Squirrelly and Subtle

Yes, we were in London, taking care of business. Now, we’re back in Buenos Aires. We’ve tried medication. We’ve tried prayer. We’ve tried heavy drinking – all in an effort to understand how our crazy money system works. And where it leads.

You’d think it would be easy. It’s just Central Banking 101, no? Well, no. It is squirrelly… and diabolically subtle. We doubt anyone understands it – especially those who are supposed to control it.

The basic unit for the system is a kind of money the world has never had before: the post-1971 fiat dollar. It’s paper money – worth as much as people think it is worth … and managed by people who think it should be worth less as time goes by.



Photo via Pixabay


What a Business!

Who are these people? Who do they work for? You might say they are “public servants.” But that implies they are working on the public’s behalf. Nooooo sireee…

They are employees of a banking cartel that is owned by private banks. These banks have a license to lend money into existence, earning interest on their loans.

It is no surprise that their share of US corporate profits has risen fourfold since President Nixon ended the quasi-gold standard Bretton Woods system. What a business! Their cost of goods sold is next to nothing. A few strokes on a keyboard and millions… billions… heck, trillions… of dollars are created.

As our friend and economist Richard Duncan points out in his book The New Depression, the amount of liquid reserves banks have to hold against their loans is now so small they provide “next to no constraint” on the amount of credit the system can create.

Banks just have to maintain a certain “capital adequacy ratio.” This restricts their lending to a multiple of their equity capital (money provided by their shareholders). Of course, money is valuable only as long as there is not too much of it. The market can absorb a little counterfeited money. But there’s a limit. And that limit has been greatly increased, thanks to:


  1. 1) A worldwide overcapacity of output, financed by previous lending
  2. 2) A huge glut of cheap labor, also largely brought forth by the credit expansion of the last 30 years


Without these unique circumstances, central banks’ irresponsible policies – ZIRP and QE – would probably have caused inflation to rise to the double-digit range already … maybe higher.



Loans vs. bank reservesProof of Richard Duncan’s contention: prior to the crisis, a negligible amount of bank reserves “supported” trillions of dollars in outstanding bank credit. QED, reserves actually don’t matter anymore in the “fractionally reserved” system. However, it is still necessary to understand the money multiplier theory in order to fully grasp how the system works – click to enlarge.


Free Money for Governments

The authorities must feel like a college student who has found his professor’s exam questions. He knows he’s going to get away with something…

And since there are about 1 billion people who live on $1 or less per day, central bankers expect to get away with a lot more. Not only that, but also they’re lauded as heroes for it.

And now there’s no further need to worry about how much governments borrow. Central banks buy governments’ bonds… hold them on their balance sheets… return the interest payments… and the whole thing will be forgotten. And when those bonds expire, central banks can use the repaid principal to buy more government debt!

In effect, today’s raft of central bankers is doing something previous central bankers could only dream of doing: printing money without causing inflation. Politicians, too, are enjoying this once-in-a-lifetime opportunity for recklessness. They will be able to do what none could do before: borrow money without paying it back. We have not seen it in the press yet, but it should be coming soon. Commentators and kibitzers are bound to urge Germany to lighten up:

“Why should Greece have to repay those loans, anyway? Where did the money come from? It didn’t come from German taxpayers. It came from nowhere, like all the rest of the world’s money. And so what if it isn’t repaid? What difference will it make? None.”


FedPrintingUnfortunately, it will make a difference: Even though most of the money was created ex nihilo, Greece’s liabilities are offset by assets someone owns. That “someone”, quite involuntarily, are the taxpayers in other euro nations. The above cartoon illustrates quite nicely how “helpful” money printing is to the economy.


Nirvana for Public Finance

Duncan, whose analysis of liquidity levels at Macro Watch helps us understand the effects of QE, believes central banks should – and will – buy 100% of government bond issuance… and then simply set fire to them. Too much government debt? Problem solved…

Hallelujah! Hallelujah! Nirvana for public finance has arrived. Heaven has come for politicians. Who says there is no such thing as a free lunch? We doubt that either the public or Congress has fully come to terms with this. We’ve just realized it ourselves. But eventually they’ll start lining up.

Budget restraint will be yesterday’s worry. Government debt will be written off and forgotten. The feds will be eating breakfast, lunch and dinner on money that never existed… and never will be paid back. But wait? Is that too good to be true?


GermanyHyperChartYes, it is too good to be true. If central banks really were to set fire to all government debt, this would happen. The illusion that money is “backed” by something with value, however ephemeral, would be irrevocably shattered.


Image captions by PT


Charts by: St. Louis Federal Reserve Research, Wikipedia


The above article is taken from the 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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