The Greatest Fraud of the US Economy

Tuesday, the Dow lost 119 points. Gold continued its progress back to where it was when the last dip began.

And we continued looking for the weak link.

A chain of deception, humbug and larceny has corrupted the entire US economy. From top to bottom, every financial decision has been twisted in one direction or another.

From student loans and payday loans, to the corporate borrowing binge and the stock buybacks it fuels – from link to link, money from nowhere leads to somewhere people want to go. Especially, to higher asset prices.

At the lower end, it doesn’t look so good. Students who graduate this year, and who took out government-backed loans, are saddled with an average of $33,000 in debt. They’ll spend decades paying it off…at best.

Homebuyers, too, find themselves not so much benefiting from cheap money as competing with it. Private equity firms with billions of dollars in ultra-low cost leverage have bid up the cost of homes in key markets.

The average buyer pays higher prices as a result…and then finds himself indentured to the lenders for most of his life.

The typical American household also finds itself with a major headache. Rising real prices press from the right (about which more in a minute). Falling real wages squeeze hard on the left. And its debt burden, though slightly smaller than it was in 2007, is still heavy.

A dear price to pay

But at the upper end people are delighted. Banks – with the happy connivance of the US Federal Reserve – create new money. Corporations use it to buy their own shares. Central banks buy shares too. (What else are they going to do with all the money they create?)

Besides, buying stocks seems to please everyone who matters. Investors are happy. Speculators are happy. Economists are happy. Politicians are happy, too.

After all, a rising stock market means the economy is getting better, doesn’t it?

But there is a heavy price to pay, dear reader. The financiers end up owning more of the real businesses…the real enterprises…the real houses…the real output of the real US economy.

Wall Street firms own more houses. And more stocks. All are bought with money that they — or their cronies — created.

Imagine that you were a well-connected Wall Street insider. You had borrowed at the beginning of last year and bought the S&P 500. What a genius you were. With a 30% gain in the stock market… and a cost of money at only, say, 4%, you’re 26% ahead — on money you never earned nor saved!

What a hoot!

‘Print’ more money. Buy more assets. Keep at it until you own the whole shebang, no?

And what’s to stop you? Who complains? Who even notices?

The weak link

But there has to be a weak link in this chain somewhere.

Yesterday, we looked at the inflation numbers. The Bureau of Labor Statistics says consumer prices are rising at an annual rate of 2.1%. MIT says they’re going up twice as fast. And John Williams of ShadowStats reminds us that if you figured the CPI according to the formula used by the US government as recently as 1990 (it’s been changed since), you’d have an inflation reading of 6%.

And if the inflation rate is 6%, real (inflation-adjusted) GDP is collapsing.

Nominal GDP growth (which doesn’t take account of inflation) in the first quarter was only about 1%. Reduced by 2% in real terms, it left the real GDP growth for the quarter at minus 1%. Adjust for 6% inflation, on the other hand, and you get growth at minus 5%.

Six percent inflation also cuts deeply into the rest of the economic numbers. Hourly wages, for example, may be back to 1968 levels when adjusted by official inflation numbers. But adjust them using John Williams’ calculations, and wages, too, are collapsing.

We also saw yesterday that the official numbers show consumer prices up 39% since 2000. The Fed’s favorite PCE deflator (a measure of the change in the cost of living similar to the CPI) shows them up only 31%. But taking an average of food, energy, transportation and housing – the things that really matter — prices are up about 50%!

Where’s the weak link?

It is in the money: the stuff the links are made of. This is not money that was forged in real commerce…tempered by beads of real sweat…and hammered with the sledge of savings.

No…this money lacks tensile strength.

Put it to the test. What will it do?

Our guess is that it will break.


Bill Bonner
for Markets and Money

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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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