by Bill Bonner
YOUGHAL, IRELAND – “The whole thing is a giant fraud,” was perhaps too much for an unprepared audience to take on.
Your editor, in trying to explain why the U.S. money is “fake,” had perhaps bitten off more than he could chew… at least in the context of a panel discussion in Ireland on cryptocurrencies.
We’ll return to Kilkenny in a moment.
Back in New York yesterday, investors were worried. The Dow had sold off by more than 500 points by 3 p.m. By the time the bell sounded, it was down 602 points.
This is a market that – like a nervous passenger at a bus stop – is eager to go somewhere. Sooner or later, it will get there.
It was a lively discussion at the Kilkenomics Festival. We were joined on stage by our old friends Dominic Frisby, who writes for our MoneyWeek magazine in London, and Jim Rickards, a colleague from America.
Both Dominic and Jim know far more about cryptocurrencies than we do. But they come to opposite conclusions.
Jim is certain that cryptos are not much more than a scam and a bubble. Dominic, on the other hand, is an “early adopter,” who is convinced that cryptocurrencies will replace government-issued paper money.
Both are probably right.
Cryptos are bold experiments, like mutations in the money gene pool. Almost all will fail… as many innovations do.
But some form of digital money, perhaps built on blockchain technology, will probably succeed. And most likely, it will be sponsored and controlled by the feds.
We confessed at the outset that we know nothing about cryptocurrencies, except that we don’t like them. But we claimed a more-than-average knowledge of money itself.
Explaining, we took the crowd back to August 15, 1971, and showed how economist Milton Friedman had encouraged President Nixon to dump the gold-backed dollar in favor of one that would “float” on a sea of supply and demand, expertly guided by the skillful navigators at the Federal Reserve.
This led us to describe not only America’s fake money itself, but the whole armada of fake money and fraudulent information (especially the price of credit), and how they were used by the few to rip off the many.
The audience looked puzzled. What the hell was I talking about, they wanted to know.
We took a question: “If fake money is so bad, why has the system lasted so long… over 45 years? And nothing bad has happened.”
We hemmed and hawed, stalling for time as we searched our brain looking for the right answer.
The short answer was that the 1971 change was not intended to be permanent. But once the elites saw that it was making them rich, they didn’t want to give it up.
“Well… Remember, the first 10 years of the system were disastrous – just as the old-timers predicted. The new credit-based money did exactly what it should have done: it went down. Inflation went to 9%. And then, inflation expectations had gotten so deeply embedded in the economy that Paul Volcker had to put the federal funds rate up to 20% to overcome them.
“And because Volcker defied the politicians… and much of the public… by sticking to his “hard money” program, he was able to save the system… for a time. That is, he showed that the authorities would make sure that the new money acted like the old money, more or less.
“Instead of the old feedback loop, where gold automatically stopped the feds from issuing too much money, the Fed itself would keep a lid on the money supply.
“In short, the message was simple: You can trust the new money.”
But you couldn’t really trust it. It looked like the old money. It acted like the old money. It pretended to be just as “good” as the old money.
Except, it wasn’t… not at all.
The new, fake money succeeded largely because of a historical accident. Volcker came along at the very bottom of a stock, bond, debt, and economic cycle.
Putting the screws to inflation, he allowed the economy to begin a very natural, healthy expansion that carried it along (with more help from the Fed) for the next 36 years. It was only two years ago – in 2016 – that the interest rate cycle finally turned.
Another big part of that accident was the arrival of the Chinese into the world economy. Increases in fake money usually lead to increases in consumer prices (which is what happened in the 1970s).
But, beginning in 1979, hundreds of millions of Chinese workers began laboring in unheated factories for $10 a day so that Americans could enjoy Everyday Low Prices at Walmart for the next four decades.
Those lucky trends have run their course. And now, the U.S. economy faces a historical accident of another sort… with much different consequences.
Total debt in the U.S. was only 1.5 times GDP in 1971. Now, it is 3.6 times GDP. And the federal government only owed $390 billion in 1971. Now, it owes $21 trillion.
And now, instead of being at the bottom of a cycle, the U.S. is near the top, with very high stock and bond prices… and the lowest unemployment in four decades.
All the positive trends of the last 30+ years will now turn into negative trends. Expect falling stock and bond prices… rising unemployment… rising consumer prices… and higher interest rates.
Fake money rarely survives a full market cycle. We doubt that the fake dollar will either.
But we weren’t finished. We were aiming for a deeper point:
“The fundamental unfairness at the heart of the U.S. economy is that this fake money was not distributed evenly,” we said. “It was used to buy bonds. So it went into the financial markets, where the rich, the privileged, the insiders… and people like Donald J. Trump… own the assets.
“The Fed increased the U.S. monetary base by some 400% in the last 10 years alone. That money – magnified by credit and markets – is what made the rich so much richer. It’s why the elite won’t give up their fake money system – not without a fight. And it’s why Donald Trump is already pressuring the Fed to stop trying to “normalize” interest rates.
“This is not just a monetary crisis that is coming; it’s a social and political crisis. Fake money created a dishonest society, where some people got much richer at other peoples’ expense. People don’t understand the cause of it. But they feel it. And it’s a much bigger danger to America than just financial losses.”