The Illusion of Modern Money

10/13/10 Buenos Aires, Argentina – Nothing comes from nothing, nothing ever could

– The Sound of Music

Expect a miracle. Or a fraud.

It is impossible for printed money – money created out of thin air – to bring real wealth. It’s just paper. Or not even paper. These days it’s nothing more than the wispy imagination of the Internet.

A clerk types in a number. Presto! A bank a thousand miles away has a billion dollars.

Is the world one jot richer? Of course not. Same buildings. Same businesses. Same output. Same purchasing power.

But wait… What then, do those billion dollars really do?

Ah…that…well, they look like real money. They act like real money. And they buy things – just like real money.

So, wouldn’t you know it, people think they ARE real money.

They feel richer. They spend. They invest. They speculate. Just as if they had more real money. But it would be a miracle if this phony money created a real boom. But that seems to be what investors are betting on.

The Dow held about steady yesterday. Gold lost a little ground. Nothing big either way.

But the Dow rose over 11,000 last week. The S&P 500 is selling at a p/e ratio 50% higher than the long-term average. Investors must think that corporations are going to grow 50% faster than they did during most of the 20th century.

Huh?

Let’s see…

…we’re in the early stages of a Great Correction…

…there is about $20 trillion worth of bad credit still to be eliminated…

…unemployment is at levels not seen since the Great Depression…

…so many houses are headed to foreclosure that banks have had to stop taking them back…

…what little “growth” there has been seems to all have come from the government. And now the government itself is headed for a debt crisis…

Hey…and our president tells us that things are getting better every month. Which just proves that he has no idea of what is going on.

Things are not getting better. The US government is so deep in the hole it may never be able to get out. It borrows a dollar for every dollar it receives in taxes. So, it’s still digging the hole deeper.

And in early November, the Fed is expected to announce that it will join the QE party. That is what has investors’ attention. That is what they’re betting on – more hot money from the Fed.

“The job of the Fed is to take away the punch bowl” when the party gets out of hand, said Fed chief William McChesney Martin. Instead, the Fed is pouring in more alcohol and handing out car keys.

Investors are convinced that it will announce a new round of quantitative easing in November. They think the number will be between $100 billion and $1.5 trillion. A big number, in other words.

Why? Because the economy is not improving. Because it is a Great Correction. And because the Fed believes it can add money and boost Americans’ “animal spirits.” And because they are really a bunch of dumbkopfs.

If you believe you can really improve the situation by adding phony money, why not add a lot more of it? Ha ha… never mind.

You’re just counting on a miracle…or a fraud. We wouldn’t count on a miracle. But we wouldn’t bet against the fraud. Adding phony money can’t create real prosperity. Nothing comes from nothing. But it can create a boom…and a bubble…in speculative assets. That is, it can work as a fraud. Speculators take the hot new money and bid for gold, copper, platinum. China shares. Everything goes up as the hot money gets passed from hand to hand. And then…it burns someone.

Right now, we’d be a little concerned that investors have already bought the rumor of more QEII. So, if the Fed comes out with the predicted announcement, investors are likely to sell the news. The only thing that would push prices higher is if the Fed did MORE than was already anticipated…that is, if it went ALL OUT in its fight with the slump.

Then, you’d really see some accidents!

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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