The Central Banking Beat Goes On

The Dow fell 21 points yesterday. Gold was flat.

Around the world, stocks have been doing well. Even our top recommendation, beaten-down Russian stocks, are moving up fast. The Russian market rose 14% in May (leaving it still down about 9% for the year).


Maybe world debt levels hitting mega highs has something to do with it. Over $100 trillion was the last estimate we saw.

Meanwhile, why worry? Volatility is ultra low. The VIX measures investors’ worry levels by looking at implied volatility in the options market. The index just posted its lowest monthly close since 2007.

Investors are not fearful. And not necessarily greedy, either. They are just complacent, sure that nothing bad will happen.

Keys to Daddy’s car
The source of that complacence is not hard to find. Governments and central bankers are all working night and day to make sure nothing changes.

As we keep saying, the US financial industry should have been spanked hard in the crisis of 2008. Instead, like a spoiled rich kid after a traffic accident, the financial industry got bailed out of jail and was given the keys to a new car…with a bottle of whisky under the seat!

When the price of money goes down banks’ profit margins go up; by moving to zero interest rates, the US Federal Reserve handed them higher earnings. And by guaranteeing the debt of the weakest institutions, the Fed gave big bonuses to the worst managers.

Now, the alcohol is taking effect. All around the world markets stagger. Economies slur their words. Investors have severe memory loss. Businessmen can’t tell up from down. And the poor consumer gets a headache every time he checks his bank balance.

We have tried to chronicle the oddities of today’s zero-interest world. Everywhere we look we see something strange…something that shouldn’t exist in a sober world.

The talking heads and bleeding hearts are up in arms about wealth inequality. But the real cause of inequality, as we have illustrated, is largely the feds’ bubbly credit booze.

A rigged game
Some people have access to the free money. Others don’t.

Those with the access tend to be in the financial elite. It is no wonder the rich get richer; the game is rigged.

We saw that most recently in the housing market. Supposedly, the housing market is recovering. But when you take a closer look at the market you find that houses that sell to the 1% are soaring. Sales volumes and prices for the 99% — the overwhelming majority of the population — are flat or falling.

Likewise, the averages distort the real picture in earnings and household wealth too. Huge increases for the 1% pull the averages up. But the typical person…and the typical household…are slipping backward.

As we reported yesterday:

‘Since the feds took gold out of the currency — in 1968 — the typical man has lost about $3,000 of income every decade, when the numbers are adjusted for the “official” inflation rate. Adjust them to a more realistic measure of inflation, and the loss has been closer to $5,000 a decade.’

Even on the official numbers, since the end of the recession of 2009, the typical household has lost $5,000 in wealth.

Low interest rates have made it possible for corporations to borrow more money than ever before. There’s now more corporate debt outstanding than mortgage-backed securities.

And guess which corporations benefit most from these low rates? The weakest borrowers, of course. They are the ones that normally pay the most for credit. Now, with all rates squeezed like passengers in a Japanese subway car, the unwashed borrowers are cheek by jowl with the prudent, well-funded ones.

The curiosities continue through every corner of the markets — with dozens of barely profitable billion-dollar companies that wouldn’t exist at all were it not for nearly-free capital.


Bill Bonner
for Markets and Money

From the Archives…

What the US Bond Market Suggests You Do
31-05-2014 – Vern Gowdie

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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.

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