Condor Snacks

We’re back from South America. We’re toughened up. But we’re more puzzled than ever. Our horse threw us last week. Maybe that addled our brain. It certainly toughened us up a bit more. But then we learned about the hard life of the poor cattle…

High in the mountains there are pastures. Cattle live there – almost wild. They are the cattle of the local people, but they are so tough they are nearly unsaleable. And they barely survive anyway.

Gustavo explained:

 

“Most of the calves die. They are killed by the puma or the condors. The condors are the worst. They attack in groups. So while the mother runs one of them off, the others assault the calf. They don’t try to kill it. They just eat it alive. They go after the soft parts. They eat the eyes and the tongue. And they attack from the rear too, pulling out the intestines. Then, of course, the calf dies and they eat the whole thing.”

 

 

eyesREX1411_468x354

 

Cow-tongue-side

Dinner is served …

 

Tough Living

Business … investments … climate … food – everything is tougher in the Andes. Including the housing market. Say, for example, you want to buy a house. In the little towns of Argentina – as in much of the undeveloped world – they start a lot of houses … but never seem to finish them.

The village of Molinos, near the ranch, has dozens of houses with no roofs … doors … or windows. In the town of Cafayate, too, houses seem to go up little by little. Walls go up. The roof may be put on years later. You see rebar sticking out … and many walls without plaster.

Why?

Lack of credit. People can’t borrow, to buy or build. Instead, they build whenever they have cash. People build houses with paycheck money. Credit makes it possible to build more efficiently. You borrow the money … build your house … and then pay off the loan over the next 20 or 30 years.

Or you never pay it off. You may refinance. Or you may sell to someone who also takes out another mortgage. This is where it gets interesting: Effectively, the lender owns the property… and you pay “rent” on it to the mortgage lender.

 

The New Credit Economy

The curious part of this is that the banks – who lend for mortgages – don’t have any money to lend in the first place. The modern fiat money system – with the Fed as regulator-in-chief – allows banks to create money (credit) out of thin air without setting aside any meaningful reserves. (For instance, by 2007, US commercial banks held just $73.2 billion in reserves and vault cash against loans of $11.9 trillion – for a reserve ratio of just 0.6%. In 1945, US commercial banks had a reserve ratio of 12%.)

These days, banks don’t lend pre-existing money. When they lend, they create money that didn’t exist before. And over the last 30 years, the US economy has come to depend on it. As former World Bank economist Richard Duncan explains in his book The New Depression, total credit in the US surpassed $1 trillion for the first time in 1964. Between 1964 and 2007 – 43 years – it increased 50 times to $50 trillion.

This credit helped the economy expand. It allowed borrowers to command the resources needed to build their houses. Under the gold standard borrowing was anchored to available savings. But not in the new credit economy. Today, the sky’s the limit!

Then borrowers either pay the banks back the money the banks never had … or the banks become permanent “rentiers.” Bankers collect mortgage payments. And since few people ever fully pay off their mortgages, bankers get their “rents” almost forever. Pretty sweet, no?

In other words, this is more or less how the US economy grew over the last three or four decades – using money from nowhere, which was turned into real assets for the financial sector. The financial industry accounted for only 10% of the nation’s corporate profits in the 1960s. By 2007, it was bringing home 40%.

Ben Bernanke was hailed as the “Hero” of 2008-09. By preventing a correction, what he was really doing was saving the bankers’ hides … and protecting the system that made them rich.

Now, Janet Yellen has taken up the cause of the poor and unemployed – as though lending more non-existent money will make them better off!

 

TMS-2

US broad money TMS-2 (the chart is slightly dated, this is as of November 2013). The proportion of money substitutes that are covered by standard money (vault cash and bank reserves) is denoted by the blue area. The purple area are uncovered money substitutes, which are technically money, but have literally been created out of thin air by commercial banks and are a bit like the Highlander – they exist and don't exist at the same time (the money is in customer accounts, but only theoretically – in reality, it is not there). The portion of the money supply that is 'covered' has increased due to 'QE', as bank reserves can be transformed into cash currency when customers withdraw money from their accounts. Note though that these bank reserves were also created ex nihilo, by the monopoly issuer of currency, the Fed. None of this would be 'money' in a free market. It is only 'legal tender', an artificial creation. What once used to be receipts for money (gold and /or silver) has been transformed into receipts for, well, nothing. Can we get richer by creating more 'nothings'? Not really – or as Rocco, the jailer in Beethoven's Fidelio puts in the gold aria: “If  nothing is combined with nothing, the sum is, and will always remain, small” (chart via Michael Pollaro / comment by PT) – click to enlarge.

 

The above article is from Diary of a Rogue Economist originally written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

 

 

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