The Illusion of Modern Money

Nothing comes from nothing, nothing ever could

– The Sound of Music

Expect a miracle. Or a fraud.

It is impossible for printed money – money created out of thin air – to bring real wealth. It’s just paper. Or not even paper. These days it’s nothing more than the wispy imagination of the Internet.

A clerk types in a number. Presto! A bank a thousand miles away has a billion dollars.

Is the world one jot richer? Of course not. Same buildings. Same businesses. Same output. Same purchasing power.

But wait… What then, do those billion dollars really do?

Ah…that…well, they look like real money. They act like real money. And they buy things – just like real money.

So, wouldn’t you know it, people think they ARE real money.

They feel richer. They spend. They invest. They speculate. Just as if they had more real money. But it would be a miracle if this phony money created a real boom. But that seems to be what investors are betting on.

The Dow held about steady yesterday. Gold lost a little ground. Nothing big either way.

But the Dow rose over 11,000 last week. The S&P 500 is selling at a p/e ratio 50% higher than the long-term average. Investors must think that corporations are going to grow 50% faster than they did during most of the 20th century.


Let’s see…

..we’re in the early stages of a Great Correction…

..there is about $20 trillion worth of bad credit still to be eliminated…

..unemployment is at levels not seen since the Great Depression… many houses are headed to foreclosure that banks have had to stop taking them back…

..what little “growth” there has been seems to all have come from the government. And now the government itself is headed for a debt crisis…

Hey…and our president tells us that things are getting better every month. Which just proves that he has no idea of what is going on.

Things are not getting better. The US government is so deep in the hole it may never be able to get out. It borrows a dollar for every dollar it receives in taxes. So, it’s still digging the hole deeper.

And in early November, the Fed is expected to announce that it will join the QE party. That is what has investors’ attention. That is what they’re betting on – more hot money from the Fed.

“The job of the Fed is to take away the punch bowl” when the party gets out of hand, said Fed chief William McChesney Martin. Instead, the Fed is pouring in more alcohol and handing out car keys.

Investors are convinced that it will announce a new round of quantitative easing in November. They think the number will be between $100 billion and $1.5 trillion. A big number, in other words.

Why? Because the economy is not improving. Because it is a Great Correction. And because the Fed believes it can add money and boost Americans’ “animal spirits.” And because they are really a bunch of dumbkopfs.

If you believe you can really improve the situation by adding phony money, why not add a lot more of it? Ha ha… never mind.

You’re just counting on a miracle…or a fraud. We wouldn’t count on a miracle. But we wouldn’t bet against the fraud. Adding phony money can’t create real prosperity. Nothing comes from nothing. But it can create a boom…and a bubble…in speculative assets. That is, it can work as a fraud. Speculators take the hot new money and bid for gold, copper, platinum. China shares. Everything goes up as the hot money gets passed from hand to hand. And then…it burns someone.

Right now, we’d be a little concerned that investors have already bought the rumor of more QEII. So, if the Fed comes out with the predicted announcement, investors are likely to sell the news. The only thing that would push prices higher is if the Fed did MORE than was already anticipated…that is, if it went ALL OUT in its fight with the slump.

Then, you’d really see some accidents!

And more thoughts…

“This country is in a boom,” said the editor of a financial magazine in Buenos Aires. “Everything is going up. Everything is selling. And inflation is roaring at 25% per annum.”

To hear him tell it, Argentina is everything America wishes to be. Its people shop. Its restaurants are full. Its economy is growing at more than 8% a year.


“Inflation. Everyone wants to get rid of cash. You hold onto it and it’s worth less and less. So you buy an apartment.”

Amazingly less than 10% of property transactions in Argentina include mortgages. People pay with cash. Still, prices are not as low as you would expect. The lot next to our office is on the market for $250,000.

“It should be about $100,000,” said a friend who keeps an eye on real estate. “But everything is high.”

The cab ride from the airport was 70 pesos when we came 4 years ago. This time it was 128 euros. Two glasses of wine at a local bar were 40 pesos. They would have been half that a few years ago.

“There’s a boom going on,” continued the financial editor. “But it can’t go on forever. You can’t have 25% inflation and have a healthy economy. People don’t make wise investments. They just try to avoid getting ripped off by inflation. They don’t make long-term investments. They just try to park their money where it won’t disappear. That’s why real estate is so expensive. People will save their money and buy an apartment whether they need it or not. They figure it will still be there in five or ten years. The peso won’t be. At least not today’s peso.”

Nor will the dollar.

*** By the way, your editor is giving a speech at the MoneyShow in London on the 12th of November. For more info, follow this link


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

Latest posts by Bill Bonner (see all)

Leave a Reply

Be the First to Comment!

Notify of
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to