Tomorrow Happened Yesterday

A shocking figure came out last week. In the US, fewer new houses were sold last month than in any month since they started keeping records in 1963.

How is it possible? Simple. The houses that would have been sold to today’s able buyers were built and sold years ago. That’s what excess credit does. It doesn’t really enlarge or enrich an economy…it stretches it, bringing things that would have happened tomorrow forward, to yesterday. Only a certain number of people every year can afford a new house. If in 2005, you give credit to buyers who won’t be ready for many years, or perhaps never – who will buy a new house in 2011?

By the time the bubble popped in ’07, there were few able buyers still looking. And then, a US federal tax credit program in the fall of ’09 and the first part of ’10 finished them off. That program expired a year ago. Housing has been an empty husk ever since.

The latest data show more remarkable developments in time travel. You have to see it to believe it. And even then, you rub your eyes and wonder. In the US, the financial sector is riding high. Again. After bringing the whole world economy to its knees three years ago, profits for the industry are back where they were before the crisis began 4 years ago. For every dollar of corporate profit made in the United States of America in 2011, nearly 30% comes from shuffling money.

A good bartender will stop serving a customer who is in danger of falling on his face. No such decency exists in finance. Even with the crisis of ’07-’09 fresh in their memories, the debt mongers keep the taps open. At the low end, borrowers increased their credit card debt over the last 2 years. The word “usury” must have been invented to describe the interest rate charged subprime borrowers – an average over 18%. Meanwhile, total debt in the US is now above where it was when the correction began. At the end of 2008, debt crested at $56.4 trillion. In the last quarter of 2010, thanks to the tsunami of cash and credit coming form the feds, the total had risen to $56.6 trillion.

And it’s going higher. Clive Crook gave us a peek into the vanities that make it possible. Writing in The Financial Times, he says the Fed made “the decisive interventions that stopped the recent recession from turning into something much worse…” Yes, the Fed probably did overstep its boundaries. But “thank heaven” it did, he says. “By every commonsense measure, what the Fed did was right.”

This year marks the beginning of the 5th decade of the world’s latest experiment with a free floating, paper-based monetary system. The authorities are taking no chances. Lest member governments slip into integrity, the IMF bans them from backing their currencies with gold. And now, under pressure from insolvent banks, natural catastrophes, and a Great Correction, the authorities are introducing huge new amounts of this paper money – trillions of it.

For example, the Irish needed cash to bail out their banks. Wiser providence had the solution already in hand – bankruptcy – when the government committed 46 billion euros to save them, an amount equal to more than a quarter of GDP. They may need 35 billion more.

In Japan and America, as in Ireland, the feds try to shift the finance industry’s losses onto taxpayers. Unlike the Irish, they use absurdly low interest rates to push the cost into the fog of the future; at zero interest rates it costs less to carry bad debt than to bury it.

Most beguiling of all, they can print an almost unlimited supply of non-interest bearing securities – cash – with which to keep the ponzi plan going a bit longer. In Japan, for example, the authorities responded to the recent disasters with money-printing on a Godzilla scale. The Bank of Japan announced that it would create 39 trillion yen – about $481 billion. In proportion to the economy, it is as if the Bernanke Fed said it would run off $1.5 trillion in stacks of 20s and 50s. In America, the central bank covers more than 100% of the government’s IOUs – equal to more than $5 billion in new currency every business day. Money-printing used to be what central bankers hoped no one would notice. Now, they call press conferences to announce it. And no one cares.

Mr. Crook even wants more of it: “When QE2 ends in June, QE3 should start.” He should watch out. For the gods of money are as mischievous as they are unrelenting. They use short-term success like the mortgage industry uses teaser rates.

The record from yesterday is clear: Once they get a taste for it, few economies can resist spending money they didn’t earn. First, they borrow from the future. Then, they steal from it, by simply printing up new money. Finally, you get déjà vu tomorrow, as yesterday’s greatest financial disasters happen, once again.


Bill Bonner
for The Daily Reckoning