Surrounded by the Enemy

OUZILLY, France  –  Poor Christine! The IMF director and Parasitocrate Haute Gamme Ms. Lagarde recently learned that she must stand trial for corruption charges in France.


LagardeAfter the globalist cabal made the effort of raising the mummy of Nefertiti from the dead, she is suddenly dragged before a court for misdirecting a few 100 million euro in taxpayer moolah? That’s chump change, isn’t it? The whole affair is very strange. Perhaps the powers-that-be are unhappy with IMF’s discordant noises about the Greek bail-out and felt it was time to set another example so as to keep the troops in line. We’ll never know of course, but the charges against Ms. Lagarde do actually appear a bit far-fetched (or let us rather say: since when do high-ranking Deep State minions get charged for corruption? That’s almost unheard of…).

Cartoon by Steve Bell


It concerns a complicated deal that went down while she was finance minister of France. Not worth trying to understand in detail, but poor Christine – who did part of her schooling in the heart of the Deep State, in Bethesda, Maryland – will have to defend herself.

And now emerges a report from the IMF’s own Independent Evaluation Office that says the organization misled its own board of directors, failed to “grasp an elemental concept of currency theory,” and generally made a mess of things. In dealing with the Greek crisis, particularly, the IMF was incompetent and ineffective, says the report.

In this too, it is easy to get lost in the woods. And getting lost is what we are trying to avoid. We are explaining our money system to our grandson, James, now 14 months old

His mother tries to get him to go to bed at 9 p.m. But the little boy’s internal clock is still on Baltimore time; it tells him it is much too early to go to sleep.

Grandpa takes over, drawing out the monetary system like a general spreading a map on a field table. “Here is the enemy,” he says gravely. “They have us completely surrounded. We’re doomed.”


Surrounded and doomed...Surrounded and doomed…


James grumbles. He squirms. He has a sunny, optimistic temperament. But we think our explanations are sinking in. He seems to understand…


…that money is not wealth; it just measures and represents wealth, like the claim ticket on a car in a parking garage.

…that our post-1971 money system is based on fake money that represents no wealth and measures badly.

…that this new money enters the economy as credit, and that the credit industry (Wall Street) has privileged access to it. The working man still has to earn his money, selling his work, by the hour. But Wall Street – and elite borrowers connected to the Establishment – get it without breaking a sweat or watching the clock.

…that a disproportionate share of this new money is concentrated in and around the credit industry – pushing up asset prices, raising salaries and bonuses in the financial sector, and making the rich (those who own financial assets) much richer.

…that this flood of credit helped the middle class raise its living standards, even as earnings stagnated. But it also raised debt levels throughout the economy.

…and that it allowed the average American family to spend American money that Americans never earned and buy products Americans never made; instead, Walmart’s shelves were stocked with goods “Made in China.” The middle class lost income as factories, jobs, and earnings moved overseas. Debt stayed at home.


“Okay so far?” we asked James as his eyeballs rolled backwards and his breathing slowed. But one thing must still puzzle him. How did the new dollar actually retard growth?

Maybe it didn’t make people richer – after all, how can you expect to make people better off by giving them fake money? But how did it make them worse off?


The Ultimate Absurdity

We began with an attack en masse across a broad, philosophical front: “As you sow, so shall ye reap,” we said. “And when you put a lot of fake money into a society, you end up with a fake economy.”

Just look at Argentina in 2001, or Zimbabwe in 2006, or Venezuela now.  Prices go wild as people try to figure out what the money is really worth. But the economy shrinks.

It was the same way in Germany during the Weimar hyperinflation. People stopped producing. You might have a billion marks in your pocket, but you couldn’t find a bar of soap for sale.


1-IBVCThe IBC General Index in Caracas – even though the country’s economy is imploding, stock prices have soared amid a collapse of the bolivar’s purchasing power – click to enlarge.


“But wait… I know what you’re thinking.” we imagined James pushing back. “Those are all hyperinflation stories. We don’t have that now. Instead, we have much less inflation – prices are almost stable.”

“Yes… for now. The inflation is in the asset sector and in credit itself – not in consumer items. But the phenomenon is much the same.

“Fake money is giving grossly distorted information to everyone. In Manhattan, we are told that an ordinary apartment is worth $2 million. But in Geneva – where interest rates have turned negative – we are told that $2 million is worth nothing. You will have to pay one of the banks to take it off your hands.


2-manhattan-condomedianManhattan condo prices disaggregated (new developments, overall and resale) resale prices dipped earlier in the year, but as of April, overall prices have reached new all time highs – click to enlarge.


“Without honest money, real savings, and true interest rates, businesses and investors have nothing to guide them. They are lost in the woods. Few want to do the hard work, and take the risks, of long-term, capital-heavy ventures. Instead, the focus shifts to speculation, gambling, and playing the game for short-term profits.

What’s more, artificially low interest rates provide fatal misinformation. They tell the world that we have an infinite supply of resources – time, money, energy, and know-how.

Then, without its back to the wall of scarcity, with no need to make careful choices, capitalism becomes reckless and irresponsible with its most valuable resource – capital itself. It is destroyed, wasted, misallocated, and malinvested. Growth rates fall and the world becomes poorer.

And now, in Japan, there is talk of the ultimate absurdity. Look carefully, because we believe this straw may have “final” etched on it in tiny letters. Japan is said to be considering a perpetual bond issued at negative interest rates.


3-JGBYields on JGBs have been in negative territory since March. Recently there was a small disturbance in the farce, as yields rose from minus 30 bps to minus 4 bps – click to enlarge.


“How does that work?” we can hear James asking.

“Well, it’s very simple. You give your money to the government. And then you pay the government every year, forever, for taking it from you.”

James is startled awake. He is disturbed.

“What kind of a world have I been born into…?” he seems to ask.


Charts by: BigCharts, Miller Samuel, BarChart


Chart and image captions by PT


The above article originally appeared as “How You End up With a Fake Economy” at the Diary of a Rogue Economist, 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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