What “Financializing” the Economy Has Done for Real Business

02.03.2018 • United States

Bill Bonner – Bill Bonner’s Diary (United States) –

GUALFIN, ARGENTINA – Another miracle! It rained.

“We got 200 millimeters (about 8 inches) this year,” reported the capataz, Gustavo.

After two years of drought, finally, the fields, mountains, and pastures are green. And the river that separates the house from the rest of the ranch – usually dry – is running fast.

“Yes, every’s happy now,” Gustavo continued. “Water was all we needed.”

Off to the Races

Meanwhile, stocks dropped another 420 points on the Dow yesterday.

Bond yields rose to 2.8%. Investors thought Fed chief Powell seemed serious in his drive to destroy some $2 trillion worth of the very stuff on which stock and bond prices float – liquidity.

Over the last 30-some years, the U.S. economy has been “financialized.”

Finance generally, and liquidity in particular, played a larger and larger role, while actual business – providing products and services – declined.

Main Street went down. Wall Street went up. Debt increased. And gradually, the whole economy became misshapen by false price signals and too much debt.

Behind this trend, of course, is money itself.

You could say its source is the introduction of fake money by President Nixon in 1971.

Or you could focus on the 30-year period after Alan Greenspan removed the last impediment to runaway finance by backing the stock market with Fed policy.

Since then, it has been off to the races, with debt rising three to six times faster than income. U.S. government debt rose eight times. The stock market rose 11 times. And the economy that supports both of them only went up four times.

As we will show next week, investors in the U.S. stock market thought they were profiting from the Great American Enterprise Machine.

Instead, they were unwitting accomplices to a huge fraud… in which most citizens were robbed to transfer money to the elite.

A Soft Landing

But today, we’re focusing – again – on the heist itself, and trying to understand if, when, and how the money goes back to its rightful owners.

As we showed you yesterday, Fed policy always consists of three mistakes.

(1) It keeps rates too low for too long. (2) It raises them, causing a serious allergic reaction on Wall Street… which it then medicates (3) with more low rates.

The Fed – benighted as always, bewitched by power, and vainly besotted by its own image – is now making Mistake 2.

That is, it is trying to recover from Mistake 1 in time to be able to gather up some interest rates so as to make Mistake 3 again.

Having put the whole world over heels in debt (the world total is around $230 trillion), it now believes it can increase the cost of carrying that debt without crashing the whole system. A “soft landing” is what it is aiming for.

It intends to sell or let expire nearly $2 trillion of its cache of bonds by 2021.

This it will be doing over the same period that the U.S. government is borrowing $3.5 trillion in bonds, just to keep up with current spending and tax cuts.

Together, they will absorb $5.5 trillion worth of liquidity.

There is no way this can happen without sharp increases in interest rates to entice savers to stump up more liquidity of their own.

But real savings are not the same as Fed-provided fake money. When savings increase, it takes money out of the economy.

Higher rates and more savings will mean, at a minimum, a very serious recession and a long, deep sell-off in the stock market.

Most likely, stock prices will be cut in half… and not bounce back, in real terms, during our lifetimes.

Mistake 4…

But the future we are describing will not happen. As we’ve been saying for months, the Fed will never really “normalize” interest rates and its asset pile – not willingly.

So far, the Fed has only cut $21 billion out of its bond portfolio, a tiny sliver of the $2 trillion it intends to cut, and less than half of the $50 billion it was scheduled to unload.

Yet this small amount, and the anticipation of more to come, seems to be what provoked the 10% correction last month.

The Fed did not take this sitting down. Instead, it rushed to REVERSE Mistake 2 (raising rates), resorting to Mistake 3 (lowering them again, after they’ve triggered a crash/recession), with a $14 billion increase in its bond portfolio.

That is, it abandoned QT in a panic and returned to QE.

Reports the financial blog, Seeking Alpha:

The Fed more recently started “quantitative tightening” (QT) that involves normalizing (reducing) the Fed balance sheet by slowly letting securities mature/roll-off the same (plan announced September 2017).

Curiously, last week it appears that $14.1 billion in assets were added back onto the Fed’s balance sheet. This raises the question whether it is possible the Fed may have fired-up the money printing press again in response to the recent acute stock market correction.

And come the next stock market correction – which could well be accompanied by a recession – the Fed will immediately swing around again.

But this time, it won’t be able to implement Mistake 3 as it did in 1987, 2000, and 2008; it will lack the firepower. It has already shot its monetary wad.

With no choice, it will team up with the White House and Congress to resort to Mistake 4.

The pols will propose wasteful, unproductive, and unneeded spending programs, to be financed with money they haven’t got. The Fed will “print” the fake money with which to pay for them.

Stay tuned.





By Dan Denning, Coauthor, The Bill Bonner Letter

Editor’s Note: In our recent survey, we asked Bill’s dear readers what they wanted to see more of. Many readers asked how they should prepare for the next financial crisis. So today, we asked Bill’s coauthor on The Bill Bonner Letter, Dan Denning, to share five easy steps you can follow to prepare for an uncertain future.

You may not be an investor or have a large portfolio, in which case, most investment advice is useless.

But there are practical steps you can take that go beyond purely financial advice. Part of what I’m hoping we can help you do is have the right frame of mind to deal with a fragile financial system.

That’s one of the things Bill and I have been telling readers of The Bill Bonner Letter. As I showed you recently with the example of the “short volatility trade,” the bull market is much more fragile than you might think.

When a system is so complex it could break at any moment – from its own complexity or from an external attack – you need to prepare. Here are five personal tips I practice in my own life. They don’t make me any wealthier. But I think they may give you a bit more peace of mind when you’re dealing with a turbulent system.

Defer consumption no matter what. Save more than you think you need to. It’s a good moral habit, too. When you defer consumption, you accumulate capital. You resist the urge to gratify every desire. As the Stoic philosophers would say, you free yourself from enslavement to your passions.

A little walking-around money. Carry enough cash on you each day to eat a meal or get a cab ride or Uber over a long distance if you need to. You never know when the cash machines will break down or you might not be able to get back to your home.

Cash insurance. Have enough accessible savings (in cash) to survive for six months if you lose your job or are ill. If this seems insurmountable now, see rule number one above. Americans have fallen into the dangerous habit of mistaking full grocery store shelves for wealth. We ARE a wealthy culture. But don’t live with “just-in-time” cash management.

Establish a family disaster recovery plan. Each of your family members should know how to contact one another in the event of an emergency which affects any or all of them. They should know important phone numbers, addresses, and, if necessary, the name of a family friend or lawyer to contact in a legal or medical emergency.

A “bug-out bag.” You may not have heard of a bug-out bag. And if you haven’t, it may sound a little crazy. But I can assure you it’s not as crazy as you think. Events that disrupt the routine of normal life across all of society rarely happen, even at the most extreme times in American history. But they DO happen.

The “bug-out bag” is just a reminder that in a real crisis, the value of your portfolio may be the least of your problems. Like the first-aid kit in your bathroom or the spare tire and road flare in your car… it’s the sort of thing you hope you don’t have to use… but shouldn’t be without…

A few things to get you started for the bug-out bag are…

  • A bag (obviously)

  • Identification

  • Cash

  • A first-aid Kit

  • Contact names and addresses of friends and family

  • Food and water

  • Maps

  • A multi-tool

  • A change of clothes

  • Hygiene items (toothpaste, hand wipes, etc…)

Something I missed? Send your list to feedback@bonnerandpartners.com

– Dan Denning

Editor’s Note: As Bill is always showing readers, today’s financial system is far more fragile than most realize. And when the next crisis hits, it will come without warning.

For nearly a year, Dan has been working on an ambitious project. He’s been traversing the American west looking for “boltholes” to ride out the next crisis. These are safe, undervalued towns in America that could serve as your refuge if the worst were to happen. Dan will publish his findings soon. But the research is only available to readers of The Bill Bonner Letter. To get access, go right here.

-Read more at bonnerandpartners.com-

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