Last week was a bad one for the US dollar, but good for stocks. The greenback had its worst five days of trading in four years, but the Dow rose another 168 points on Friday.
This action took place after Madame Janet Yellen, proprietress of the House of the Rising Stockmarket, said she would not be impatient about raising rates. She would not be patient either, she warned.
Investors drew the obvious conclusion: she has no idea what she is doing.
Until she finds a clue, or is startled out of her paralysis by events, it is business as usual. The piano player will keep his head down. The bartender will keep the liquor flowing. The card sharps will keep pulling aces out of their sleeves. And the girls upstairs will continue plying their trade.
Not that we have any objection. But it is hardly the thing you’d expect from a respectable central bank. Then again, so much has changed in the last half-century.
We have been trying to understand it. That is what we do every day. While there are an infinite number of plots and subplots, there are probably only a few worth following.
The world of today is not the same world it was 50 years ago. We have a new kind of money. We have a new economy. And we have a different kind of government. All have been transformed over the last 40 years in ways that few people have noticed and fewer still have understood.
Our job is to try to understand that story. Not in its entirety – that would be impossible – but merely in its most gaudy outline and most sensational details.
We’ve already spent much of our time and much of your time trying to figure out how our money system changed post-1971. In the next few days, we hope to look at first, how this new money turned the economy into something new, and then how it (along with other things) transformed our government too.
This last transformation is the most salacious of all.
“Government can have no more than two legitimate purposes”, said William Godwin in his Enquiry concerning political justice, “the suppression of injustice against individuals within the community and the common defence against external invasion.”
But the US system of government, nourished by the almost unlimited credit that its money gives it, has swelled to a shape that would have been grotesque and unrecognisable to Godwin. To those who still maintain some romantic attachment to ideals of the American Revolution, it is merely repulsive.
Did you realise that we no longer have a political system can properly be called a republic or a democracy? Did you realise that voting is a waste of time, because the whole system is rigged to favour small, powerful groups?
One of them not only steals trillions of dollars, it also creates enemies like the Fed creates money – out of nothing – so that the US can be kept in a constant state of alarm, whacking one phoney enemy after another to no apparent benefit, except to the elite who are paid to do it.
Another of these elite groups was on display, prominent in the gallery, when Benjamin Netanyahu gave his controversial speech in the US Congress last week. Sheldon Adelman – billionaire casino magnate – paid good money for that speech, just days before the presidential election in Israel. It paid off. Netanyahu was re-elected in a landslide.
In politics today, money makes the nag run. Adelman has so much of it, practically every jackass in Congress feels his spurs or fears his lash.
But that is a long story, too. And we don’t want to get distracted.
Today, let’s just look at the economy. At the risk of repeating ourselves, we note that the new money, after 1971, was credit-based, not commodity (gold)-based. Gold is limited. Credit is not. Most important, gold-backed money is impossible for politicians to create. Credit is not.
As soon as the new money found its legs, it was off to the races. Credit raced ahead 50 times in about 50 years. And it knew where to go, too. While income gains, 1930-1970, were broadly shared among all the people of the US. The new money found its way more and more to the people who controlled it – the political class and its cronies.
Consumers substituted credit for earnings. With it, they were able to buy more and more stuff they couldn’t afford. Global trade boomed. Chinese factories filled up with bumpkins. All was, apparently, well.
Then, in 2007, US consumers reached what might be called ‘peak debt’. It became obvious that they couldn’t pay for all that expensive real estate they had bought. Housing collapsed, along with mortgage-backed financial instruments.
Central banks responded with more credit. But US consumers have not been able to join the party. Global trade has been sluggish and China has slumped (and may be nearing a recession and/or credit crisis).
Meanwhile, interest rates on government bonds fell as the new money looked for a safe home. In Europe, investors pay for the privilege of having governments waste their money. Governments, themselves, borrow to reward favored industries, fund its pet projects, and buy votes in order to keep the plain people in line.
The corporate sector borrows too – enriching management and/or shareholders (more or less in that order). Malinvestments (shale oil, buybacks, Tesla…), scams, boondoggles, and giveaways – just what you’d expect.
They spend it like they stole it, in other words. At Madame Yellen’s place.
More to come…