CPI is likely to be an artefact. The period covered by BPP for US is only since mid 2008 and the data are exclusively gathered from supermarkets!
    These presumably exclude such components as Uni/school fees; travel costs; heating costs; medical costs; rents etc.
    Prediction: the two measures will diverge significantly as time goes on. Not because the BLS CPI is corrupted (it almost certainly is) but because they’re attempting to measure different things.

Recent Articles

How the American Dream Can Make You 14-Times Your Money

Chris Mayer

Most U.S. citizens subscribe to an idea called the American dream - working hard on a level playing field so you can "get ahead" in life. But that's not what the original "American dream" was all about. As Chris Mayer explains, that term originally referred to a completely different, yet equally important goal. Read on...

Why Too Much Data Might Actually Protect Your Privacy

Sam Volkering

The world is awash with data. All these data will shape the future, helping people make smarter decisions and act faster. But to realize this vision, there has to be a way to crunch the data. And with such a huge amount of it, that could be a problem. Luckily, there's a unique solution on the horizon. Sam Volkering explains...

Laissez Faire
Why the Fed Has Declared War on Your Money

Peter Ferrara

The value of the US dollar has been steadily declining for nearly a century. Thanks to Nixon, Greenspan and a slew of other "leaders" the poor greenback is a sad shell of its former self. But there is a way to reverse this trend, and restore it to its former glory... if only those in power were willing to do it. Peter Ferrara explains...

How to Trade the Return of Social Media Stocks

Greg Guenthner

The word of the day is "growth." With GDP screaming higher in the second quarter it appears social media stocks have taken this as a sign and have started showing their own outsized growth. Today, Greg Guenthner shows you how to play this trend for huge gains as the second half of the year gets in full swing...

6 Major Flaws in the Fed’s Economic Model

James Rickards

Use what analogy you will: a car, a clock, a chemistry experiment... the point remains that the Fed believes it can control the economy. Indeed the Fed will stop at nothing to realize the goals of its dual mandate" to maximize job growth and maintain price stability. But, as Jim Rickards expalins, that conceit always ends in disaster. Read on...