Editor’s note: Governments have tried anything and everything to stimulate the economy since 2008.
They’ve
cut interest rates hundreds of times. They’ve printed trillions of
dollars. Some governments have even adopted “negative interest rates.”
Dispatch
readers know these radical measures have failed miserably. But that
won’t stop the government from continuing to experiment during the next
financial crisis.
Today,
Agora founder Bill Bonner reveals what the government could do when the
next crisis hits. Unlike previous measures, this new policy could directly target the money in your wallet.
[This essay was originally published on September 12, 2016, in Bill Bonner's Diary.]
OUZILLY, France – We came back from South America poorer but wiser.
For
the first time ever, we have had to face the reality of politics; up
until now, it was never more than an abstract, theoretical matter.
We read about the French Revolution, the Bolshevik Revolution, and the passage of Obamacare.
We
knew politics was corrupt and repulsive. But except for a brief stint
on the board of governors of our local church, we had nothing to do with
it.
Now
the wolf is in our own backyard… so close that we can smell its hot
breath and hear the clicking of its pearly teeth as it snaps at our
heels.
More as it develops…
Criminalizing Cash
But wait… money sometimes goes “full politics,” too.
Take poor Kenneth Rogoff at Harvard.
He
wants a dollar with a voter registration card, a U.S. flag on its
windshield, and a handgun in its belt – the kind of money that supports
the Establishment and votes for Hillary.
Writing last month in the Wall Street Journal under
the headline, “The Sinister Side of Cash,” he noted that “paper
currency, especially large notes such as the U.S. $100 bill, facilitates
crime: racketeering, extortion, money laundering, drug and human
trafficking, the corruption of public officials, not to mention
terrorism.”
Of
course, large notes do make it easier for criminals to operate. Like
cellphones. And sunglasses. And automobiles with air-conditioning.
But that’s what money is supposed to do: make it easier for an economy to function. You use it as you please.
Yes, dear reader, we are back to our regular beat. Money. But what’s this? Finally, we’re beginning to see some action.
You’ll recall that the markets have been eerily quiet… with less movement in stocks than we’ve seen in the last 100 years.
What gives?
Perhaps
it was the calm before the storm. The Dow fell nearly 400 points on
Friday. We don’t know. It could be the calm before the storm. Or it
could be the calm before more calm.
How It All Ends
There’s something fundamentally tranquilizing about having a central bank that gives out the word that it’s got your back.
The Bank of Japan is buying bonds AND stocks (by way of exchange-traded funds)… pushing up prices for both.
Under
its €1.7 trillion ($1.9 trillion) QE program, the European Central Bank
bought so many government bonds, it ran out of new bonds to buy. So,
this summer, it added corporate bonds to its shopping list.
According
to Reuters, it will soon run out of corporate bonds, too. Then it will
have to follow the Bank of Japan’s lead… and wade into the stock market…
if it wants to keep its QE program going.
And
in the U.S., the Yellen Fed continues to jive and diddle… teasing
investors with the threat of “normalizing” interest rates, but having
neither the desire nor the fortitude to act.
We’ve
been wondering how it ends. Bear markets are facts of life. But if the
central bank has set its face to stopping them, then what?
Central
banks – in the current system – can create unlimited amounts of fake
money. They can use this money to buy real financial assets.
Theoretically,
they could buy all the world’s stocks and bonds. And theoretically,
they can leave the feds with almost complete ownership of the planet’s
capital.
The
rich get richer (selling their assets to the feds at inflated prices).
The poor get poorer (as the misallocation of capital increases… price
signals are distorted… and real wealth is wasted).
What goes wrong?
Everything. As in politics, the gap between theory and practice is as wide as the Sargasso Sea.
The Next Crisis
Even with the largest bidder in the world on their side, investors can still panic.
That would mean a big drop in asset prices, high-profile bankruptcies, and a new crisis.
Things move fast. The feds may step in with more QE buying, but they may be a dollar short and a day late.
A 20% drop in stock prices is equal to a loss of about $5 trillion in the U.S. alone.
The
bond market is roughly twice the size of the stock market, so add a 20%
drop there and you’re talking real money – a total loss of $15
trillion… which could easily happen in a few days.
Now, imagine a drop similar to the 2008-09 plunge…
In
round numbers, equities lost 50%. Today, there’s about $60 trillion
worth of stocks worldwide, so that would be a $30 trillion loss.
If
the bond market fell in sync, you’d be looking at another $60 trillion
or so… or a total loss of market capital of $90 trillion.
What would the feds do?
Yes, they would buy stocks and bonds. But they would buy at market prices. Owners would still take big losses.
And the feds wouldn’t stop there.
We
are now almost eight years into the central bank’s various “stimulus”
programs; they have coincided with the weakest recovery on record.
After taking account of inflation, incomes for most Americans are lower today than they were in 2007.
Clearly,
reducing the cost of credit doesn’t work – even with yields on roughly
$13 trillion worth of bonds in negative territory.
Fire Up the Whirlybirds
So what’s next?
When
the next crisis hits, central bankers will rush back into their tool
rooms and bring out something new. It will no doubt include “helicopter
money.”
This
is the term economist Milton Friedman used to describe direct giveaways
of newly minted money without any corresponding increase in the
government’s budget deficit.
Huge
new infrastructure projects will be announced. Tax credits, tax cuts,
minimum guarantee incomes – we don’t know what the feds will come up
with.
But watch out…
With
the carrot will come the sticks. The feds will impose measures to crack
down on tax cheats, tighten the noose on black-market operators, and
shut off funds to causes they don’t like.
They’ll use their money helicopters to “drone” you. That is, they’ll make sure you do with your money as they please.
Mr. Rogoff’s nutty suggestion to restrict cash could become law.
Regards,
Bill
