Corrupt Money leads to a Corrupted Economy

If dishonest money begets dishonest accounting, it also begets dishonesty and corruption in every aspect of life — from the boardrooms of the big bankers down to the lowest economic agent.

Dylan Grice

Last week was spent reacting to two pieces of new information. First, the official annual rate of consumer price inflation in the US came in higher than expected — at 2.1%. And real GDP for the first quarter was adjusted to a much lower than expected annual rate of MINUS 2.9%.

Janet Yellen dismissed the higher inflation reading as ‘noise’.

Among the hullabaloo of lying statistics and misleading figures, it is indeed difficult to distinguish noise from meaningful signals. But we know the Fed chief is as deaf as a post. And other inflation readings are much higher; according to the formula used by the feds in 1990, for example, the true measure of consumer price inflation is 6% a year, not 2%.

At this rate, the drop in real GDP is much greater than the feds admit. Nominal economic activity must be reduced by the annual rate of inflation to arrive at a real rate of economic growth.

Nominal growth for the first quarter was 0.8%. Had the 6% annual inflation rate been used, the falloff would have been minus 5.2% — which might have gotten investors’ attention.

It’s NOT the economy, stupid!

But Wall Street digested the news with little discomfort. Neither gas pains nor indigestion resulted. The drop in first-quarter real GDP was attributed to bad weather and other ‘one off’ events. The inflation reading was simply ignored.

Neither really mattered. Because investors have figured out that the economy is no longer of any importance to stock prices. What matters is credit.

As long as the rate of annual interest on debt is available at less than the annual rate of inflation, the hustlers and financial engineers will use it to goose up stock prices — using buybacks, buyouts, M&As and other tricks.

Investment in new plant equipment and startup businesses, meanwhile, declines. You might think that industrious, forward-thinking entrepreneurs would use cheap credit to build new businesses. Apparently not.

Productivity declined at a 3.5% rate in the first quarter, six percentage points below the average rate of productivity growth. That, too, is subject to an inflation adjustment. Had a 6% CPI figure been applied, the real rate of productivity decline would have been catastrophic.

The rate of new startups is also running about 30% below the average annual rate in the 1980s. Big, well-established corporations can borrow at low rates… and use the money to push up their stock prices. Startups, on the other hand, often can’t get money at all.

Not only does this help explain low levels of employment, it also is a major factor, according to professors Edward Prescott and Lee Ohanian, writing in Wednesday’s Wall Street Journal, in the drop in productivity. Without new businesses, new plants and equipment, new technologies and new business models, productivity drops.

The blame for all these economic aches and pains may be laid on the Fed. Its easy-money policies have created an easy-money attitude throughout the financial world. Investors want fast, easy profits — from stock market manipulations — rather than from the long, hard work of capital investment.

Corrupt money leads to a corrupted economy. Investors beware.


Bill Bonner
for Markets and Money

Join Markets and Money on Google+

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money