‘Through the door there came familiar laughter
I saw your face and heard you call my name
Oh, my friend we’re older but no wiser
For in our hearts the dreams are still the same
Those were the days’
‘Those Were the Days’ by Gene Raskin
Yes, they were good years…1980–2015. We laughed. We cried. We got married. We raised children. We bought houses. We made money.
Whose life has not been improved since the end of the 1970s?
Reagan’s ‘Morning in America’. Then the Clinton Years. Finally, George W. Bush’s ‘Fin de Bubble’ era. Who is not older and better off (or at least older) than he was when the era began?
Should we just stop there, happy to have had such a wonderful time together?
Today, the Dow opens at 17,867 points — not far from its all-time high. And about 1,180% higher than it was 35 years ago.
A man would be fool to question his happiness in marriage; would he be so foolish to wonder about the bliss afforded by such a bull run?
Should we merely thank divine providence…or the profane feds…for our granite countertops, our rising stock market portfolios, our families, and our fortunes?
Should we look in the closets and under the rug?
Or maybe — just maybe — should we check the balance sheet?
The press was unanimous as to what happened yesterday: ‘US Stocks Slip on Yellen’s Testimony’.
What was it about her testimony that caused investors to think that their stocks may be less valuable at 4pm than they had been at 9am?
‘Yellen hints at December rate hike’.
Investors are no dopes. They know the fix is in. The value of a stock is no longer determined by honest commerce. Now, it is a feature of finance — specifically, the rate of interest the Fed pays commercial banks on their excess reserves.
And this number — as tiny as it is at 0.25% — can have a big effect. Set at the ‘wrong’ level, and much of the capital value built up over the last 35 years could vanish — as much as $50 trillion worth, by our calculation.
We mentioned earlier this week ‘how we got where we are.’ We referred to more than three decades of easy money…leading to a big increase in the world’s monetary base.
In rough terms, it rose by an average of $500 billion a year every year for the last quarter of a century.
Delta of plenty
Allan Sproul joined the Fed in 1920. He became the president of the powerful Federal Reserve Bank of New York in 1941…a post he held until 1956. And after leaving the Fed he became a director of Wells Fargo.
When he died in 1978 he must have thought he had seen it all.
‘As gilt-edged securities [bonds], both public and private, rise in price under pressure of the abundant money supply [which pushes down bond yields],’ he wrote in 1946, ‘funds flow ever-increasingly into lower-grade securities and into equities, and into commodity, real estate and other markets.’
Too bad he couldn’t live for another few decades. We’d like to see his face now. The funds have flowed in a torrent into stocks, bonds, and real estate, just as he predicted.
That flood of EZ money created the delta of plenty in which we live today.
Unfortunately, it’s not likely to continue, because funny things happen when you do funny things to money.
Dreams of easy money
That is the lesson from colleague Vivek Kaul’s masterful three-volume history of money, Easy Money.
Vivek, who edits the Indian edition of the Markets and Money e-letter, goes all the way back…beyond the Carter administration…to the beginning of money — to cowrie shells and cocoa beans.
Anything can be used as money.
In colonial Maryland and Virginia, tobacco was widely used as money. And in World War II prison camps, once again, tobacco — cigarettes — were the currency of choice.
Vivek traces the development of money and banking from its origins all the way through the crisis of 2008 and beyond. If you want to know ‘how we got where we are,’ Vivek’s book is a must-read.
Particularly interesting is his telling of the 1929 Crash and the Great Depression.
So much was happening, so fast — and with so many meddles and interventions — it must have been impossible to follow events, even if you were right in the middle of them.
Even now — after eight decades and after the story was told by giants such as Galbraith, Keynes, Friedman, and Rothbard — it is still hard not to get lost in the details.
Something happens in the markets…the feds react clumsily…it leads to unforeseen consequences…which causes more market action…leading the feds to do something even more asinine.
In Vivek’s account, the comedy is never overt. But the farce is unmistakable. One government bumble leads to another throughout the Great Depression. Finally, the Second World War comes along and a new round of mistakes begins.
Vivek set out to describe how today’s world of money got to be what it is. He shows how simpleminded, self-serving theories, along with the usual low-bred chicanery and larceny, have caused countless headaches over centuries.
In that sense, there is nothing particularly special about our generation or the boom of the last 35 years.
The dreams of easy money are still the same.
For Markets and Money, Australia