CNBC Leaks Secret Yellen-Bernanke Phone Call…

BALTIMORE – The first quarter ended yesterday… leaving most people neither worse off nor better off than they were when it began.

The Dow is about 1% higher than it was start of the year. The economy is still neither in a recession nor a boom…

…and the Janet Yellen Fed hasn’t moved an inch toward its destination: “normalization” of interest rates.

Bombshell Leak

In a remarkable turn of events, CNBC has released a bombshell – what appears to be a recording of a private conversation between Janet Yellen and her old boss, Ben Bernanke.

Apparently, the cellphone conversation was broadcast inadvertently to other cellphones in the Washington D.C. area and captured by CNBC staff.

Bernanke began the conversation in a cheerful mood…

Ben:Saw you on TV yesterday.
A woman’s voice, said to be that of Janet Yellen, replies.
Janet:Well, you know what it is like.I’m now competing with the presidential election news cycle. And Trump is getting all the page views now.
Ben:But wow! I like the way you turned it around…
Janet:What do you mean…?
Ben:I mean… that “cautious” thing. You managed to get almost every news agency in the world to say you were “cautious.” Heh heh. Makes you sound prudent.And this is after you and I together put about $4 trillion of new cash into the system… we must have induced other central banks to pony up another $8 trillion or so… and now there are about $650 trillion in open derivative contracts.

Yeah… cautious! I love it. Just don’t strike a match…. Heh heh.

Janet:Oh, stop… I wasn’t the one who started this thing… You… [inaudible]. Besides, I’m learning from Trump. When he entered the race, we all thought he was a joke. But that’s the problem with politics – jokes get elected.Anyway, Trump’s trick is to always say something bold and outrageous. And vague. People don’t know what the f*** you are talking about. They can fill in what they want to hear. It makes me sound like a strong leader who is keeping her options open.

At the end of my speech to the Economic Club, I was even tempted to say “Investors love me!”

We Homeys Did It

At this point, static interrupts the conversation. Then the two voices become clear again…

Janet:You know, Ben, they should love us. And you and I should get more than just our pictures on TIME and a few million in speaking fees. After all, our yiddisher kops added more wealth to the world than Carnegie, Ford, Buffett, Gates… all of them put together.
Ben:But, Janet… Now that I’ve been out of the hot seat for a while, I’ve had a chance to think about it.
Janet:Think about what?
Ben:Well, the system and how it works.
Janet:Hey… That’s not allowed…
Ben:I know… but now that I’m a private citizen just shaking down the big banks for speaking fees… It’s payback time!
Janet:Yeah… I see you’re getting $400,000 a pop. Not bad…
Ben:         Janet, just wait… you’ll get your turn…But seriously, I’m just wondering how it all fits together.

I mean… it seems like something very important has changed in a way that we didn’t recognize.

Janet:What’s that?”
Ben:When Nixon made that change in 1971 [eliminating the restraint on credit creation imposed by gold] nobody really knew what it meant. The gold bugs ranted and raved, but even they had no idea what would happen. Nobody really saw how it would change the system completely.Nobody… except maybe the damned French… ever asked to exchange their dollars for gold anyway. It didn’t seem to matter that we shut the window [ending the convertibility of dollars to gold at a fixed rate by closing the “gold window” at the Treasury].

But this is just coming into focus for me. It changes everything. We went from a savings-based money system to a credit-based system. And that’s a big change.

You following me? There is only so much money available from savings. So that naturally limits the amount of credit. But when you can create credit with just a few keystrokes on your computer… it’s a different thing entirely. You can have as much as you want.

But the guy who runs a liquor store… He stocks his shelves for total sales. He doesn’t care whether you spend cash or credit. As people spend more – on credit – he orders more bottles and hires a young man to put it on the shelves. He thinks there is more demand for his product. He expects it to last. So does everyone else.

So, the economy booms. That was the idea. That’s why we got our faces on TIME. We homeys did it. We manipulated the economy. We tricked people into thinking there was more demand than there really was. And all we had to do was keep interest rates a little on the low side…

Debt Is Deflationary

Again… the line gets fuzzy for a bit. Then the voices come back.

Janet:Ben… I’m going to hop off the line… I’ve got an FOMC meeting…
Ben:Hold on, Janet… Just a minute… I’ve got something figured out. It’s important…In the old system, people had to earn money before they could lend it. That imposed a natural limit on credit. You couldn’t lend it if you didn’t have it.

The scarcity of credit forced up the price of it. Interest rates never went to zero. So, savers were encouraged to save. And it forced investors and entrepreneurs to find projects that were worthy of precious capital. That’s what made the system work. It encouraged real capital formation and real wealth building. That’s how we got richer.

Now, all we’ve got is credit… unlimited credit. Banks’ cost of funds these days is so low it’s almost free. Nobody knows what anything is worth – because all prices are distorted by unlimited credit.

That’s what happened to the oil industry. Oil was $140, and then it was $30. You don’t know what it should be. So nobody wants to take the risk or trouble to fund long-term projects. We don’t build much real wealth any more. We just speculate. Short term. And the amount of credit in the system just goes up and up.

But the dark side of credit is debt. You have to pay interest on it… and eventually pay back the loan. So, as your debt increases, it takes more and more of your income to make the debt payments, leaving you less to spend. This means you have to borrow more – increasing your debt – just to maintain the same level of spending.

We know our income is not keeping up with our debt levels. Debt was about one and a half times GDP in the 1970s. Now, it’s three and a half times.

I know lower interest rates airbrush the picture… so the debt burden is not so obvious. But unless we’ve eliminated the credit cycle, we have to assume rates will one day turn up again. Then, the cost of all this debt will suddenly hit us – hard. It will take a big chunk out of current spending… leading to those “D” words that you can’t use in public.

The gloom and doomers were right all along. But they didn’t understand any better than anyone else how it really worked. They kept expecting inflation. And it never came. So, they went broke and went away.

Debt is not inflationary. It’s deflationary. You either earn your way out… or you reach a limit, and the economy melts down. And here’s the thing: The super abundance of credit reduces real growth. That’s the thing I just realized. The more credit you make available… to try to ‘stimulate’ the economy… the more you stimulate speculation and suppress real growth. Less real growth means less real income to pay your debt.

So, there’s really no way out… because the debt is slowing down the economy it depends on, like a huge leech that is killing its host. You eventually end up in a Minsky Moment… [when asset values plunge after a long period of speculation and unsustainable growth]…

What are you going to do then?

Janet:You’re asking me?
Ben:Yea… Janet. I know what I’m going to be doing – collecting more big bucks for telling Goldman how you screwed up. Heh heh.What are you going to do?



The line goes dead.


Bill Bonner
for Bonner and Partners

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