Last week, the plot did not so much thicken as congeal.

There’s no changing it now — the cameras are rolling… the costumes are on… and everyone knows his lines.

President Trump went further in becoming the first president independent of either major political party in American history.

After having sided with the Democrats on the debt ceiling, he went back to the swamp to resolve the “Dreamer” issue — the 800,000 children who arrived in the U.S. as undocumented migrants and were allowed to temporarily stay legally in the country.

Then, over the weekend, it was reported that the administration wanted to get back on the Paris climate change agreement bandwagon.

The White House denies it, but it’s now clear that Mr. Trump aims to be a whole lot less disruptive than he promised to be.

And now, with the floodgates open, the U.S. national debt has surged over $20 trillion.

Of course, we don’t worry about debt anymore. That is sooo 20th century. This is the 21st century. Debt doesn’t matter.

What seems to matter are the more symbolic issues. The Dreamers, for example.

It was okay for the president to betray conservatives on the money issues… but let him agree to offer refuge to hundreds of thousands of migrant children… and “conservatives” are up in arms.

It is further proof — if any were needed — that this comedy is going to turn into a farce… and end as a tragedy.

We’re going broke… and no one cares. Certainly, we don’t care. People get what they deserve.

Our job is only to try to understand what it is that they deserve… to anticipate it… and make sure we don’t get it, too!

Last Friday, we went to Paris to meet with Jim Rickards.

The ex-general counsel for hedge fund Long-Term Capital Management, CIA advisor, best-selling financial author, and Wall Street veteran told us that we are too naïve.

A major crisis is coming, he says, worse than 2007.

It’s coming on its own accord — a natural and inevitable consequence of the feds’ meddling. According to Jim, the authorities are actually looking forward to it… planning for it… and helping to cause it.

On that last point, we have no doubt.

Their ham-fisted, pigheaded program is bound to lead to a crisis. Specifically, the problem that caused the crisis of 2007 — too much debt — was not resolved; it was made worse.

The Fed, confronted with a debt crisis of its own making, did the only thing it could do — it lowered interest rates to encourage more borrowing. Now, there is more debt than ever. And the same people who caused the crisis are still running the banks, the regulatory agencies, the corporations, and all the other institutions that made the crisis possible.

Why were none of the problems corrected? We attribute this to simple self-interest: The insiders live on debt. Of course, they are always going to want more of it. But this is more than a matter of chance, imbecility, and swinishness.

There’s cupidity, too!

The powers that be are setting us up for another big crisis because they want another big crisis. Why?

“It was no accident that Congress passed that Patriot Act so quickly after 9/11,” Jim told me. “They were waiting for it.”

A crisis is an opportunity. And in the next crisis — which could be days, weeks, or months away — the feds will further tighten the noose around our necks.

“They’ll ban cash,” says Jim.

Jim knows the insiders. He knows what they know. And he knows what they don’t know.

What they don’t know — and don’t want to know — is how to run an economy properly.

But they know they don’t need to know. Because the more they fail and the more crises they cause, the more opportunities they have to grab more power… and more money. That is what they did in 2008, for example.

Corporate profits — which reflect the real earnings of large American businesses — have risen only 2% a year since then. After inflation, they were more or less flat. But stocks have risen 10 times as much. The Dow, for example, is up 200% over the same period.

How is that possible?

Well, the Fed pumped $3.6 trillion into the capital markets via its QE (“quantitative easing”) programs. Not into the consumer market. Not into Main Street. Not into the pockets of ordinary citizens. Instead, the money went to the big banks and other rich people.

JPMorgan Chase CEO Jamie Dimon, for example, got a bonus last year of $25 million thanks to this hustle. And he calls bitcoin a “fraud”!

As a card-carrying member of the “One Percent,” we’d like to pause briefly and offer a word of thanks to the Fed. Since 2008, the wealth of the richest 1% of Americans has soared. As measured by the S&P 500, it’s up more than 230%.

Great for us. Thanks.

But it’s all very well for the feds to use crises to take more wealth from the lumpenproletariat… and arm the local police with tanks and assault helicopters to keep them in line…

Still, every elite eventually goes too far… every empire dies… and, in the final act, every jackass gets what he’s got coming.

Regards,

Bill Bonner
for The Daily Reckoning

The post America Is Going Broke… and Nobody Cares appeared first on Daily Reckoning.

And The Donald said: “Open the floodgates!”

And the floodgates opened.

Less than 48 hours after Congress approved his debt ceiling suspension, more than $300 billion had flooded in.

That is the amount by which the U.S. national debt increased on Friday, Sept. 8. By $317 billion, to be exact.

And The Donald said:

“It’s good.”

And it is good, but only if you are a zombie or a crony or a Deep State grifter.

The rest of us better get out our high waders and pool floats. This flood is going to drench us all.

“Deficits don’t matter,” said Dick Cheney.

Since the Reagan era, Republicans as well as Democrats have been ready to borrow money. But never, ever, did they borrow so much so fast as they did that Friday.

The feds needed cash… and they needed it fast.

So the floodgates opened. And now they are wide open… with no plausible way to close them.

The president and Congress are ready to borrow as though there were no tomorrow.

In comes a tide of debt, splashing over the sandbags put up by the old conservatives, sloshing through our banks and financial institutions, and coming to rest in the fetid waters of The Swamp.

If there were no tomorrow, Mr. Cheney would be right.

Why not eat tomorrow’s “seed corn” today?

There would be no reason not to reach for another dessert… or park your car in a handicapped space and tell your boss exactly what you think of him.

The trouble is there is a tomorrow. And tomorrow is when a drinking binge turns into a hangover… a bad marriage turns into a divorce… and your boss fires you.

Tomorrow is when deficits DO matter.

We don’t know exactly what will happen… or when. But we know the world still turns. Every boom not supported by real savings and real increases in output is phony. Tomorrow is when you find out.

Today’s prosperity, such as it is, was built on fake money, fake savings and fake signals from the Fed.

The feds have pumped $37 trillion in “excess credit” — above and beyond the traditional relationship between debt and GDP — into the system over the last 30 years.

And now, the economy — especially the parasitic half of it run by the Deep State — depends on more and more fake money and fake credit.

That’s the one thing Republicans, Democrats and Trumpistas agree on — nothing will be allowed to get in the way of the fake-money flow.

With the sluices open, the debt will rise. How much?

No one knows.

Credit expert Richard Duncan, who runs the Macro Watch advisory service, believes it could increase another $19 trillion before the U.S. is as deeply in debt as Japan.

Maybe.

All we know for sure is that, with nothing to stop it, you can expect it to keep going up — until the whole economy drowns in it.

That is the real meaning of Trumpismo and the Great Debt Ceiling Betrayal.

The wash of credit will continue. More spending. More debt. More mischief. More claptrap. More swindles by more scoundrels. No turning back.

In short, this is what we’ve seen coming for the last 15 years…

Empires do not back up. The institutions that were meant to restrain them — a constitution, a bill of rights, voters, a debt ceiling — are abolished, ignored or reshaped so the farce can continue to its final act.

Now Congress blithers impotently. Politicians plot and connive. Deep State apparatchiks gather more power. Corporate insiders jig the figures and rig the game.

At some point, though, the gods stop laughing… and tomorrow comes.

Markets crash. And all the feds’ money… and all the feds’ men… can’t put them back together again.

The insiders can control many things… but not everything…

Regards,

Bill Bonner
for The Daily Reckoning

The post Trump and the Great Debt Betrayal appeared first on Daily Reckoning.

This week, we are talking about the perishable nature of gods.

The city fathers of our hometown of Baltimore have let it be known that it was time to toss out the old deities. Reports the Associated Press:

After violence erupted in Charlottesville, Virginia over the weekend in response to the city’s plan to remove a Robert E. Lee statue from a park there, Mayor Catherine Pugh has renewed efforts to remove similar Confederate imagery from Baltimore. [… ]

On Monday, Pugh released a statement saying that it is her intention to remove all of Baltimore’s Confederate-era monuments – Confederate Soldiers and Sailors Monument on Mount Royal Avenue, the Confederate Women’s Monument on West University Parkway, the Roger B. Taney Monument on Mount Vernon Place, and the Robert E. Lee and Thomas. J. “Stonewall” Jackson Monument in the Wyman Park Dell.

The statues came down this week.

All across the country, the old gods become devils. New, gluten-free gods take their places. The statue of Taney (pronounced Tawney) will be particularly missed.

Roger Taney, like your correspondent, comes from the western shore of the Chesapeake Bay.

Like your correspondent, he grew up among the tobacco leaves. Like your correspondent, his teachers advised his parents that he was someone whose future lay beyond the green fields. And like your correspondent, he left the rich farms and oyster beds, went to college, and studied law.

This is where the similarity ends.

Taney had a brilliant career; he took the high road to the top of the nation’s highest court. We never even took the bar exam…

The statue was less than a one-minute stroll from our office. Artfully done, it shows the Supreme Court jurist in his robes, bent forward in gloomy reflection.

The poor man had a lot to think about. Upon his shoulders fell the weight of contradictions over slavery.

America was supposed to be a free country. As chief justice of the Supreme Court, his main duty was to protect the freedom of its citizens against the power of the government. And yet a large part of the population was kept in chains, condoned and abetted by that very same government.

On a personal level, where he bent to his own bricks and tilled his own plants, he knew what to do. He freed his slaves and gave pensions to the older ones.

Taney said of slavery that it was “a blot on our national character.”

But the gods and myths misled him. In his chambers… wrestling with a complex legal issue by candlelight, the shadows confused him.

Before him was the plaintiff, Mr. Dred Scott, slave and lifelong resident of the United States of America, asking the highest court in the land to affirm that he had a right to life, liberty, and the pursuit of happiness… without being forced into a win-lose deal by his former slave master.

But instead of boring down to the bedrock of the issue, Taney let himself get distracted by the surface dirt.

The rights of the black slave, he seemed to think, were bound up with his race and limited by them — not by the Constitution of the United States of America. This from his decision:

They [slaves] had for more than a century before been regarded as beings of an inferior order, and altogether unfit to associate with the white race, either in social or political relations, and so far unfit that they had no rights which the white man was bound to respect…

Apart from the iceberg, the voyage of the Titanic was a great success. And apart from Dred Scott, Roger Taney had nothing to be ashamed of.

After he died, a few statues of him were put up. Now it is time to take them down, says Baltimore’s mayor.

We live in an age of miracles, of course.

Negative interest rates… money out of the air… the election of Donald J. Trump to the highest office in the land — things that we took for absurd a few years ago we now take for granted.

We take for granted, too, that our officials are miracle workers… and that we live among the gods themselves in an economy that never takes a breather… a stock market that only goes up… and something for nothing until Hell freezes over.

President Trump seemed to wonder how we could be so ungrateful. He used the occasion of his condemnation of the violence in Charlottesville to remind Americans how lucky they are:

We are renegotiating trade deals and making them good for the American worker. And it’s about time. Our economy is now strong. The stock market continues to hit record highs, unemployment is at a 16-year low, and businesses are more optimistic than ever before. Companies are moving back to the United States and bringing many thousands of jobs with them. We have already created over 1 million jobs since I took office.

But America’s president is sui generis… practically a walking miracle.

In the wake of Charlottesville, Ken Frazier, CEO of pharmaceutical giant Merck, resigned from the president’s American Manufacturing Council.

Frazier said his decision is “a matter of personal conscience” and “a stand against intolerance and extremism.”

Another president might have responded to the issues — his own connections to the alt-right, for example. Or the allegations against him of racism.

Not Mr. Trump. He understands better than his predecessors that in the land of myths and gods, logical argument is unnecessary. His response via Twitter:

Now that Ken Frazier of Merck Pharma has resigned from President’s Manufacturing Council, he will have more time to LOWER RIPOFF DRUG PRICES!

Ya gotta love him.

But taking credit for the economy and the stock market is a dangerous thing for the president to do. They are likely to blow up in his face.

In June, we entered the ninth year of economic expansion. Next month brings us to 99 months without a recession.

Typically, since World War II, a boom ends before it has gone on for 59 months. Only twice have they lasted for longer than the present one.

A recession cannot be far off. When it comes, the stock market will go down in sympathy.

Then, Mr. Trump’s statue might be hauled off, too, before it is ever put up.

Regards,

Bill Bonner
for The Daily Reckoning

The post Will They Haul off Trump’s Statue, Too? appeared first on Daily Reckoning.

“Fortune is rightly indignant at those who break with the customs of the past.”
— Winston Churchill

My calendar says that today is the day traditionally set aside to remember those who fought in America’s wars. Not one to trifle with tradition, I will do so.

The contrarian insight is a traditionalist’s one. Certain market relationships have endured for many years. The relationship of price to earnings, for example. There is no law that says P/Es can’t be higher…or lower…in the future. But the person who bets that they will be substantially different for a very long time is taking a big risk. He is betting that something fundamental has changed…maybe in the value of capital, or perhaps in the nature of man. Perhaps capital will be worth more in the future than it has been in the last 100 years. And maybe there really will be a New Man with different attitudes towards time and money.

But the odds of there being something really new are slim. Between phases of manic euphoria and manic depression, things tend to regress to the mean — that is, where they traditionally have been. And the mean does not change often or quickly.

I have compared the manic phases of market history to the manic phases of political history. Normally, people live with a bit of violence in their lives — murders, assault and battery, riots. And occasionally, full-scale wars break out. Even then, they are usually contained within “normal” bounds.

The Yanomamo Indians practice a form of institutionalized savagery in which they beat each other over the head with clubs until one dies or passes out.

The Greek city-states met one another periodically in an almost ritualized, and deadly, shoving match. If they had actually wanted to destroy the enemy town, they might have assaulted at night, burned the towns and slaughtered the inhabitants. Instead, they formed up neatly on a level field and marched towards each other.

On some occasions, armies would wait patiently for their enemies to form up — including a delay for a distant town to bring up its troops. It wasn’t proper to go after an enemy before he was ready. Even if you won, it would not be a victory you could enjoy. Dishonor was, after all, worse than defeat. “Come back with your shields,” said the Spartan mothers to their sons, “or upon them.” Don’t run away, in other words.

Today, we honor those who did not run away — those who faced the mania of war…who did the right thing and had the right stuff when it was needed.

Flamm Dee Harper had to struggle to raise the American flag in the little field near Montmorillon where he had crash-landed 56 years ago. The mechanism was stiff and difficult. He struggled, too, to make sense of it. The war, that is. He proved he could fly. He could fight. He was courageous.

But the “why” tripped him up. There, he couldn’t quite turn the crank. What was the point? When the mania is past — like a bubble that has popped — you look back…and it is a puzzle. Why would he have ever done such a thing? What was going on? What did it mean?

Russian soldiers at Stalingrad were urged to use their bodies as “concrete and stone” — to sacrifice themselves to stop the Germans. Many did. But for what? So they could be ruled by Russian-speaking tyrants rather than German-speaking ones?

Col. Harper did not dwell on the subject. He merely said the war was “stupid.” And then he fell back on the familiar cliches that seem to work for generations of Americans. It was a fight, said the old soldier, for freedom.

“We are,” said Adolph Hitler addressing Reichstag just before the Luftwaffe began dropping bombs on London, “in the middle of the tremendous struggle for the freedom and the future of the German nation…”

Everyone fights for freedom. While the Russians died in the millions to save Stalin’s slave regime, Harper and millions of Americans, it turned out, fought for the freedom of Roosevelt and subsequent administrations to impose even greater restrictions and higher taxes.

The American mainland has never really been seriously threatened by invasion. But every war for freedom has led to less liberty for Americans. Not necessarily immediately or even by consequence — but that has been the drift of things.

No one wants to think that their dead relatives were on a fool’s errand. And it is impossible to know what would have happened had not history unrolled as it did. But there is an element of stupidity in all America’s wars — maybe in all wars.

Reading the histories of World War I, it is not at all clear that some useful purpose was served by sending American troops. “Lafayette, we are here,” announced Pershing on his arrival. But one could almost hear Lafayette replying from his grave: “Why?”

The combatants were nearly exhausted when the United States entered the war. Like a fresh flood of money into a tired bull market, American troops turned the tide…forced Germany to accept defeat…and helped create such an awkward peace that another war was almost inevitable.

When that inevitable war began, WWII, it began awkwardly, too. After the British had been routed from Europe and the French had surrendered, the British went on the attack. But they didn’t attack the Germans; they attacked the French! In order to avoid letting the ships fall into German hands, the British fired on the French fleet in Oran, North Africa, and sent 1,200 French sailors to their deaths.

And then there was Korea and Vietnam. In each event, freedom was once again at issue. The soldiers did their duty. They avoided the “why.” But they fought when they were asked…and died when it was required of them. Even in the stupid wars.

Pascal said, “we understand more than we know.” The soldiers must have understood something we will never know. And they can’t tell us.

Your ever more humble correspondent,

Bill Bonner
for The Daily Reckoning

The post Memorial Day appeared first on Daily Reckoning.

There was a time when central banking was an honest profession.

Central bankers provided financing for the government. They backed the banking system, too, by holding savings as reserves, which they lent to solvent member banks in emergencies.

They were tight-lipped, tight-laced and tightwads. Their role was to say “no” more often than “yes.”

When the king wanted money to fight in a war… or build a bridge… the banker would give the terse reply: “Sire, we don’t have any.”

Real money was backed by gold. And credit had to be backed by real money, which meant it had to be saved. Savings were limited, as was money.

Savings backed 100% of U.S. credit needs until about 1973… two years after President Nixon first announced that the dollar would no longer be backed by gold.

Then, almost unnoticed, a new financial system took over… with new central bankers in control of it.

Forty-five years later, America saves scarcely 20% as much as it issues in new credit.

The other 80% is “funny money” — credit created out of nowhere by the Fed, by banks and by foreign central banks (mostly recycling trade surpluses).

Unlike the real-money system that prevailed until 1971, this system — with its heavy reliance on credit — is, surprise, surprise, extremely vulnerable to the credit cycle.

This is the “doomsday bug” buried in the world’s money system.

When the credit cycle turns — when people begin to notice that the whole system is FUBAR and become reluctant to lend — the world’s money disappears… and the whole thing blows to smithereens.

But back to honest central bankers…

Another key responsibility of the pre-1971 central banker was to protect the national currency.

Money was limited. Everyone knew it. You couldn’t afford to waste it. Or lose it. Or depreciate it.

And if a banker failed, he was disgraced, fired… and ruined. In ancient England, a banker who lost the kingdom’s money was castrated.

Times have changed, as they say. Now central bankers are more secure in their private parts and public illusions. They are no longer expected to act within an economy but upon it.

They are no longer expected to be the lender of last resort but the lender of first, second and every other resort.

Nor are they expected to confine their credit — the precious savings of the realm — to solvent institutions that will pay it back.

Instead, they are encouraged to spread their fake money far and wide, scattering it like manna upon every half-wit and spendthrift in the empire.

Do the feds have some cockamamie spending project? Does a corporation want to borrow to buy back its shares? Do the baby boomers want more medical benefits?

Hey, no problem… says the Fed. There is plenty of this fake money for everyone.

No need to dip into the nation’s savings to fund the fool projects. Now the central bank can conjure up credit money — out of nowhere!

Cometh the new money, cometh the new central bankers.

Gone are the tight lips and carefully chosen words. Now they will say anything, gabbing away like inmates in a special asylum for lunatic economists.

Today, the world’s major economies, twisted and befuddled by central bankers’ policies, depend on debt. In the U.S., $2.5 trillion in new credit is required every year — just to stay in about the same place.

Less than that causes a recession… which sets off a credit contraction, the last thing the feds can tolerate.

But total savings in the U.S. amount to only about $500 billion.

Uh… you can do the math later.

Meanwhile, Bloomberg reports that the U.S. Fed is less likely to “blink” than in the last tightening cycle:

U.S. central bankers appear to be on course to raise interest rates twice more this year and remain confident in their forecast for growth of around 2% despite a series of weak first-quarter reports…

‘I still think the median of three rate increases for this year — we’ve already done one — is still a good baseline,’ Dallas Fed President Robert Kaplan, who votes on policy this year, told Bloomberg Television’s Michael McKee.

‘If the economy develops a little more slowly, then we can do less than that. If the economy is a little stronger, we can do more.’

Blink?

The Fed will put out both eyes with a ballpoint pen before it will allow a return to honest finance.

It’s not going to happen.

Regards,

Bill Bonner
for The Daily Reckoning

The post The Fed Will Blink appeared first on Daily Reckoning.

Editor’s Note: Bill Bonner has been in the newsletter business for 30 years. Along the way he’s met some very interesting characters. Together with, Addison Wiggin, who wrote to you yesterday, he co-founded your daily reckonings. This will be our 17th year of publication.

As we enter the new year, it’s our tradition to “remobilize our axioms”. To reflect about how and why we publish financial forecasts for you in the first place. That’s best done by reading this Bill’s candid confession, below…

Again, Happy New Year…

We begin with a question: Was ever there a fairer métier than ours?

The poor carpenter risks cutting his fingers or banging his knee.

The used car salesman’s hearing goes bad as soon as he takes up his job: “No, I don’t hear any rattle,” says he.

The foot-soldier gets sent to a Godforsaken hole like Afghanistan, where the women are covered up and the liquor stashed away.

But in our trade as newsletter publishers, hardly a day passes without a good laugh. Our only occupational hazard is a rupture of the midriff.

Most people, after all, read the news pages for information. They lack the proper training and perspective to fully enjoy them. The consequence is that they are always in danger of taking the humbug seriously, or worse, finding the people who populate the headlines important.

If you really want to appreciate the media you have to get close enough to see how it works — like a prairie dog peering into a hay bailer — but not so close that you get caught up in it yourself. The investment newsletter business is perfect; it is part of the media, but it wouldn’t be mistaken for a reputable part.

More than 30 years ago, we began our career publishing newsletters. Those were the days! They were even more fun than today. Years of television, heavy-handed regulation, and waiting in line for airport security have taken much of the lightheartedness out of American life.

In its place, a kind of earnest timidity has settled over the 50 states. Everything is forbidden, or else it is compulsory — especially in the financial markets. You can barely talk about an honest investment without some ambitious prosecutor wanting to make a federal case out of it.

But back in the 1970s, the folks you met in the newsletter trade were even wilder and more disreputable than those who are in it today. At one investment conference, we remember an investment advisor from East Germany. He had escaped the Soviets’ grip by stealing a small plane and flying to the west. This alone made him a bit of a hero back in the 1970s. But his talk to investors endeared him further. He gave the following discourse:

“Take a look a zis chart,” he would begin, pointing to the bottom of what appeared to be a wave pattern. “Investing is reeelly very simple. You just buy at zee bottom. Heere! Zen, ven ze stock goes up, vat do ve do? Ve sell. Heere! [Pointing to the top of the wave pattern.] It is reeelly verrry simple.”

“Well, what if the stock doesn’t go up,” asked an investor, fresh off the Great Plains and not prepared for patterns or people that weren’t perfectly straight.

“Ya… ve just keep our eyes on ze chart. If it doesn’t go up, ve don’t buy it.”

We don’t recall the man’s name. It was something like Dr. Friederich Hasselbauer. We were always a bit suspicious of financial advisors who used the “Dr.” title, though many did. Especially when they spoke with thick German accents. We imagined that they had been conducting experiments on Jews before they entered the financial markets.

And then there was the Quack man. His name was “Red Robin.” As near as we could figure, he liked ducks. So he called his financial analysis “The Quack Report.” He had once made his money paving airport runways. Then, in his fifties or sixties, he decided to devote himself to financial analysis and to save the world from a small group of criminal conspirators known as the Bilderburgers, who were in cahoots with the English government.

Once, flying on the Concorde across the Atlantic, Ol’ “Red” saw the U.K. Chancellor of the Exchequer, it must have been Lord Barber, on the same flight. He told us that he decided to confront his lordship right then and there, when he had the chance.

“I just went up to him and I said, ‘I’m on to you… ol’ buddy … ”

It must have been quite a scene. Red Robin was a funny-looking fellow with a paunchy stomach who always dressed in orange coveralls, which made him look a little like a red-breasted sapsucker. Why he wore orange overalls, we don’t know; perhaps they were a holdover from his days working on airport runways when he didn’t want the cement trucks to run him down.

Red also had funny ideas about publishing investment advice. He offered readers a Lifetime Guarantee — they could have their money back anytime. But then, he added a caveat: “My life, not yours.” As it turned out, the guarantee was less valuable than readers imagined — or Red himself had hoped. He was gunned down on a beach in Costa Rica, we were told.

But that was the strange milieu in which we decided to make our career. What was delightful about it were the nuts and kooks, the charlatans and dreamers, the brazen hucksters and earnest geniuses who made up the industry.

Here were thinkers whose thoughts were untainted by any trace of advanced doctrinaire theory, let alone rudimentary training of any sort. Here were mountebanks and scalawags galore… along with a few saints… dispensing market wisdom, stock recommendations, and macro-analysis so far reaching you needed a Hubble telescope to see where it came from.

And here, too, were the sort of men whom rich widows were warned about. And the sort of theorists who made you wonder about the limits of human reason itself.

Our friend, Gary North, somewhat of a legend in the business, began studying the possible consequences of the Y2K computer problem in the late 1990s. The more closely he looked, the more alarmed he became. He began writing about the subject, and the more he explored it… the more he thought about it… the more convinced he became that it would lead to a complete meltdown of modern society.

He looked and he saw commerce coming to a stop. He saw trains that couldn’t run without electronic instruction. He saw cash machines frozen up. He saw power plants idled by their computer brains. And what would happen to all that electronic information — bank accounts, trading records, inventories — on which the whole financial world depended? He saw millions of people with no money… and then no food. He saw riots in the streets… and worse.

Then, he looked around and saw that he and his family were as exposed to the menace as everyone else. He decided to take precautions, moving his family to an isolated rural area where they would be safe from the apocalypse he saw coming.

Maybe he would be wrong, he reasoned. But what if he were right? The cost of being right — and failing to protect himself — could be catastrophic. He moved to a mountain hollow, buried provisions, and began the countdown to the year 2000.

Of course, when the big day came… nothing happened. The clocks worked. The trains ran. The power was still on. Apparently, not a single cash machine failed.

People pointed and laughed. But was he wrong? What if the odds of a meltdown had been only 1 in 100 or 1 in a 1,000? Was he not right to give a warning in the strongest possible terms? And wasn’t it partly because of him and others like him that billions were spent to correct the problem before January 2000?

Colorful eccentrics, careful analysts, cheerful con men, and self-assured delusionals trying to figure out how things are put together — this is the world of investment gurus.

But guess what? The gurus are often right. True, some financial gurus have gone broke following their own advice. But many have gotten rich.

In the late 1970s, we undertook a study — with Mark Hulbert, who is still at it — of how well these financial gurus actually perform. We wouldn’t presume to summarize Mark Hulbert’s nearly 30 years of work; we will just tell you what we took from it: There is no right way to invest.

Investment gurus are an original bunch. They come up with all sorts of systems, ideas, and approaches. Almost all of them are successful — sometimes. There are a lot of different ways to invest and to make money.

And often one that works spectacularly well in one period may collapse completely when the market changes course. So, too, an approach that often works poorly under certain market conditions will work poorly in other conditions.

But, generally, an investment advisor who works hard to develop and refine a system and who sticks with it can do reasonably well, sometimes. He can be a technical analyst, a chartist, a Graham and Dodd follower, even an astrologer. Almost any disciplined approach, pursued intelligently and steadily, can pay off.

We have a theory that explains why this is so. Investing is, when you get down to the basement of it, a competitive undertaking. If you do what everyone else does, you will get the same returns as everyone else. In order to get better returns, you have to do things differently.

Investment gurus seem to be favored, in this regard, by their own originality and quirky self-reliance.

“Sometimes right, sometimes wrong,” they say. “But never in doubt.”

Taken together, they are probably the most independent and contrary professional class in the world. And this contrariness, alone, seems to put them at odds with the great mass of lumpen investors, allowing them to make more — or, often less — than the common results.

By contrast, what seems to doom the average investor is the same mushy quality that seems to be ruining the whole country. He will wait in line — without a word of protest — while guards frisk girl scouts and old ladies for dangerous weapons.

If the mob is large enough, he can’t wait to be a part of it and fears being isolated from it. And he will believe any line of guff — no matter how fantastic — as long as everyone else falls for it, too.

Dow 36,000? House prices always go up? Interest-only negative amortization mortgage?

A man who follows a newsletter guru has no guarantee of making money… but a man who follows the great mass of conventional wisdom is practically guaranteed that he will not.

Regards,

Bill Bonner
for The Daily Reckoning

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Today, I’m going to tell you about the end of the world.

Not the end of the world exactly. But the end of the fiat money system President Nixon gave birth to in 1971… when he cut the dollar loose from gold. And it may feel like the end of the world, because of the social chaos it will provoke.

What follows is taken from a speech I gave at Doug Casey’s La Estancia de Cafayate…

I’ve been predicting the end of the world — at least the end of the post-1971 monetary world — for a long time.

I hope I’m wrong about it. But sooner or later, I’ll be right.

In the meantime, I’m like a surgeon who has just botched an operation. He sees the patient stiff on the table and wonders if he should go back to the textbooks. Maybe the anklebone is not connected to the shin bone after all.

But the textbooks are hopeless. They’re written by modern economists. And they believe an economy is mechanistic, not humanistic.

These folks have fixes for every problem and wrenches in both hands. They also run our central banks. And they think they know what is going on… and what they’re going to do about it.

So they give you “forward guidance.” But it is worthless. Worse than worthless, it suggests knowledge and foresight — neither of which the authorities possess.

Do you remember the Fed giving us “forward guidance” before the crisis of 2008?

I don’t.

Neither Ben Bernanke nor Janet Yellen had any idea what was happening. They couldn’t give any forward guidance about that crisis and can’t give any about the next one.

They just react to events. They neither see them coming nor control them. And they have only one major reaction — even more credit.

But you can’t solve a debt problem with more debt. That’s what the Fed is offering. And that is what the European Central Bank and the Bank of Japan are offering too.

They are committed to this policy of providing more and more credit to a world that is already drowning in it. I should stop here and say a few words about how the economy really works.

These clumsy mechanics at the Fed, the European Central Bank and the Bank of Japan think they can turn knobs and adjust levers. But an economy is a complex dynamic system with intricate feedback loops.

It responds to the ham-fisted grease monkeys at central banks, but not necessarily the way the feds want. It is far more complex than they can ever understand, let alone control.

Right now, they are getting away with jaw-dropping policies. The markets are not yet punishing them. In fact, investors seem to be rewarding this kind of innovation.

For example, what is the 1.1% yield on a Spanish 10-year government note if not an invitation for trouble? Or how about a 10-year German government note with a yield of 0.2%?

It’s impossible to know what will happen exactly. But someone is going to lose money. These yields are unnatural. And downright dangerous.

But the risk is not just that the pace of consumer prices will outstrip these puny yields; it is also that bond issuers will default.

Europe’s governments are deeply in debt. And the ECB is now making it easier for them to go further into debt.

Europe’s bond yields are at their lowest level in 150 years. About one-third of the total new issuance carries a negative nominal yield (that is before you account for inflation).

What sense does it make for the ECB to drive yields lower still… by further pushing up prices? (Bond prices, remember, move in the opposite direction of yields.)

None at all — except that many European governments and corporations now get paid to borrow money!

And the clever Japanese have another trick up their sleeves. Not only is the BoJ directly propping up the market for Japanese government bonds. It’s doing the same with the stock market. Our head spins. But it’s true.

When it comes to overdoing it, nobody overdoes it better than the Japanese. Remember, near the close of World War II, when Japanese pilots strapped themselves to flying bombs?

Kamikazes took to the air hoping to die in a fiery explosion on the deck of a US aircraft carrier. Today, it’s Japan’s monetary policies that are kamikaze. The Bank of Japan is set to buy $1.4 trillion of government bonds under its current QE program. This allows the Japanese government to continue going deeper and deeper into debt.

But the BoJ has more explosives to strap onto its financial kamikazes. Why stop at buying bonds? Why not buy stocks too?

The BoJ has been a buyer of Japanese equity exchange-traded funds (ETFs) since 2010. And in September 2014, it bought a record amount of stock through its ETF-buying program. This makes it the single largest holder of Japanese stocks in the world — with 1.5% of total capitalization.

The BoJ chooses to buy the dips too.

I doubt this is because BoJ governor Haruhiko Kuroda is a value hunter. Instead, it is almost certainly because he wants to manipulate stock prices directly, just as he does with the bond market.

The BoJ has waded into the stock market one in every three days since 2010, reports the Wall Street Journal.

Where does this lead?

To a fiery crash!

As Yogi Berra would say, America is going to come to a fork in the road… and it’s going to take it.

Right now, the Fed isn’t as aggressive as the European Central Bank (which is set to pump €1.2 trillion into the financial markets by way of its QE program) or as innovative as the Bank of Japan (which is buying stock market funds as well as bonds by way of its QE).

Valuations are at extreme highs on Wall Street. Take Warren Buffett’s favorite measure — market cap to GDP. With an eight-month exception at the height of the dot-com boom (and you know what happened next), the value of all outstanding S&P 500 shares is the highest it has been relative to US GDP in the last 100 years.

Meanwhile, Deutsche Bank is warning that S&P 500 earnings per share will be flat this year when compared with 2014. Retail sales are down about 9% on an annual basis over the past three months. And the US GDP has slowed to an annual rate of just over 1%… with the possibility of a surprise recession on the horizon.

Besides, crashes and bear markets happen. This seems as good a time as any. When the next crisis comes, the fork in the road will be a choice. The Fed can either admit its policies have not worked… chuck them out… let interest rates settle where the market wants them to settle and let the free market do its work.

Or it can follow the Europeans and Japanese toward more aggressive intervention — including massive QE and direct stock buying.

I don’t think there’s any doubt about what it will do: It will go deeper into that heart of darkness.

In fact, I believe central banks and central governments now have revealed the full madness of their intentions. Well, maybe not the full madness. They haven’t thrown money from helicopters yet… but that will come.

Here’s what’s in the cards for central banks:

• They will set interest rates at preposterously low levels for years and years.
• They will finance 100% of government deficits — forever, if it comes to that — with printing-press money.
• They will also pump up the stock market with this same money-from-nowhere by directly buying equities ETFs (as the Bank of Japan is already doing).

…and also to acquire real businesses.You’d have to be brain-dead (or a modern economist) not to be staggered by the audacity… the ballsy mendacity… and the incredibly big lie that undergirds the entire charade: that you can create money out of nothing and use it to pay for wars, schools, highways, and salaries for bureaucrats.

I recall Lenin’s quote: “The capitalists will sell us the rope with which we will hang them.”

Today, of course, the capitalists don’t even sell the rope; they give it away, for nothing.

But what’s not to like?

Stock investors are getting rich. Bondholders are making money. The government can spend as much as it likes. And the voters are bamboozled by it; they think it helps make the economy work better.

This is going to be a hard habit to break.

So, here’s the gist of my conclusion: Governments won’t break the habit of getting something for nothing. It will break them.

But how?

It looks as though they’ve got the perfect hustle going. They create money to buy their own debt. But this doesn’t cause consumer prices to rise (at least how they’re officially measured). Everybody’s happy.

Obviously, that won’t work forever. I don’t care how many knobs you turn or how many levers you pull. It doesn’t work that way. Ultimately, you’re putting rusty nails on the ground… and you’re going to step on them.

How? When?

Nobody knows. But I’m going to take a guess…

And here I’m no longer using my powers of observation to tell you what is going on. I’m using my intuition and guessing. The weakest link in the central bank chain, I believe, is credit. So let’s look at how this link might break.

In our modern economy, when we talk about “money” what we are really talking about is credit.

Banks create this credit ex nihilo (out of nothing) when they make a loan. It exists, for the most part, as a digital record on a computer network somewhere…

And unlike even traditional paper money, this credit can vanish as quickly and easily as it got here in the first place. Because it is purely digital in nature, you can’t hoard credit. You can’t put it in your safe. You can’t take a wheelbarrow full of it to the grocery store for a loaf of bread.

Credit depends on trust. (The word “credit” comes from the Latin “credere” — to believe or trust.)

So, when our financial system implodes — which is what always happens when there is too much debt — the machinery of borrowing and lending will seize up. No one will trust that he will get paid. Credit will simply disappear — trillions of dollars of it — overnight.

This is, of course, not the end of the world. Nor even the beginning of the end. But it will be the end of the beginning of the paper money world President Nixon unwittingly created in 1971.

Then the end can begin…

Regards,

Bill Bonner
for The Daily Reckoning

P.S. This article was originally featured, right here.

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The post How, Exactly, the World Ends appeared first on Daily Reckoning.

“It’s the end of the great debt cycle,” says hedge fund manager Ray Dalio of Bridgewater Associates, taking the words out of our mouth.

Bond fund manager Bill Gross adds context:

In the past 20 to 30 years, credit has grown to such an extreme globally that debt levels and the ability to service that debt are at risk. […] Why doesn’t the debt supercycle keep expanding? Because there are limits.

In Europe, bond yields are lower than they’ve ever been. Between $2 trillion and $3 trillion in sovereign and corporate bonds now trade at negative nominal yields.Neither Mr. Dalio nor Mr. Gross nor we know precisely where those limits are. But the Europeans and the Japanese are rushing toward them.

We don’t need to tell you that it is unnatural and perverse for lenders to accept a poke in the eye for giving up their valuable savings.

But that’s just part of the perversity of the present system – no real savings are involved. The money never existed in the first place. Getting a negative yield seems almost appropriate, if nevertheless incomprehensible.

Today, banks create “money” from thin air, in the form of new deposits, when they make loans.

As our friend Richard Duncan explains in his book The New Depression: The Breakdown of the Paper Money Economy, by the turn of the new millennium the reserve requirement – whereby banks are forced to hold some cash or gold in reserve against new loans – was so low that it played “practically no role whatsoever in constraining credit creation.”

That means as long as banks meet regulators’ capital adequacy requirements, they can create as much new money (loans) as they want. No risk of mining accidents. No need for anyone to sweat or strain. No self-discipline or forbearance required.

Savers can eat their cake. And borrowers can have it too.

Economists who still have their wits about them – if there are any left – are baffled.

The lowest bond yields in history… and along comes the European Central Bank with a plan to drive them lower by way of €1.1 trillion ($1.2 trillion) of QE.

What is the sense of it?

No one can say. Rather, no one wants to admit that the real motive is to relieve banks of their bad debt.

Banks bought the debt of bankrupt European governments. Everybody knows there is no way governments will pay it back.

Fortunately, when central banks buy government debt, it is effectively canceled – forgotten forever. So, the ECB helpfully exchanges this bad debt for new bank reserves before the public catches on.

Over in Japan the government has been running budget deficits for 25 years – funded largely by Japanese “salarymen” who think they are saving money for their retirements.

What a disappointment it will be when they discover that the money was not saved at all, but spent by their government.

And now, Tokyo’s debts have grown so large that 43% of tax receipts are required just to service its debt, to say nothing of the amounts needed for current and future deficits.

You can imagine how far you’d get if you tried this at home. Try living on 57% of what you earn (the rest goes to pay your creditors)… while still spending more than your income.

See how long that would last…

The Japanese are too polite to mention it, but their public finances are doomed. And it can only be a matter of months – okay, maybe years – before the entire Ponzi scheme blows up.

Since 2009, we’ve been saying that our itinerary was likely “Tokyo… then Harare.”

By that, we meant that we were probably going to experience a Japan-like deflationary slump… and then a Zimbabwe-like hyperinflation.

We are now in year six of that slumpy, lumpy, bumpy ride. The US economy has been growing, but it is the weakest postwar “recovery” on record.

And what little growth we saw was in asset prices. And it was bought with about $4 trillion in central bank stimulus. Few people realize it, but this also retarded real economic growth.

You can see that by looking at the difference between what has happened in the financial markets and what has happened in the real economy.

Wall Street is as bubbly as ever. But Main Street is still struggling. Real wages and real business investment, for example – things that mark and measure genuine prosperity – are as limp as a Tokyo noodle.

Why?

Prosperity depends on savings and capital formation. You have to devote real resources to new output capacity. You have to hire people and find new and better ways of doing things.

But business investment has gone down since 2007. Based on fourth-quarter figures from 2007 and 2014 and annualized, $400 billion was invested in business development in 2007 against only $300 billion in 2014.

Meanwhile, businesses borrowed about $3 trillion more.

Where did all this money go?

It appears to have gone into share buybacks, mergers and acquisitions, bonuses, fees and other speculator payoffs.

These things benefit the 1% of the 1% – the insiders who are in on the deals. They do nothing for the real economy, except deprive it of the capital it needs to make real progress.

In 2000, we had a bubble in tech stocks. In 2007, we had bubbles in finance and housing. Now, we have bubbles in corporate bonds ($14 trillion)… securitized auto loans ($20 billion)… and student loans ($1.2 trillion).

Pop… pop… pop – that’s what will happen to these bubbles.

And when it does, it will complete our travel to Tokyo. That is when our slumpy ride turns into a terrifying train wreck.

Yes, Tokyo deflation before we get to Harare hyperinflation.

Regards,

Bill Bonner
for The Daily Reckoning

This post was originally posted right here.

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The post The End of the Debt Cycle appeared first on Daily Reckoning.

“Count no man happy until he be dead,” said Athenian statesman and poet Solon.

The man to whom Solon gave the advice was the richest man alive at the time (the 6th century B.C.) — the king of Lydia, Croesus.

Croesus considered himself to be the happiest man alive. But he discovered that fortune could turn against you, no matter how rich and powerful you were.

His son died in an accident. His wife committed suicide. And he was captured and burned alive by Cyrus, king of Persia.

And now, poor Warren Buffett must be feeling the heat. He’s 84 years old and the most successful investor of all time. Respected. Admired. Beloved, especially by the thousands of people he has made into millionaires. And “as rich as Croesus” himself. Buffett celebrated the golden anniversary of his investment conglomerate, Berkshire Hathaway, last week. And what a success!

He turned every dollar invested in 1965 into $182,616 today. For 30 years, he never had a 10-year compound annual gain of less than 20%. Over 50 years his compound annual gain has been 21% — or just over twice that of the S&P 500, including dividends.

And now, Berkshire is worth $367 billion and has $195 billion in annual revenues.

If money were what really matters, Warren Buffett would have no peer. He has had unparalleled success in this world; surely he has a first-class ticket to the next.

And if his good fortune were of his own making, what would he have to fear?

But what if fortune, which smiled on him so broadly for so many years, begins to frown?

That idea was raised back in 1984 on another 50th anniversary — the half-century mark following the publication of Benjamin Graham and David Dodd’s classic book on value investing, Security Analysis.

The occasion was used for a debate.

On one side was Michael Jensen of the University of Rochester, a leading proponent of the Efficient Market Hypothesis (EMH). (In a nutshell the EMH states that investors can’t get above-average returns without taking above-average risk.)

Jensen argued that Buffett’s success was a matter of chance.

On the other side was Buffett… who argued that skill, not luck, was behind his, and a select group of value investors’, impressive track records.

Jensen began by pointing out that when you have a nation of coin flippers, a few — by sheer dumb luck — are going to get a long string of heads… and therefore be viewed as “winners.”

Yes, said Buffett, but if all of those who were getting heads were all using the same technique (value investing) it should make you wonder.

It would be as though there were a town where no one ever got cancer: You’d want to know what they were having for dinner.

Buffett — who had been a student of Graham at Columbia Business School — attributed his early success to the aforementioned Security Analysis as well as Graham’s 1949 book, The Intelligent Investor.

The Intelligent Investor was at least the Old Testament part of Buffett’s investment bible. He was to write the New Testament himself, fulfilling the prophecy laid out by his mentor.

“He who comes after me comes before me,” Graham might have said… had he realized what his young acolyte from Omaha would achieve.

As Buffett explains in his 50th letter to Berkshire Hathaway shareholders, Graham taught him “cigar butt” investing.

The idea was to find troubled companies (with declining margins, an obsolete business model or overhanging litigation)… buy them ultra-cheap… and have “one puff” on them as they rose back to fair value.

That worked beautifully, for many years.

But then Buffett went beyond Graham. He started to buy the whole cigar company.

Instead of just looking at price, as Graham had, Buffett started to look for businesses that had a sustainable competitive advantage.

As Buffett put it, he would rather own a comfortable business at a questionable price than a questionable business at a comfortable price.

Crucially, this allowed him to hold his investments for the ultra-long term. As he put it in the recent shareholder letter:

[T]hough marginal businesses purchased at cheap prices may be attractive as short-term investments, they are the wrong foundation on which to build a large and enduring enterprise. Selecting a marriage partner clearly requires more demanding criteria than does dating.

This focus on quality over price is what turned Berkshire Hathaway into such a money machine for Buffett and his partner, Charlie Munger. For 36 years, the duo tossed their coins and got heads every year.

But in 2000, the tails began to appear. You may say that Buffett and Munger “changed their strategy.” Or they “made a mistake.” But if their success were based on skill, why would they suddenly forget how to make money?

“Berkshire’s investment portfolio performance has been extremely poor for at least the last 14 years,” writes colleague Porter Stansberry.

Between 1970 and 2000, the lowest 10-year annualized return on Berkshire’s investment portfolio was 20.5%.

Starting in 2000, however, the wheels come off. Between 2000 and 2010, the annualized return was 6.6%. And, after never recording an annual decrease in book value, Buffett lost money twice in the 10-year period (2001 and 2008).

Relative to the S&P 500, these numbers haven’t gotten better since 2010.

In 2011, Berkshire’s portfolio return was 4%. (The S&P 500 was up 2.1%.) In 2012, Berkshire’s portfolio return was 15.7%. (The S&P 500 was up 16%.) In 2013, Berkshire’s portfolio was up 13.6%. (The S&P 500 was up 32.4%.) In 2014, Berkshire’s portfolio was up 8.4%. (The S&P 500 was up 13.7%.)

Last week, Buffett moved the goalposts. Instead of reporting Berkshire’s results in terms of book value only, he showed how well the company did in terms of share price.

Why he did this is a matter of some controversy.

Did he do it, as he claimed, because book value no longer gives an accurate picture of the value of his “sprawling conglomerate”?

Or did he do it because the gods have turned against him; his book value increases have underperformed the S&P 500 for the last 14 years and it is becoming embarrassing?

Barron’s offers an opinion:

Buffett probably can be faulted for not being forthright in the letter about the disappointing performance of the Berkshire equity portfolio that he oversees.

Of the company’s big four holdings, American Express, IBM, Coca-Cola and Wells Fargo, only Wells Fargo has been a notable winner in recent years. […]

Buffett tends to manage the portfolio’s largest and longest-standing investments. Two managers who help run the rest, Todd Combs and Ted Weschler, have outperformed Buffett in the past few years.

Is that Mr. Jensen we hear laughing?

Regards,

Bill Bonner

for The Daily Reckoning

The post Warren Buffett — Lucky Coin Flipper? appeared first on Daily Reckoning.

Please remember this warning when you go to the ATM to get cash… and there is none!

While we were thinking about what was really going on with today’s strange new money system, a startling thought occurred to us.

Our financial system could take a surprising and catastrophic twist that almost nobody imagines, let alone anticipates.

Do you remember when a lethal tsunami hit the beaches of Southeast Asia, killing thousands of people and causing billions of dollars of damage?

Well, just before the 80-foot wall of water slammed into the coast an odd thing happened: The water disappeared.

The tide went out farther than anyone had ever seen before. Local fishermen headed for high ground immediately. They knew what it meant. But the tourists went out onto the beach looking for shells!

The same thing could happen to the money supply: Cash could evaporate suddenly and disastrously – just before we drown in it.

Here’s how… and why:

If you look at M2 money supply — which measures coins and notes in circulation as well as bank deposits and money market accounts — America’s money stock amounted to $11.7 trillion as of last month.

But there was just $1.3 trillion of physical currency in circulation — about only half of which is in the US. (Nobody knows for sure.)

What we use as money today is mostly credit. It exists as zeros and ones in electronic bank accounts. We never see it. Touch it. Feel it. Count it out. Or lose it behind seat cushions.

Banks profit — handsomely — by creating this credit. And as long as banks have sufficient capital, they are happy to create as much credit as we are willing to pay for.

After all, it costs the banks almost nothing to create new credit. That’s why we have so much of it.

A monetary system like this has never before existed. And this one has existed only during a time when credit was undergoing an epic expansion.

So our monetary system has never been thoroughly tested. How will it hold up in a deep or prolonged credit contraction? Can it survive an extended bear market in bonds or stocks? What would happen if consumer prices were out of control?

Our current money system began in 1971. It survived consumer price inflation of almost 14% a year in 1980. But Paul Volcker was already on the job, raising interest rates to bring inflation under control.

And it survived the “credit crunch” of 2008-09. Ben Bernanke dropped the price of credit to almost zero, by slashing short-term interest rates and buying trillions of dollars of government bonds.

But the next crisis could be very different…

Short-term interest rates are already close to zero in the US (and less than zero in Switzerland, Denmark and Sweden). And according to a recent study by McKinsey, the world’s total debt (at least as officially recorded) now stands at $200 trillion – up $57 trillion since 2007. That’s 286% of global GDP… and far in excess of what the real economy can support.

At some point, a debt correction is inevitable. Debt expansions are always – always – followed by debt contractions. There is no other way. Debt cannot increase forever.

And when it happens, ZIRP and QE will not be enough to reverse the process, because they are already running at open throttle.

What then?

The value of debt drops sharply and fast. Creditors look to their borrowers… traders look at their counterparties… bankers look at each other…

…and suddenly, no one wants to part with a penny, for fear he may never see it again. Credit stops.

It’s not just that no one wants to lend, no one wants to borrow either – except for desperate people with no choice, usually those who have no hope of paying their debts.

Just like we saw after the 2008 crisis, we can expect a quick response from the feds.

The Fed will announce unlimited new borrowing facilities. But it won’t matter….

House prices will be crashing. (Who will lend against the value of a house?) Stock prices will be crashing. (Who will be able to borrow against his stocks?) Art, collectibles and resources – all will be in free fall.

In the last crisis, every major bank and investment firm on Wall Street would have gone broke had the feds not intervened. Next time it may not be so easy to save them.

The next crisis is likely to be across ALL asset classes. And with $57 trillion more in global debt than in 2007, it is likely to be much harder to stop.

Are you with us so far?

Because here is where it gets interesting…

In a gold-backed monetary system prices fall. But the money is still there. Money becomes more valuable. It doesn’t disappear. It is more valuable because you can use it to buy more stuff.

Naturally, people hold on to it. Of course, the velocity of money – the frequency at which each unit of currency is used to buy something – falls. And this makes it appear that the supply of money is falling too.

But imagine what happens to credit money. The money doesn’t just stop circulating. It vanishes.

A bank that had an “asset” (in the form of a loan to a customer) of $100,000 in June may have zilch by July. A corporation that splurged on share buybacks one week could find those shares cut in half two weeks later. A person with a $100,000 stock market portfolio one day, could find his portfolio has no value at all a few days later.

All of this is standard fare for a credit crisis. The new wrinkle – a devastating one – is that people now do what they always do, but they are forced to do it in a radically different way.

They stop spending. They hoard cash. But what cash do you hoard when most transactions are done on credit? Do you hoard a line of credit? Do you put your credit card in your vault?

No. People will hoard the kind of cash they understand… something they can put their hands on… something that is gaining value – rapidly. They’ll want dollar bills.

Also, following a well-known pattern, these paper dollars will quickly disappear. People drain cash machines. They drain credit facilities. They ask for “cash back” when they use their credit cards. They want real money – old-fashioned money that they can put in their pockets and their home safes…

Let us stop here and remind readers that we’re talking about a short timeframe – days… maybe weeks… a couple of months at most. That’s all. It’s the period after the credit crisis has sucked the cash out of the system… and before the government’s inflation tsunami has hit.

As Ben Bernanke put it, “a determined central bank can always create positive consumer price inflation.” But it takes time!

And during that interval, panic will set in. A dollar panic – with people desperate to put their hands on dollars… to pay for food… for fuel…and for everything else they need.

Credit may still be available. But it will be useless. No one will want it. ATMs and banks will run out of cash. Credit facilities will be drained of real cash. Banks will put up signs, first: “Cash withdrawals limited to $500.” And then: “No Cash Withdrawals.”

You will have a credit card with a $10,000 line of credit. You have $5,000 in your debit account. But all financial institutions are staggering. And in the news you will read that your bank has defaulted and been placed in receivership. What would you rather have? Your $10,000 line of credit or a stack of $50 bills?

You will go to buy gasoline. You will take out your credit card to pay.

“Cash Only,” the sign will say. Because the machinery of the credit economy will be breaking down. The gas station… its suppliers… and its financiers do not want to get stuck with a “credit” from your bankrupt lender!

Whose lines of credit are still valuable? Whose bank is ready to fail? Who can pay his mortgage? Who will honor his credit card debt? In a crisis, those questions will be as common as “Who will win an Oscar?” is today.

But no one will know the answers. Quickly, they will stop guessing… and turn to cash.

Our advice: Keep some on hand. You may need it.

Regards,

Bill Bonner
for The Daily Reckoning

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