The Shaky Foundation of the Financial System

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

The Daily Reckoning