Meet the Founder, Bill Bonner
Bill Bonner founded The Agora in 1978. Since then, it has grown into one of the world’s largest independent newsletter research and publishing businesses. Bill co-wrote two New York Times bestselling books, Financial Reckoning Day and Empire of Debt. In his latest book, Hormegeddon, Bill describes what happens when you get too much of a good thing in the sphere of public policy, economics and business.
The Credit Expansion That Began After WWII Must Come to An End
I have been saying more or less the same thing for 40 years. And I have been more or less wrong for 40 years.
And today, I’m going to say it again. That is, I’m going to tell you – again – that the end of the world is coming. But what do I mean by that? I mean, the end of the monetary, financial and economic world we have had for so many years – actually longer than many of you have been alive… I’m going to tell you that that world is coming to an end.
And you would certainly be wise to be skeptical. Not only because I have made this forecast so many times before but because all the evidence of the past 44 years suggests just the opposite. This financial system is nothing if not durable. It has survived the opening of China, the fall of the Berlin Wall, the Crash of ’87, the Dot.com crash, and the housing crash in the US.
It seems to be able to survive everything. But here I’m going to stick my neck out once again – what’s left of it. I’ll look ahead, both to the end of my speech and to the end of the world as we know it. This financial system has survived so much for so long… I’m predicting that it can survive a real rate of 5%.
But let’s look at it. Then, you make up your own mind.
And if you’ll permit me, I’ll wrap my own story around it, because I have been one of the biggest beneficiaries of the present system. And if not one of the biggest, at least one of the most grateful.
History Shapes Us
You see, Karl Marx was wrong about a lot of things, but he was mostly right about the way history works. It follows broad patterns. We don’t shape history; history shapes us.
And I wouldn’t be here in the same way if were it not for the credit expansion of the last half century. Most likely, you wouldn’t either.
The system we take for granted began in 1968 – when the US went off the gold standard domestically…which was then broadened to include foreign monetary arrangements on August 15, 1971 – that is, 44 years ago.
This change was much more important than anyone realized at the time. Real money was replaced with empty paper money. Real savings were replaced by bank credit. And capitalism began its transformation into crony capitalism.
I remember at the time I thought this new money wouldn’t last. I was a young man back then. But I had read Murray Rothbard. I even met him. And I knew that no country had ever made pure paper money work. The temptation to overdo it was simply too great.
No paper money had ever survived a full credit cycle. And still hasn’t, by the way. The evidence for this was so abundant and so persuasive that betting against the dollar seemed like the easiest money you could make from ’71 until about ’81.
And for 10 years, I looked like a genius.
Then, of course, Paul Volcker got ahead of inflation and made us gold bugs look like fools for the next 18 years.
In the financial markets, the hardest decision you will make is when you want to look like a fool… during a boom or after it.
As things evolved, there were only a very few years in which I did not look like a fool. About one year in 10…and then only briefly. In the crash ’87… in the recession of ’93… in the dot.com crash in 2000… and in the credit crisis of ’08-’09.
Over that time the best investment approach was also the simplest – buy and hold. That is what has worked for at least the last 33 years. And you might think it will work for the next 33 too.
I would caution against that conclusion, however. The law of regression to the mean may be now catching up to me. After being wrong for so long, I may surprise you… and myself… and be right.
By the way, the credit bubble and I, we go way back. My personal history with the credit expansion goes back to the mid-‘70s. I was director of a public interest group in Washington, the National Taxpayers Union. Our goal was to reduce the cost of government. Politicians were loath to raise taxes. Until the 1970s, they had also been loath to run deficits, except in times of war. But then, the deficits started to pile up.
I tried to stop this by amending the US constitution – to ban deficits except in time of war.
When that didn’t work, we sued the government. We argued that young people would be taxed for things that neither they nor their elected representatives ever had a chance to vote on.
That failed too.
Then, when Ronald Reagan was elected we thought our troubles were over. I remember the happy, optimistic attitude at the first inaugural ball for Reagan. Here was a president who would set things right. We thought. But then, he went over to the dark side and began running big deficits himself.
I concluded that it was hopeless and began looking for a new line of work.
But where could a self-taught economist… with a record of such important failures… find employment? In the financial industry, of course!
I wasn’t even self-taught in the right kind of economics. Not a monetarist. Not a Keynesian. No Nobel Prize. No credibility.
No respectable firm would hire me, so I started by own firm. I hired analysts. I published investment advice. Alternative investment advice… based on the assumption that the whole financial system was going to go belly up. Which of course, it didn’t.
But while I was ranting and railing against the monetary system, investors were getting rich… and wanting more and more advice. Why were they doing so well? Because the funny money system was effectively shifting huge amounts of money in their direction… and mine!
From Main Street to Wall Street
Of course, I didn’t understand this at the time. But the effect of unrestrained currency… and runaway credit …was to move resources from the real economy to the financial economy, that is, from Main Street to Wall Street.
The model used by central financial planners over the last half century calls for tight policies when the economy is hot… and loose policies when it is cool. This is supposed to smooth out the boom-bust cycle.
But what we’ve gotten is not counter-cyclical policies, but just a boatload of easy money. The Fed was quick to cut rates and slow to raise them.
And fiscal policy – the federal government budget – has always been stimulative. The feds are supposed to run surpluses in the fat years and deficits in the leans years. But there hasn’t been a dime of real surplus since the mid-70s. Nothing but deficits.
This was not a good model. Only occasionally counter-cyclical. Usually, it was pro-cyclical – making the booms and busts worse, not smoothing them out.
And now, thanks largely to all that stimulus delivered to the financial sector – but not to the real economy – there’s a huge gap between what the economy actually produces in real wealth… and the wealth that people think they have as measured by stock, bond, and real estate prices.
But why didn’t all that stimulus cause the real economy to grow? Wasn’t that the whole point?
Here is the thing – easy profits push out real growth. The Swedish economist Knut Wicksell explained it a hundred years ago. When you lower interest rates below the natural rate the easy money pushes out the hard money. People invest existing assets. They don’t do the hard work of saving, taking risks and creating new wealth.
That’s why the stock market and the bond market go up – because they are bid up by easy money looking for easy returns. Wall Street and the people who own existing capital assets flourish. But Main Street – where new wealth is created – stagnates.
Cheap money may not be a durable model, but it is popular while it lasts. And throughout the ‘80s, ‘90s, and ‘00s more and more people were paying me for advice on how to get in on it. Our sales – of investment opinion and advice – were going up.
We now have about 2.5 million people all around the world who pay for our publications, read what we write, and often follow our advice. That’s more than the Wall Street Journal or the New York Times. And yet, while the Wall Street Journal and the New York Times are both very well known, who ever heard of us? Or me?
I don’t know how many customers Michael Bloomberg has. But it was enough to get him elected mayor of New York, largely on the reputation he built in his company. Do you think there is any town of any size that would elect me mayor? If they did I’d claim election fraud. And demand a recount.
Knowing Something Others Don’t Know
What’s going on? How can we be talking to so many people and nobody has ever heard of us? How come I’m not rich and famous?
There are two parts to the answer. It’s important that you understand them. The first part is that ours is not a public media. The New York Times, or The Times of London, or Le Monde are all ‘newspapers of record.’
They provide a very public narrative of news and opinions that are widely viewed and shared among the public. Everybody knows who they are and, more or less, what they are stories that “everybody knows.” They tell the news and opinions you are expected to know as an informed citizen of a modern democratic nation.
That public narrative is also almost always moronic. It has to be. In order for it to be shared among so many people, it has to have its nuances and ambiguities stripped off. That is, it must be stripped of all the paradoxes and complexities that make it real life. So, you end up with these simpleminded stories, binary stories… good vs. evil… conservative vs. liberal… red states vs. blue states…
In the financial world, the public narrative is disastrous. Look at the narrative of the crisis of ’08-’09, for example. It goes like this: the country suffered a financial crisis because of deregulation and greed. It is now recovering, thanks to the decisive action by the authorities. Ben Bernanke, Janet Yellen, and Mario Draghi are the heroes. The big banks are the villains. Dramatic tension is provided by occasional kangaroo courts that hit the bankers with big fines and arguments over how fast the economy is recovering… and when the Fed will raise rates.
Good luck to you if you believe any of that. It is all nonsense. Nonsense on stilts. Nonsense on steroids. Nonsense with broadband.
That’s much of the reason you can never make any money by following the mainstream media. You make money by knowing something others don’t know. That’s part of the reason the insiders… and private equity investors… can do better than you. They know what you don’t know.
If your only source is the public media you know only what everybody else knows. And what you know is fully exposed and fully priced… and often over-exposed and over-priced.
When it comes to finance and investing, knowing what everyone else knows is not a benefit. It’s a liability. If you base your investment decisions on information from the public media you will almost certainly lose money. You will be doing, essentially, what everyone else is doing, after the insiders have already done it.
We Answer Only to You, the Subscribers
Our industry and our network exist as a different source of ideas, information and analysis.
First, it is private, not public. We do not write to the public, we write to thousands… no millions… of readers, one by one. Individually.
Nor do we have one voice, one opinion, or one publication. We have dozens of them… dozens of voices, each one with its own point of view… and each one with its own self-selected readership. Our media is person to person, not mass media.
We have more in common with new, disruptive technology businesses than with old-fashioned publishing. We are more like Uber than the New York City medallion taxi system. We are more like AirBnB than like the Hilton chain.
We get almost no advertising. We get no money from the government. We don’t depend on financing or stock sales from Wall Street. Our researchers and analysts can say what they really think. They answer only to you, the subscribers.
Forgive me for talking about myself and my business, but you need to understand what is going on.
I wrote about this in my last book, ‘Hormegeddon.’ Sometimes, the public narrative is disastrous… and so powerful no one can resist it. I gave one rather extravagant example: WWII Germany.
At first, in the ‘30s, it looked like the German economy was a kind of miracle. Hitler had the whole country working again – after a terrible depression. How did he do that? He geared up for war. And in the beginning, like inflation, war looks like a winner. The factories hum. Employment soars – partly because so many people are taken off the streets and put into the army. The people look forward to victory and prosperity.
But only an economist could believe that you become wealthier by spending money on war. It’s an illusion. You can’t live in a tank and you can’t drive a fighter plane to work. But people are generally ready to make sacrifices in the name of ‘national security,’ and soon almost everyone has a close relative in the army and a job with a military supplier. At its peak, half the German GDP was directed towards the army, and it was almost impossible to find a family that didn’t want to see the army well supplied – either because they depended on it for their revenue or they had a son or grandson in the army who needed it for his survival.
The war was effectively over in 1943… it was almost impossible for Germany to win after then. Italy had deserted it. America had declared war on it. The Soviet Union was winning on the Eastern Front. And in the West, the Allies were preparing an invasion.
Hitler should have pulled his troops back to the Homeland and begged forgiveness.
“Ooops…sorry about your country, dude.”
Instead, the Wehrmacht kept fighting for two more years… until the economy was nearly 100% destroyed, 2 million more German soldiers were dead, the country was forced to make an unconditional surrender, and was occupied by foreign armies for the next 44 years.
In the financial sphere, the stakes aren’t nearly so high, but the phenomenon is the same. The Credit Bubble War is being lost. But who can stop it? Who wants a crash in the stock market? And probably a depression?
Not the New York Times. Not the Wall Street Journal. Not Congress nor the President. Not Janet Yellen. Not Jamie Dimon. Not Paul Krugman. Not the banks. Not the farmers. Not the people on disability.
Let’s Not Call It a Depression
As far as we know, we’re the only ones in the whole world in favor of a full stop, even a depression. We are the only ones – apart from a few lonely academics and brave, and rather poor, hedge fund managers – with a logical and practical theory about why a depression would be a good thing.
But let’s not call it a depression. Depressions have gotten so much bad press. Let’s call it a ‘reboot.’ You know, if you use a computer that it tends to accumulate trash… viruses… bad commands… confusion. Over time, it slows down… or even comes to a halt.
What do you do? Increase the power? Put on more software. More apps. More big files. No, you reboot it. You start afresh.
Well, sometimes, you have to do that to an economy too.
I thought I’d seen everything when I saw a house for sale on the coast of Florida for $139 million – the highest price ever put on a US dwelling. The place is huge. Gaudy. And ugly.
But then in the news – last month – a builder is putting up a house, a spec house, in California with a $500 million price tag. How much are those things going to be worth after a reboot?
The US only had about $1 trillion of debt when the new dollar was created. Now, it has $60 trillion. That’s about $35 trillion more than it should have, considering the size of the US economy and the traditional relationship between debt and output. And that’s about $35 trillion of assets that might disappear when the economy reboots itself.
In the last seven years $57 trillion more debt – worldwide – has been added. Most of this shows up in today’s asset prices, especially at the top of the financial food chain.
Why Asset Holders Do Not Want a Depression
Just last month, I got an email from Dow Jones, publisher of the Wall Street Journal. They’ve launched a new publication called “Mansion Global,” to cater to this large crowd of internationally-minded rich people.
I actually predicted this trend about 10 years ago. The internet… and this huge credit expansion… are creating a class of very rich, and very mobile people. Do they want to live in small town in the Midwest with a single McDonald’s and three gas stations? No, they want to live in the best places to live – where there is art, culture, entertainment… business, investment opportunities… and most important, people like themselves.
New York. Vancouver. Miami. Istanbul. Sydney. Panama City. They go to one place, check it out… and then may go to another.
They buy chic apartments and townhouses, driving up prices so much that local people can barely afford to live there. And then, because they own several of these places, and they can only be in one place at a time, there are whole neighborhoods – expensive neighborhoods – where the lights never go on at night. Because there is no one home.
Meanwhile, working class people can’t afford to live there anymore. Salaries have shown little increase in the last year, but property prices are up 19% over the past 12 months in New York, 13% in Dublin, 11% in Sydney. The average property in London now costs $750,000, also up 19% over the past year. And in Hong Kong average house prices more than doubled since 2008. I don’t know what’s happened in Vancouver, but I wouldn’t be surprised to learn that it tops them all.
But it’s not just real estate. Stocks are up – not everywhere – but certainly in the US, where prices have almost tripled since the bottom of the ’09 sell-off. Works of art – contemporary art – have skyrocketed in ways that defy explanation. And a woman’s handbag recently sold in Hong Kong for $222,000.
Not so long ago, the highest price ever for a work of art – around $300 million – was paid for a Gauguin painting.
What are these things worth after a reboot? How much are all those empty condos in London worth? How about that $500 million spec house in California? I don’t know…
But nobody wants to find out. Which is why asset holders do not want a depression.
There are charts – from David Stockman’s excellent website – Contra Corner. Stockman followed the corruption of the US economy even more closely that I did. He was Ronald Reagan’s budget chief. He left Washington about the same time I did and for the same reason… he realized that public spending could not be controlled.
And he also went into the financial industry. But he went into a better, or I should say, better paying, part. He became a partner in Blackstone, one of the biggest and most profitable private equity firms on Wall Street. So he saw it from both sides of the crony complex – from the government side and from Wall Street.
But the people in the financial sector – whether they sell financial assets or just own them – have gotten richer and richer.
The Need to Reboot
Money, by the way, has no value on its own. It’s only made valuable by what it can buy. The economy gives value to money, not the other way around. So a lot of the wealth that people think they have – because they have assets that are said to be worth a lot of money – isn’t real. And it will disappear then the system reboots.
All societies have to have some way to dispose of their mistakes. All need to reboot from time to time.
The concept of a debt jubilee is described in the Old Testament book of Deuteronomy. It was supposed to take place on the year following the seventh set of seven years – or once every half-century. The slate was supposed to be wiped clean. Of course, there are many less predictable and less pleasant ways to wipe the slate clean too. Debt deflations. Hyperinflations. Depression. Devaluations. Confiscations. Defaults. Wars. Revolutions. There are a lot of ways to do it.
One way or another, the credit expansion that began after WWII must come to an end. About that I have no doubt. Contrary to the evidence of the last half a century, credit cannot increase faster than income forever.
It is mathematically, economically, and financially impossible.
But when will it stop? One of our readers wrote in to say that we are often way too early. But he also said that we were also often right about the underlying cause and effect.
Early? Yes. Certainly. In the case of the credit bubble we were nearly 40 years too soon. I saw the handwriting on the wall back in the ‘70s.
I thought it said “the end is nigh.”
I still don’t know where ‘nigh’ is… but it wasn’t 1978, or 1988… or 2008… or any other year between now and then. Might it be in 2018? Yes… it might.
But I’m not telling you this simply to argue that there is a credit bubble. You knew that already. I’m just explaining our role in it… and why almost no one warns you about it.
After so many years of credit growth, and asset price inflation, there are millions and millions of decisions…and careers, retirements, reputations, and living standards that now depend on it.
This is why the public narrative is what it is. This is the narrative you will find in almost the whole world’s press… and it is explained in universities… and in board meetings. Practically everyone in government, industry, commerce and academia has an unspoken prejudice and unrecognized bias. The system only works by putting ordinary people further in further in debt. Credit has to increase. Somebody’s got to borrow money. And much of this borrowing is done by government and corporations, so the average person isn’t even aware of it.
But everybody is in on it. And nobody wants it to stop.
Wall Street wants to sell you stocks and bonds. Industry and commerce have products to unload, not to mention mergers and acquisitions to finance. Governments all over the planet are running deficits and counting on low interest rates to pay for their zombie wars and crony programs. Central banks, too, are fully behind today’s program of central economic planning, which means keeping the whole system – the system created and developed over the past 30 years to 50 years – going as long as possible.
All of them are prisoners of past spending and past capital allocations. They are slaves to this system; they depend on it for all they have.
You can look at it as a conflict between generations. We – the baby boomers – have been running things for at least the last quarter century. And we – speaking for my generation – have been so eager to protect our perks, power, and profits that we have perverted the entire system.
It’s Not Money That Makes People Rich
And all of today’s elites – whether in academia, media, business, finance or government – are blinded by their own self-interest. They can’t see the truth, let alone speak it. They are all paid not to see it. And if they do see it, they keep their mouths shut. Nobody – or almost nobody – can believe it will come to an end, even though – mathematically and logically – it has to.
If you could print money and get rich, Zimbabwe would be the richest country on earth. But it’s not money that makes people rich – it’s the economy. It’s output. Even gold has no value apart from what it can buy.
If you were at the North Pole with an ounce of gold, for example, and nothing to buy, the gold would be worthless. Adding money just distorts the economy, it doesn’t improve it. It transfers resources from the people who earn it to the people who get the money. It doesn’t make the society a penny richer.
We can see that in the following calculation: in 1982, a typical working man could buy the entire S&P 500 with 15 hours’ worth of his time. Now, the poor fellow will have to work two and a half weeks.
It is a system that creates wealthy people but little real wealth. It is also dangerously dysfunctional. It is like a business that can only increase sales by lending its customers more money. And nobody wants it to stop.
Who speaks for the alternative view? Who speaks for the future? Who stands up for a healthy, sane, real economy? Who champions the cause of the little guy…the small investor…the small businessman…the ordinary working stiff?
Who wants a depression? Who wants a ‘reboot’?
I was in Paris recently. I saw a major French magazine with a remarkable headline. It said: “What we are doing isn’t working. What if we tried Free Enterprise?” It was scandalous, shocking… almost subversive.
But you might think Janet Yellen would throw up her hands: “Really, what we are doing isn’t working. So, why don’t we try the free market?”
Why not try the free market? Real price discovery? Honest capitalism?
Why? The answer is obvious. Schumpeter called it ‘creative destruction.’ It’s like a forest fire that burns up the dead wood to allow regeneration and growth.
The elite don’t want it because they are the dead wood. Ms. Yellen et al. are not acting on some time tested experience or reasonable theory.
Instead, they are really just acting out of fear. Like everyone else. They are desperate to protect what they’ve got – their reputations, their status, and the money they are going to make when they retire from the Fed and begin getting $100,000-a-pop speaking fees.
They are part of the dead wood that reboot will get rid of.
So who speaks for the parts of the economy that are left behind? Who speaks for Main Street… for real capitalism… and the unknown, surprise-filled future? Who stands with the mysterious angels, inviting a reboot… like a forest fire, to clear away the dead wood… to correct the mistakes of the last 3 decades? Who cheers on creative destruction as it whacks the cronies and starves the zombies?
I do. This is the point. This is our role. This is our mission.
We are on the other side of the trade. And we’re standing there alone, with a pack of matches in one hand and copies of Mises and Hayek in the other.
Of course, we – and I speak for myself as well as the entire confrerie of contrarian analysts and alternative economists – aren’t saints, or do-gooders either. We are just trying to make a living, like everybody else. But we come at it from a different direction than most.
One thing we seem to be good at is looking ahead and seeing what others don’t want to see. That is, we’re probably no better at alpha than a lot of other investment analysts. But we’re much better at beta…!
Beta is the word I use to describe the gains you get from seeing the big picture correctly.
There were five major macro events that marked the last 30 years:
- The collapse of the Soviet Union
- The fall of the Japanese miracle economy in 1990
- The end of the dot.com bubble in 2000
- The attack on the World Trade Center in 2003 and the War on Terror
- The financial crisis of ’08-’09 and subsequent non-recovery
These things are important largely because they were unanticipated. People weren’t ready for them. And most authorities said they wouldn’t happen. The CIA – in the ‘80s – thought the Soviet Union was going from strength to strength, for example. Until 1990, investors were betting heavily on a continuation of the Japanese boom. Same thing for the dot.com bubble, which was accompanied by the most delirious ‘this time it’s different’ talk we’ve ever heard. Nobody expected such a dramatic attack on Manhattan – especially not the people we paid billions of dollars to stay on top of it. And, finally, Alan Greenspan and Ben Bernanke both said that the credit crisis of ’08-’09 was unforeseeable.
A Good Time To Prepare For It
But the crash in real estate and finance of ’08 wasn’t unforeseeable at all. Our analysts and economists were all over the story years before the crisis hit. As for the other big events, our analysts were on top of three out of four of them. The only one we missed – and everybody missed – was the attack on the World Trade Center.
In the interest of full disclosure, it is also true that we saw many things coming – such as the Y2K computer glitch in 2000 – that never happened. And, as I’ve been saying, I’ve been predicting a meltdown of the credit system for years – and that hasn’t happened yet.
Still, it seems impressive, at least to me, that we were able to see these things coming when so many others – including those responsible for keeping an eye on them – failed. How did we do it?
I believe it is simply that we are paid by our customers to notice things that others are paid not to notice. Bear markets, crashes, credit contractions… governmental, technical and social catastrophes – nobody wants to look carefully for these things. Nobody wants them to happen. They make people poorer, not richer. And yet, they do happen.
And it seems a part of nature’s system that mistakes are punished, errors are corrected, and ‘bad’ things happen from time to time. Whether you want them to happen or not.
Currently, I am predicting a credit crisis – much worse than the ’08-’09 event. No one wants it – especially not the dead wood itself. True, I’ve been expecting something like this for an embarrassingly long time. But it is bound to happen sometime. And this is probably a good time to prepare for it.
The crisis will cause a crash on Wall Street. The banks will go broke. The credit system will seize up. People will line up at ATMs to get cash and the cash will quickly run out. This will provoke the authorities to go ‘full central bank retard.’ This will be the second stage. They will flood the system with ‘money’ of all sorts. Then, finally, people will lose faith in cash itself…the whole system will bust out into a spree of hyperinflation.
So, you need to hold some cash. Maybe enough for a couple months of living expenses. Hold some gold too. Maybe some bitcoins.
And, if you’ve made money over the last 30 years, this is probably a good time to take some of it off the table. Out of stocks. Out of bonds. Into safe things that you would want to own even through a depression.
And good luck.