Bill Bonner: Fragging your own money

Real currencies disappeared nearly 40 years ago, says Bill Bonner. Now they are mere tools, abused by the world's central banks.

"Monetary warfare!" says the Financial Times. The US is pointing its heavy guns at China. Congress has proposed a bill naming China as a 'currency manipulator.' How is China manipulating the renminbi? It is holding steadfast to the dollar. This, says US Speaker of the House, Nancy Pelosi, "translates into a significant subsidy, artificially making US products more expensive, and jeopardising efforts to create and preserve manufacturing jobs in America".

In South America, Brazil fires salvoes at Japan, South Korea and Taiwan. "We're in the midst of an international currency war," said Guido Mantega, Brazil's finance minister. What makes the Asian countries a target of Brazil's artillery? They intervened in the currency markets directly, selling their own currencies and buying, among other things, Brazil's real. The Asians are trying to "manage their currencies down", the FT explains. The remarkable thing about these battles is that admirals scuttle their own ships. Generals spike their own cannons. All the combatants send out their currencies like foot soldiers then shoot them in the back.

Meanwhile in Europe, the fighting takes another form. Unlike the US and Japan, Ireland cannot assassinate its own homegrown currency. It doesn't have one. It signed on to the euro, which for all its faults, seems to resist management. For now at least, the managers hesitate; Ireland will have to cheat its people and its creditors flagrantly rather than surreptitiously. On Thursday, it put another e5 billion into Anglo-Irish Bank.

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These strange facts incite the following reflection on the whole dodgy system. Not that we offer any suggestions. We will not stoop to the level of Martin Wolf or Paul Krugman, offering constructive criticism and management advice. Nor will we offer Chicken Little warnings of imminent doom. Not at all. We see disaster coming too, but we're going to enjoy it.

The trouble with today's capitalism is that there is so little honest capital in it. Instead, there is quackery, debt and fraud. Real capitalism requires solid capital money you can trust. But real money disappeared nearly 40 years ago. That was when the last traces of gold were removed. Since then, all currencies have been 'managed'. No longer fixed measures of real wealth, they have become tools, supposedly used by the authorities to promote full employment and growth. But like democracy, pornography, and last night's leftovers, managed money is less and less appetising as time goes by.

From the end of the Napoleonic wars until the start of the world wars, the world's money system was backed by gold. You couldn't 'manage' it or devalue it. You couldn't try to beggar thy neighbour by cheapening it. But after a long transition period, in 1971 a new, experimental money system was put in place. It allowed the supply of money to grow much faster than the supply of goods and services. US money supply (M2) rose 1,314% between 1970 and 2008, from $624bn to $8.2trn. What did all this ersatz new money do? It acted like a gigolo. First it flattered, then it corrupted, and finally, it robbed.

America's working stiffs were the first to get whacked. Inflation made them feel like they were earning more; but their purchasing power went nowhere. They haven't had a real, hourly raise since the system was put in place four decades ago. As we can see in the fight between the US and China, America is struggling to make sure they get none in the future either. Lowering the dollar against the renminbi raises the cost of probably 90% of the goods in Wal-Mart and Costco where the working classes shop. The US trade deficit grew by 40% in the first six months of 2010, compared to the year before.

This is just another feature of America's enlightened management encouraging Americans to shop and thereby creating more jobs, in China. But this has been going on ever since the managers began taking liberties with the dollar. In the 1960s, the working man 90% of the population got 60% of the income gains of the period. By the end of the bubble years 2001-2007 he got just 11%. This has resulted in a "record income gap", says this week's news. Half the nation's income goes to the top 20% of the population, nearly twice as much, compared to the bottom 20%, as in 1967 the highest disparity recorded.

While the working man got nowhere, the rich thought they got richer. Consumer prices rose five times over in the last 40 years. The stockmarket went up 300% faster from 800 in January 1970 to over 12,000 in 2008 roughly in line with the increase in the money supply. But the phony money betrayed the rich too. Investors were misled. Capitalists erred. Trillions of dollars were misallocated, adding capacity to a consumer economy in which consumers were already spent out. Now, stockmarket prices have gone nowhere for more than a decade. And household net worth has declined $12.3trn from the peak.

The horns have sounded and bells have been rung. It is 1939 in the currency war. When it is over, every managed currency in the world will be dead or wounded. But we will be wiser, too. When the new managed dollar was introduced in the 'Nixon shock' of August 1971, nobody knew what it was worth. When the end comes, everyone will know.

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