12/03/10 Mumbai, India – Oh, what a tangled web we weave
When first we practice to deceive
– Sir Walter Scott
“The trouble with today’s financial system,” we told a Bloomberg reporter, “is that it is based on fraud.
“At the bottom of it is paper money – itself a kind of deception. It pretends to be real money. And it is real money – in the sense that you can use it to buy things. But it is prone to lie. All the feds have to do is to turn on the printing press and it will tell you that you are a lot richer than you really are.
“This sort of flimflam has been going on ever since the end of WWII. The feds systematically increased the amount of paper money…leading people to think they had more purchasing power than they really had. Today, a dollar is worth only about 3% as much as it was 100 years ago.
“But that’s just the beginning of the scam. They also systematically under-priced credit – in the belief that the key to prosperity is consumer credit and spending, rather than saving and production.
“The system has its architects and its operators – all quacks and mountebanks. They pretend that they can manage the currency and manage the economy. Yet they misunderstand the most basic elements of how a real economy works. Wealth does not come from consuming…it comes from producing.
“The managers claim to be able to manipulate the economy so well that they can actually improve its performance…that is, they say they can make the economy perform better than it would on its own…better than it has naturally for the past two thousand years. By eliminating the cyclical downturns, the feds told us that they would we all be richer…and free from the volatility that plagued us theretofore.
“So they fiddle and fake it…improvising…and making it up as they go along. The raise interest rates…and then they reduce them. They introduce more paper money when it suits them and change banking rules as their theories suggest.
“When anything ‘bad’ happens, defined as something they don’t like, they rush to fix it. But what can they fix it with? A little duct tape of monetary policy. A little fiscal baler twine too.
“Their fixes are not completely random or haphazard. They have a bias – towards more credit, more spending, more cash, and more speculation. If they tighten rates one month, they loosen them for two months. If they run a surplus in the federal accounts one year, they run deficits for the next five.
“Gradually, more and more debt, mistakes, bad judgments and cockamamie speculations build up. And then, the authorities are under pressure…running from one crisis to another…providing credit to one zombie…and bailout to another…and raw meat to a third.
“And then suddenly, the discipline and self-restraints that held them back gives way like a frayed old rope. Then the central banks and Treasury authorities are running free…abandoning themselves to the trickery and fraud inherent in their profession. The European Central Bank says it will provide ‘unlimited liquidity’ to those who need it, in order to fend off a debt crisis in the Old World. In the New World, the Bank of Ben Bernanke is already bailing out big banks in North America as well as those of Europe. And everywhere, the feds are ready to support one another…and bankroll the IMF…with more paper money and more credit…
“…all of them desperate to hold the system together.”
And now they link arms – the Fed, the ECB, the EU and the US…and don’t forget Japan and the BOJ. And off they march – right off a cliff.
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.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
Bill said:
Wealth does not come from consuming…it comes from producing.
Well true. But that is not the whole story. Here is how it works. We want to consume, therefore we work and produce. Therefore there is something to consume.
Production without consumption is a waste of time.
We want to consume even more. So we borrow from someone willing to forgo consumption. Then we must either earn more income to pay that off (causing us to work and produce more) or we must in future forego consumption in order to pay back our debt.
Bill alerts us that the dollar has fallen 97% to 3 cents in a 100 years.
Well how much inflation causes that?
The surprisingly low answer is just 3.57%
Take 3 cents from 100 years ago and invest at 3.57% for 100 years and it is worth $1.00
So big whup, we have had an average of 3.57 inflation per year for the last 100 years.
If the stock market averaged about 9% for those 100 years your 3 cents is now grown to $166 or ( or times 0.03) $4.98 even in dollars of 1910.
Where is the harm from this terrible inflation? Living standards are up hugely…
The only harm is to someone who kept cash in a matress or invested in Gold.
Actually I don’t know how much Gold returned per year in the last hundred years. I just threw that in to get areaction from the gold bugs.
If Gold was $10 in 1910 (and it may have been closer to $35) and $1500 in 2010, that is only a return of 5.1% per year… which of course lags the stock market…
Your premise is assumes that investing in stocks will return a similar rate over the next hundred years as it has the last 100…. Lets look at the facts.
Is the business outlook as favorable for capitalistic enterprises today as it was in 1910? Are the burden of the social infrastructures demands smaller today than then? Does the currency in which one would earn his ‘returns’ have some intrinsic basis of value, or is it a pile of IOUs predicated on a bigger pile of IOUs?
Investor’s friend….. how ironic. Lemmings always have lots of friends ready to join them in the day’s pursuit. But they embark only once.
Someone likes to read his own posts.
A shame none of us will be around two centuries from now to see how the era is portrayed in the history books. Suffice to say, that Greenspan will be looked upon as a sort of Moll Flanders of his time. Bernanke? Yikes, I doubt the history books will be very kind to him at all.
Micah, the post was about the last 100 years.
Bill complained about 97% devaluation in currency in the last 100 years (sounds horrible) but I pointed out this was just 3.57% inflation per year and was easily overcome with an investment in stocks.
I never said anything about the future in that post.
And to my Groupie there (investors Worst Nightmare) Yes I do like to read my own posts. Why not? They are far better than most.
‘Unlimited liquidity’ has the same ring to it as ‘perpetual motion machine’ to this untrained ear.
Once again, thanks for some sanity Bill !