Bill Bonner

In both Europe and America the financial sector has been on the edge of disaster for the last three years. Each time a crisis flares up, the fixers rush in with a remedy. Bailouts, TARPs, TALFs, ZIRPs, QEI, QEII and now the ‘twist’. In its latest effort, the Fed announced:

“The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.”

Already, short-term lending rates are so low it is as if money-in-hand had less than zero value. Adjusted for inflation, you pay the US government to store it for you. Even with interest, you get back less than you lent. And now, the Fed aims to perform the same dark magic on long-term funds, artificially lowering the cost of money so that people will borrow more of it.

All the fixes have the same effect. They add to the world’s debt and subtract from its ability to pay it. The first proposition is self-evident. The second requires some explanation. Prices — set by willing sellers and able buyers — are information. They tell us where to focus our resources. They tell us when we have too much of one thing and too little of another. When prices are low, generally, we redirect investment to where they are high. This brings forth more supply of the thing that was wanted and less of the thing that was not. Result: real growth.

No price is more important than the price of money. It tells us when and in what it pays to put our money. But bring in the fixers to suborn prices; they make them lie. That, of course, is the demented idea behind the twist program, to mislead investors as to the real price of long term credit. They’re supposed to believe that the world is so awash with money they’d be fools not to take it.

In America, households and businesses generally ignore the signal. Household debt is doing down, despite the fed’s blandishments. Families know the rates are fraudulent. But the least productive sectors — finance and the government itself — thrive on mendacity. They borrow with insouciance and spend with impunity. Resources, which might have been used to add wealth, are tricked away from the real economy. Value is not added to resources; it is subtracted. Wealth is not produced; it is consumed.

Europe has had its own fixers on the job. They put on a fix in one country; then, another in another country when that one springs a leak.

Last week, Angela Merkel and Nicolas Sarkozy said they had reached an agreement on recapitalizing the banks — which could cost as much as $3 trillion. Then, this week, they gave themselves a deadline to do what they said they had already done; now, they will reach an agreement on Nov. 3rd.

This week too, the Chinese fixers swung into action. They will recapitalize their own big banks. China “will support the healthy operations and development of key state-owned financial institutions…” said the official news agency.

What does it mean to “recapitalize?” It means to put in capital, again. Once more. But what happened to the capital that was there? And what is healthy about putting more capital into financial institutions that couldn’t manage to hold onto what they had? Don’t ask. To pose the question is to cast doubt on the whole, earnest fixing spirit.

The problem with the fixers’ fix is that it is exactly what got the fixees into such a fix in the first place. The fixers keep administering more of the thing that caused the breakdown — debt. Adding more of it does not make it go away. It would not seem necessary to say so, but it just makes the problem bigger.

But it hardly matters. The ailment and the cure are both fatal. If the debt is reckoned with now, many banks, businesses, households, investors and sovereign borrowers will be dead. If the fixes continue, they will be even deader.

How much deader? We can measure the direct fiscal spending programs. We can count the deficits. We can count the extra zeros on central bank balance sheets. There are also specific spending programs with specific costs. The US “food stamp” program now helps feed one in 7 Americans. The student loan program is up 300% since 2008. There was the bill for TARP and TALF…and now a new one. Last week, Mr. Obama called for $447 billion in new outlays to put people back to work.

Total public and household debt in the US in 2007 was $22.4 trillion. Now it is a $26.3 trillion problem. We can tell how much good this did by looking at gross output. Growth was spectral, up from $14.30 trillion to $14.58 — with every penny of ‘growth’, and more, attributable not to honest, real increases in output, but merely transfer payments from the government to its zombie clients.

In other words, the problem gets bigger. The solution — real, private sector prosperity — gets smaller.


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. 

  • Bernankenstein’s Monster

    In the USA, all the Fed has done with it’s TWIST is to flee to the safety of long term government treasuries. You can’t blame them for this either. They get a higher yield.

    At this time, the FED can’t find anything else to park their money in.

  • kamran

    Thanks for all your input. I really look forward to reading them daily and learning from them.


    Buy the castle in Ireland for the land value.

  • The InvestorsFriend

    Bill said:

    “They’re supposed to believe that the world is so awash with money they’d be fools not to take it.”

    Interesting. World must be awash in savings money and that explains why interest rates are so low. An excess of saved money available to be borrowed by countries at record low interest rates.

    One man’s debt is another man’s savings.

    Some people and countries have too much savings, others have too much debt. Low interest rates suggest there is more people wanting to lend their savings than their are people and countries willing to borrow.

  • Chris

    Bill can you write some more about the output of mines declining and this decline on the supply side affecting the gold price as well. This could have just as big an impact as having to spend more dollars, i.e. the loss of value of the dollar, when it comes to buying gold.

    This is a huge part we are missing and it needs more attention if we want to predict the gold price in years to come. ps. What do you think the gold price will be in 5, 10, and 20 years ?

    Whether or not the demand for gold increases (due to inflation of paper money, banks investing reserved more in gold, or any other reasons) the supply is getting les due to my reasoning above and therefore gold has to go up, but how much up is the question ???

  • patrick

    call my at facebook

  • gman

    “All the fixes have the same effect. They add to the world’s debt ….”

    bill bill bill. that’s how the system works. that’s how it functions. that’s what it’s for – to accumulate debt. if the system can’t lure people into taking on more debt, it forces them into taking on more debt. if it didn’t the entire system would roll up in a few days. maybe a few hours given electronic banking and computer algorithm-controlled transaction and trading.

  • Ridley Pierre

    Our lovely empire is now spreading its tentacles into Africa to fight the Christian terrorist group The Lord’s Resistance Army, which murders and rapes by the millions in order to establish the 10 Commandments as the law of the land.

    Yes, the United States somehow feels it necessary to send “100 armed advisers” (actual words used by our government – you cannot make this $h!t up) to central Africa, at the cost of tens of millions of dollars, to, um, advise, at the point of a gun, a lawless region of the earth.

    Remind me again why this is in our national interest? Where’s the oil in Uganda and the Central Africa Republic?

    I look forward to your elaboration, Bill, as part of your expanding series on the follies of Empire.

  • Ant
  • JohnT

    For those not aware, despite all the silliness of european politicians, the germans are at the end of their rope, the minute the ECB primes the pump of QE, the Germans will leave the EU. Here’s a link to the story.

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