Bill Bonner: Spend it like you stole it

The second round of quantitative easing (QE2) is ending in June. But globally, QE3 has already begun. As usual, Japan is the pacesetter. As temperatures rose at its Fukushima reactor, so did Japan's monetary base at the rate of 100% per week! What happens to all this new, hot money? No one knows, exactly. But today, on our back page, we have advice for everyone central planners, politicians, and householders, too: if you have money, pretend you robbed a bank.

From the point of view of a modern economist, nothing stimulates better than a bank robbery. The money leaves the cold embrace of a bank vault; soon every pimp and bartender has his pockets full. Hot money gets around.

Back-page readers may have missed the article in the Rolling Stone. It explains how one Wall Street wife, and one Wall Street widow, formed a company specifically to take advantage of the US government's spending spree known as TALF.

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You'd think the Feds had already done enough for the Mack family. John Mack runs Morgan Stanley. Had it not been for the generous support of the US government and the Federal reserve, he might be parking cars. Instead, the Feds bailed out the entire financial sector. First, it bought up Wall Street's bad bets at inflated prices and then lent banks money at artificially low interest rates; they were invited to lend the money back to the federal government for a sure profit.

Business was so good and so easy at Morgan Stanley that the distaff side of the Mack household apparently couldn't resist. In June, 2009, with her friend Susan, Christy Mack set up an investment company and put in $15m. Then, they borrowed $220m from the government.

You may think that this was a brave move on their part; perhaps they should be rewarded for taking chances to help get the economy moving again. But if you think so, you are as nave as a turnip. The fix was in; the two used the money to buy non-recourse loans at deep discount. If the loans increased in value, they would make a profit. If they fell, the government would take them in full satisfaction of their debt.

Nice deal? Much safer and more profitable than robbing banks. Two months later, Mr. Mack, perhaps with a little assistance from his blond helpmate, bought a limestone carriage house in Manhattan, with a 12-space garage for the getaway cars.

Central planners and politicians know how hot money works. When they are not stealing it from the taxpayers, or borrowing it with no intention to pay it back, they are counterfeiting it. The Fed will have 'printed up' about $1.8trn by the end of June.

But if you don't have your own little stimulus scam going, you may want to listen up. Your old dollars, pounds, euros and pesos are going to lose value. Don't trust the government's inflation figures. If you live in America, you may have noticed that the price of gasoline is now $1 per gallon more than it was a year ago. As for an honest measure of the 'inflation rate', the internet has come to your service, thanks to a pair of professors at MIT. Their 'Billion Prices Project' (BPP) doesn't pussyfoot around. It trolls the internet, records prices and reveals the most accurate measure of inflation ever. This new index shows the rate of consumer price increases for the last 12 months at 3.2%. This is more than 50% higher than the Labor Department's own tally 2.1%.

Something is dreadfully wrong. Either a billion prices are in error, or people who buy US treasury bonds are. They accept a real yield (based on the BPP numbers) of barely 1.2% on a 30-year dollar-denominated, inflation-sensitive Treasury bond, while the dollar sinks and its custodians actively try to drown it. And, over the last six months, according to BPP, prices have been rising nearly twice as fast at a 6.1% annualised rate. If these figures hold, bond investors already have a built-in negative yield. And the inflation figure for the last three months is even higher, 7.4%, about 300 basis points more than the yield on the long bond.

Treasury prices have flowed higher for nearly 30 years. Could they be ready to ebb now? Maybe. Inflation is not like holding up a liquor store; it's more like a major bank heist, the product of long planning by trained professionals. The idea is simple enough; the nominal amount of available money increases faster than the real goods and services that money buys. In America, real private-sector output reached a plateau at the end of the 20th century. In the last ten years, it's scarcely increased. Total private sector GDP was $9.31trn in 2001. Now it is $9.72trn. The increase in the GDP came almost entirely from debt-financed spending by the government, with 79% of household income growth from government transfer payments.

But while real output has been flat, the output of 'money' has not. The US monetary base has tripled in the last three years. These increases are not all immediately available to households as "money"; they are mostly still in bank vaults, waiting to be liberated. Then, watch out. Dollars will be too hot to hold.

Bill's new book, Dice Have No Memory, is out now. Read an extract here.