The Fatal Flaw That Has Doomed Our Economy

We are searching for an insight. Each time we think we see it…like the shadow of a ghost in an old photo…it gets away from us.

It concerns the real nature of our money system…and what’s wrong with it.

Here…we bring new readers more fully into the picture…and try to spot the flaw that has doomed our economy.

Let’s begin with a question…

What went wrong?

After the invention of the internal combustion engine, people in Europe…and then the Americas…got richer, almost every year.

Earnings rose. Wealth increased. Then in the 1970s, after two centuries, American men ceased making progress.

Despite more PhDs than ever…more scientists…more engineers…more capital…more knowledge…more Nobel Prizes…more college graduates…more machines…more factories…more patents…and the invention of the Internet…after adjusting for inflation, the typical American man earned no more in 2015 than he had 40 years before.

Why? What went wrong?

No one knows. But we have a hypothesis.

Not one person in 1,000 realizes it, but America’s money changed on August 15, 1971. After that, not even foreign governments could exchange their dollars for gold at a fixed rate.

The dollar still looked the same. It still acted the same. It still could be used to buy booze and cigarettes.

But it was flawed money. And it changed the whole world economy in a fundamental way… a way that is just now coming into focus.

Honest money

The Old Testament tells us that God chased Adam and Eve from the Garden of Eden with this curse: ‘By the sweat of your brow, you will earn your food until you return to the ground.’

From then on, you worked…you earned money…you could buy bread. Or lend it out. Or invest it.

Dollars — or any form of real money — were compensation…for work, for risk taking, for accumulating knowledge and capital.

Money is information. It tells us how much reward we’ve earned…how much things cost…how much profit, how much loss, how much something is worth…how much we’ve saved, how much we’ve spent, how much we need, and how much we’ve got.

Money doesn’t have to be ‘hard’ or ‘soft’ or expensive or cheap. But it has to be honest. Otherwise, the whole system runs into a ditch.

But the new money was a phony. It put the cart ahead of the horse. This was money that no one ever had to break a sweat to get. It was based on credit — the anticipation of work, not work that had already been done.

Money no longer represented wealth. It now represented anti-wealth: debt. So, the economy stopped producing real wealth.

The Fed could create money that no one ever earned and no one ever saved. It was no longer the real thing, but a counterfeit.

In this way, effort and reward were cut off from one another. The working man still had to labour. But it was the banker, gambler, speculator, lender, financier, investor, politician, or inside operator who made the money.

And the nature of the economy changed. Instead of rewarding the productive Main Street economy, it rewarded insiders… and the financial sector.

The penthouses of Manhattan and the summer houses of the Hamptons changed owners. Gone were the scions of Detroit factories and the titans of New York commerce. Gone were the people who had added to the wealth of the nation.

In their place were the Wall Street hustlers…the people who moved money around…taking it from the people who made it and giving it to the financial industry, the money lenders, the insiders, and the Deep State.

This process is misunderstood. It is thought that Wall Street greed and deregulation caused the shift. But Wall Street was just as greedy as it always was…And financial regulations increased dramatically throughout the entire period.

It was not human nature that had changed; it was the money. And it changed everything.

We’ll be continuing this story tomorrow. Here’s an essay from the archives…

Dead men talking

Originally published June 20, 2003


‘Tradition…is the democracy of the dead.’

G.K. Chesterton

Yesterday’s news brought word from Deputy Defense Secretary Wolfowitz that US troops would be in Iraq for the next 10 years.

Also came an estimate of the cost: An extra $3 billion would have to be added to the defense budget for Iraq…and an extra $1.5 billion for Afghanistan.

‘Avoid foreign entanglements,’ cautioned the father of the country. But corpses have no voice and no vote, neither in markets nor in politics. They might as well be dead.

George W. Bush is undoubtedly better informed than George Washington. And heck, it’s a new era. Having foreign entanglements is just what the times seem to call for.

George W. Bush may not have the wisdom of a Washington…but at least he has a pulse.

Tyranny of the living

Few people complain about this tyranny of the living. Most accept it as a fact of life.

They do not want people to be excluded from the pleasures of life because of an ‘accident of birth.’ But they are perfectly happy to have the oldest and wisest of our citizens systematically barred from the polling stations and the trading floors by an accident of death.

The departed shut up forever, leaving behind them their car keys, their stocks, and their voter registrations…That is all there is to it. Goodbye and good riddance.

It is as though they had learned nothing useful…noticed nothing…and had no ideas that might be worth having, as if each generation were smarter than the one that preceded it…and every son’s thoughts — even in the present ‘culture of the moron’ — improved upon those of his father.

The cleverest humans

Oh, progress! Thou art forever making things better, aren’t thou?

Throw out the sacred books — for what are they but the thoughts of imbeciles?

Forget the old rules…the old wives’ tales…the traditions…habits of generations…the old-timers’ superstitions…the old fuddy-duddies’ doubts!

We are the cleverest humans who have ever lived, right?

Maybe. But today we convene a council from the spirit world; we invite the dead to have their say.

Our aim is not to kvetch on behalf of our ancestors but to warn the living: The corpses may have a point.

Many times have we referred to old-timers’ wisdom in these letters. The old-timers wanted more from a stock than just the hope that someone might come along and pay more for it.

They wanted a stock that paid a dividend…out of earnings. That was what investing was all about.

But by the 1990s, the old-timers on Wall Street had almost all died off. Stock buyers no longer cared how much the company earned or how much of a dividend it paid. All they cared about was that some greater fool would come along and take the stock off their hands at a higher price.

So, they did. And now the market is full of them — greater and greater fools who think the stock market is there to make them rich.

In the space of 20 years, the character of the US economy and its markets changed so dramatically the old-timers would scarcely recognise them.

In the mid-1980s, the US slipped below the water line separating the net creditors from the net debtors. But almost no one noticed or cared. By then, the old-timers were already in Florida shuffling along…waiting for someone to adjust their medication.

Inevitable destruction

‘In 1981,’ Gloom, Boom & Doom report publisher Marc Faber explained, ‘stock market capitalization as a percentage of GDP was less than 40%, and total credit market debt as a percentage of GDP was 130%.


By contrast, at present, the stock market capitalization and total credit market debt have risen to more than 100% and 300% of GDP, respectively.

[Today, the stock market is 109% of GDP, and debt is 346% of GDP.]

We have wondered how this ends. Not well is our guess. Too much debt and credit, too much capacity, too many dollars, too many bad investments, too much spending, too many deficits, and too much confidence.

What is the solution?

‘Less’ is our recommendation. ‘More,’ said Bernanke, Greenspan, Bush, and everyone else in a position to do something about it.

So, the whole thing rolls forward…toward its inevitable destruction. Because — and here the dead back us up 100% — all paper currencies sooner or later come to grief.

The ‘if’ question is settled. ‘When’ and ‘how’ remain open.

So, we turn to ancestors…and ask for advice.

The state’s need of money increased rapidly,’ said one of them, Italian economist Costantino Bresciani Turroni, describing the scene in Weimar Germany 80 years ago.

Private banks, besieged by their clients, found it impossible to meet the demand for money.’

Less is more

As the situation heated up in the summer of 1923, there were some who gave our advice: ‘Less,’ they said.

But officials were in roughly the same situation as Bernanke and Bush today: ‘More,’ said they.

One, Karl Helfferich, who had been Secretary for the Treasury of the German Empire during the First World War, explained:

To follow the good counsel of stopping the printing of notes would mean — as long as the causes which are upsetting the German exchange continue to operate — refusing to give economic life to the circulating medium necessary for transactions, payments of salaries and wages, etc.


It would mean that in a very short time, the entire public— and above all, the Reich— could no longer pay merchants, employees, or workers. In a few weeks, besides the printing of notes, factories, mines, railways, and post offices, national and local governments, in short, all national and economic life would be stopped.

When an economy comes to depend on more and more credit, it must get more and more of it…or it will come to a stop.

A man who has borrowed heavily to finance a lifestyle he cannot really afford must continue borrowing to keep up appearances. Or else, he must stop.

But market manias, love, politics, and war are things people rarely stop…

Tormenting the dead

In Weimar, Germany, once the hyperinflation got started, there was no stopping it until it had run its course.

In 1921, a dollar would buy 276 marks. By August 1923, a dollar would buy 5 million marks. Middle-class savers were wiped out.

If only we could roust Herr Helfferich from his eternal sleep!

We would like to shake the dust off his wormy cadaver and ask some questions. (And here, we think not of praising the dead but of tormenting them.)

What fun it would be to show him what his policies — the same, by and large, as are now put forward by Greenspan, Bernanke, and Bush — provoked.

How gratifying it would be to see the little kraut squirm under an intense interrogation.

What was he thinking? Why did he think that more of the dreadful printing press money would undo the harm that had already been done by too much?

The late Bresciani Turroni continued:

The inflation retarded the crisis for some time, but this broke out later, throwing millions out of employment. At first, inflation stimulated production… But later… it annihilated thrift; it made reform of the national budget impossible for years; it obstructed the solution of the Reparations question; it destroyed incalculable moral and intellectual values.

It provoked a serious revolution in social classes, a few people accumulating wealth and forming a class of usurpers of national property, whilst millions of individuals were thrown into poverty.

It was a distressing preoccupation and constant torment of innumerable families; it poisoned the German people by spreading among all classes the spirit of speculation and by diverting them from proper and regular work, and it was the cause of incessant political and moral disturbance.

It is indeed easy enough to understand why the record of the sad years 1919-23 always weighs like a nightmare on the German people.

There — the dead have had their say.


Bill Bonner,

For Markets and Money, Australia

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