The Great Keynesian Fraud—A Classic Reflection By Bill Bonner

By Bill Bonner

…..In the early 20th century, John Maynard Keynes came up with a new idea about economics. The politicians loved it; Keynes explained how they could meddle in private affairs on a grand scale – and, of course, make things better.

Keynes argued that a government could take the edge off a business recession by making more credit available when money got tight … and by spending itself to make up for the lack of spending on the part of consumers and businessmen.

Keynes suggested, whimsically, hiding bottles of cash all around town, where boys might find them, spend the money, and revive the economy. The new idea caught on. Soon economists were advising all major governments about how to implement the new “ism.” It did not seem to bother anyone that the new system was a fraud. Where would this new money come from? And what made anyone think that the economists’ judgment of whether it made sense to spend or save was better than any individual’s?

All the Keynesians had done was to substitute their own guesses for the private, personal, economic opinions of millions of ordinary citizens. They had resorted to what Franz Oppenheimer called “political means,” instead of allowing normal “economic means” to take their own course. The economists wanted what everyone else wants – power, prestige, women (except for Keynes himself, who preferred men). And there are only two ways to get what you want in life, dear reader. There are honest means, and dishonest ones.

There are economic means, and there are political means. There is persuasion … and there is force. There are civilized ways … and barbaric ones. The economist is a harmless crank as long as he is just peeping through the window. But when he undertakes to get people to do what he wants – either by offering them money that is not his own … by defrauding them with artificially low interest rates … or by printing up money that is not backed by something of real value (such as gold) … he has crossed over to the dark side. He has moved to political means to get what he wants. He has become a jackass.

Keynesian “improvements” were applied in the 1920s – when then Fed governor Ben Strong decided to give the economy a little “coup de whiskey” – and later in the 1930s when the stock market was recovering from the hangover. The results were predictably disastrous. And along came other economists with their own bad ideas. Rare was the man, such as Robert Lucas or Murray Rothbard, who pointed out that you could not really improve economic results with political means.

If a national assembly could make people rich simply by passing laws, we would all be billionaires, because assemblies have passed a multitude of laws and seem capable of enacting any piece of legislation brought before them. If laws could make people wealthy, some assembly somewhere would have found the magic edicts – simply by chance.

But instead of making them richer, each law makes them a little poorer. Every time political means are used they interfere with the private, civilized economic arrangements that actually get people what they want.

Here Come the Meddlers

One man makes shoes. Another grows potatoes. The potato grower goes to the cobbler to buy a pair of shoes. He must exchange two sacks of potatoes for one pair of penny loafers. But then the meddlers show up and tell him he must charge three sacks … so that he can pay one in “taxes,” to the meddlers themselves. And then he needs to put in an alarm system in his shop, and buy a hardhat, and pay his helper minimum wage, and fill out forms for all manner of laudable purposes. When the potato farmer finally shows up at the cobbler’s he is informed that the shoes will cost seven sacks of potatoes!

That is just what he has to charge in order to end up with the same two sacks he needed to charge in the beginning. “No thanks,” says the potato man, “At that price, I can’t afford a pair of shoes.”

What the potato grower needs, say the economists, is more money! The money supply has failed to keep pace, they add. That was why they urged the government to set up the Federal Reserve in the first place; they wanted a stooge currency that would be ready to go along with their plans.

Gold is fine, they said, but it’s anti-social. It resists new “isms” and drags its feet on financing new social programs. Why, it is positively recalcitrant! Clearly, when we face a war or a Great National Purpose we need money that is willing to stand up and sign on. Gold malingers. Gold hesitates. Gold is reluctant and reticent. Gold is fine as a private money. But what we need is a source of public funding … a flexible, expandable national currency … a political money that we can work with. We need a dollar that is not linked to gold.

In the many years since the creation of the Federal Reserve System as America’s central bank, gold has remained as steadfast and immobile as ever. An ounce of it today buys about the same amount of goods and services as an ounce in 1913. But the dollar has gone along with every bit of political gimcrackery that has come along – the war in Europe, the New Deal, World War II, the Cold War, the Vietnam War, the War on Poverty, the War on Illiteracy, the New Frontier, the Great Society, Social Security, Medicare, Medicaid, the War in Iraq, the War on Terror – the list is long and sordid.

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As a result, guess how much a dollar is worth today in comparison to one in 1913? Five cents.

The Road to Hell

Keynesianism is a fraud. Supply-siderism is a con. The dollar is a scam. All were developed by people with good intentions. But these good intentions not only paved the road to Hell, they greased it. There was no point putting on the brakes. Once underway, there was no stopping it. Right now, the US slides towards some sort of Hell. Half a century of deceit has produced a nation that is ready to believe anything … and go along with anything … provided it promises to make them rich.

They will be very disappointed when they discover that all the political means they counted on – the phony money, the laws, the regulations, and the wars – have made them poorer. That is when we will really need cages …

“Nothing in nature is evil,” said Marcus Aurelius. Keynes was human. Even Adolf Hitler was a man, a part of nature himself. And the Evil Empire, was it not created by men too, men who – like economists and politicians – followed their own natural impulses? Adolf may have erred and strayed. But he did so with the best of intentions: He thought he was building a better world. And he had all the “reasons” you could ask for. He could argue all day; “proving” that his plan was the best way forward.

Not that there weren’t arguments on the other side. What were smart people to do? People argued about Keynesianism for many years. Each side had good points. One was convincing; the other was persuasive. It was like a couple arguing in divorce court – the husband forgot to take out the trash and knocked over a vase; the wife ran him over with the family car. “He had it coming,” she says. What would an observer think?

No amount of logic could help him. Both parties made good points. All the judge could do was to fall back on his own deep sense of right and wrong, of proportion … and good taste. “She shouldn’t have run him down,” he says.

“Love the man, hate the sin,” say the Baptist preachers. They have a useful point. There’s no point in hating Adolf, Josef, Osama … John Maynard … or any of the other thousands of clowns who entertain, annoy and murder us. They are God’s creatures too, just like the rest of us. What they did wrong was what they always do wrong … they all resorted to political means, to get what they wanted.

We do not hate them; we just hope they get what they deserve.

The above article is from 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.

Just Another Republican Keynesian?In “Stockman’s Rants and Writes”

Keynesian Babble and the Delusions of Bubble FinanceIn “Stockman’s Rants and Writes”

Milton Friedman: Freshwater KeynesianIn “Stockman’s Rants and Writes”

Civilization Will Not Survive

Guest Post by Bill Bonner

Gold up $10 an ounce yesterday. The Dow up 40 points. Meanwhile, the most watched stock index in the world, the S&P 500, closed at a new all-time closing high of 1,890.9.

In yesterday’s Diary, we revealed economist and author Richard Duncan’s outlook for the months ahead. You noticed, surely, that it corresponds with our own, at least to an important point.

Duncan’s key insight is that asset prices – in particular stock prices – have come to depend on excess “liquidity” in the economy.

(We put liquidity in quotations, because it is not clear how fluid QE money really is. Our colleague Chris Hunter has pointed out that excess reserves can’t be spent in the economy… nor can banks multiply them into more loans – an issue of some debate around our offices. Still, there is no doubt in our minds that the S&P 500’s new record high is largely down to QE.

As long as the quantity of this liquidity exceeds the economy’s uses for it (principally borrowing by the federal government and corporations) stocks have a tendency to go up. When liquidity levels fall stocks tend to fall, too.

Duncan anticipates that liquidity will dive in the last quarter of this year (with less available cash and credit than the economy needs). If they haven’t sunk already, stocks will go down to where they belong.

But the Fed has taken a blood oath to keep the credit bubble expanding to the end of time… or until it blows up… whichever comes first.

And Janet Yellen has recently revealed herself to be a remarkable personage for a central banker. (She is, after all, a disciple of the infamous Yuri Pavlovovich!) She will not stop or sidestep the trap; she will walk right into it… recklessly blundering into the biggest financial disaster of all time.

Ex Nihilo, Nihil Fit

Ah yes… you might as well know. There’s more to Duncan’s macro views – a lot more.

In 1964 – half a century ago – the US had a total debt load (private and public) of $1 trillion. Today, the economy carries a debt load of $59 trillion.

Did the size of the economy also grow 59 times? Is our bigger, more prosperous economy now able to support $59 trillion of debt… or more? Hardly.

In 1964, annual US GDP was $656 billion. Let’s see… today it is about $17 trillion. Divide $17 trillion by $656 billion and we find that GDP has gone up 26 times – not even half as much as the debt.

In other words, each unit of today’s economic output supports more than twice as much debt as it did 50 years ago. Put another way, twice as much of what you see today – cars, hamburgers, houses, flat-screen TVs – owes its existence to transactions that have been completed. There is a day of reckoning for every debt-fueled purchase. And if interest rates rise, the coming settlement could be extremely painful.

Normally, and naturally, the amount of credit in the world is limited by the amount of savings. You can’t lend someone something you don’t have. And if you don’t save money, you can’t lend it to someone else.

But a reduction in required reserves balances for banks… and a shift to an elastic currency (in 1968)… made it possible for banks to create credit ex nihilo (out of nothing) without putting any meaningful amount of money aside as reserves. (By 2007, US banks held $73.2 billion in reserves and vault cash against assets of $11.9 trillion… for a liquidity ratio of just 0.6%.)

If credit growth had just kept up with GDP growth, it would now measure about $26 trillion, not $59 trillion. In a credit deflation, the difference would have to disappear. Ex nihilo it came. Ad nihilo it will go. That $33 trillion worth of spending and asset prices would go poof.

The Next Great Depression

And that is exactly what you should expect when the credit bubble pops.

The Great Depression saw GDP fall by more than 40%. The next great depression should see an even bigger drop. Unemployment reached 25% in the Great Depression. The next depression could see even more jobs lost. In the Great Depression a large percentage of the US population was still semi self-sufficient – with gardens, chickens, hogs and extensive home preserves. Today, few people could support themselves from home, even for a few days.

As the Austrian School economists warned us: Any credit in excess of actual savings is a fraud. It produces a fraudulent boom, which must be followed by a bust. Eventually, the phony credit must go back whence it came. Central banks can delay it. They can’t avoid it.

Today, the world economy relies on this never-ending credit expansion in the US. Without it, China’s economy would collapse along with the US economy. The US stock market would be chopped in half – at least. In short, it will be one godawful mess.

But Duncan goes further: A credit deflation would also knock the wind out of government finances. Social security, education, welfare programs, military spending – all would be substantially impaired.

“In all probability,” says Duncan, “our civilization would not survive it.” He believes a serious credit deflation would bring “chaos, starvation and war.”

An Ominous Warning Sign…

Guest Post by Bill Bonner

Wow! Peace for our time, the media reported yesterday.

The stock market celebrated with a 227 point jump in the Dow. Gold slouched away.

We would have thought that every possible stock buyer had already placed his order. Where did the money come from to push the indexes even higher yesterday?

It was borrowed. That’s another record that has been broken lately: margin debt. Never before has so much money been borrowed specifically to buy equities.

As a ratio of GDP, margin debt only saw these heights twice before in recent history: in 2000 and in 2007. In dollar terms, total margin debt stood at $481 billion at the end of January – 20% higher than it was at the peak of 2007… and nearly 3% of GDP.

But be warned: Hearts and records break from time to time, but never without some pain. The crying begins immediately after a broken heart. After a record high S&P 500, on the other hand, it can take some time.

700 Times Earnings!

So many records are breaking in the tech sector it sounds as though a beer truck smashed into a recording studio. Facebook set the pace. First, with its own public offering; and then, with its purchase of mobile text messaging outfit WhatsApp.

Who would have thought that a free app – used by young people to send insipid messages to one another – could fetch $19 billion?

Now, anything seems possible. Maybe trees really do grow to the sky. Maybe there are silver linings without clouds. Maybe biotech stocks, recently priced at 700 times earnings and up 16% so far this year, are still bargains.

And maybe… just maybe… Janet Yellen knows what the hell she’s doing.

Speaking of earnings, they too are in record territory. Recent earnings reports for S&P 500 companies showed profits at their highest level since 1946 – 30% above the postwar average.

Earnings went up about 10% over the last 12 months, while sales went up hardly at all. This, too, must be a record of sorts; for the first time ever US businesses seem to be able to produce immaculate earnings, unsullied by actual sales growth.

Degenerate Capitalism

Reported on the front pages of the Wall Street Journal and the Financial Times (the two journals of record for the late, degenerate capitalism of the 21st century) is another record…

From the Wall Street Journal: “Blowout Haul for Buyout Tycoons”

The nine founders of the four listed US private equity groups took more than $2.5 billion between them last year, both papers reported… with Apollo Global Management’s Leon Black alone receiving $546 million.

This surely must be a record. More than half a billion in compensation for a single year. And what a business model! Sharp private equity firms buy lame companies, borrow beaucoup money in their names, and then resell the debt-saturated companies to naïve investors!

Oh… did we forget something?

Oh, yes… Ben Bernanke and another world record! Without record intervention – including more than $3 trillion in liquidity from the Fed’s inexhaustible well – poor Mr. Black might have found few takers for his stray cats and dogs.

Meanwhile, consumer price inflation has set a record of its own. Not by going up, mind you, but by going nowhere. Bloomberg reported last month:

The personal consumption expenditures price index, minus food and energy, rose 1.2% in 2013, matching 2009 as the smallest gain since 1955.

Consumers, without the pressure of a rising CPI behind them, have shown little ability to join the party. Instead, they shiver in their rooms and wonder how to pay the electric bill.

As reported in the Wall Street Journal yesterday, they spend more on what they need than on what they want. Spending on health care and fuel rose in January, as consumers “cut back on discretionary products.”

That makes us think that something else is broken – not a record, but the economy. And with so many things broken, we can’t help but wonder when the whole shebang falls apart.

Regards,

Bill

CRACK UP BOOM

Guest Post by Bill Bonner

The Return of the Worldwide Crack Up Boom

[A Daily Reckoning classique, originally broadcast on June 27, 2007…]

A kiss is still a kiss. A sigh is still a sigh…

And a bubble is still a bubble.

When a kiss is over, it’s over. When a bubble pops…well…that’s all she wrote! All kisses end – even the wettest “French” kisses. And so do all bubbles – even sloppy mega-bubbles of liquidity. This one will be no exception. But of course, it’s not the certainties that make life interesting… it’s the uncertainties – the known unknowns and the unknown unknowns, as Mr. Rumsfeld says. We are all born of woman and end up where all men born of women end up – dead. But that doesn’t mean we can’t have some fun between baptism and last rites.

You’ll remember we said that this worldwide financial bubble is both worldlier, and more financial than any in history.

…if you could really get rich by printing more currency, Zimbabweans would all be as rich as Midas…

And, for the moment, it is very much alive. So much alive that the media can hardly keep up with it. Forbes magazine, for example, tries to estimate the wealth of the world’s richest people. But the rich don’t typically give out their balance sheets, telephone numbers and home addresses. So, there’s a fair amount of guesswork in the calculations.

But when it came to guesstimating the net worth of Stephen Schwarzman, founder of Blackstone, the Forbes crew wandered off into fiction. They put his wealth at about $2 billion. Recent filings in connection with the new Blackstone IPO show he earned that much in a single year!

In this phase of the bubble, it is as if your neighbors were throwing a wild party – and you weren’t invited. You detest them…envy them…and want to join them, all at once. A very small part of the population is having a ball; everyone else is getting restless and wondering when the noise will stop.

We wish we knew. And we’ve given up guessing.

Meanwhile, the experts, commentarists, kibitzers and analysts are saying that there is a whole new phase of the giant bubble about to unfold; things could get a whole lot crazier. Even many of our respected colleagues are pointing to a text by the great Austrian economist, Ludwig von Mises, for a clue. What we have here, they say, is what Mises described as a “Crack-Up Boom.”

Before we go on, readers should be aware that the “Austrian school” of economics is probably the best theory about the way the world works. Like The Daily Reckoning, it is suspicious of efforts to control the natural workings of an economy, in general…and suspicious of central banking, in particular. The fact that it was a one-time “Austrian,” Alan Greenspan, who became the most celebrated central banker in history, only increases our suspicions. He was able to master central banking, we imagine, because he understood what it really is – a swindle.

What is a “Crack-Up Boom?” Von Mises explains:

“‘This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.’

“But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

“It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.”

Mises is describing the lunatic phases of a classic inflationary cycle.

At first, no one can tell the difference between a real dollar – one that is earned, saved, invested or spent – and one that just came off the printing presses. They figure that the new dollar is as good as the old one. And then, prices rise…and people don’t know what to make of it. Later, they begin to catch on…and all Hell breaks loose.

You see, if you could really get rich by printing more currency, Zimbabweans would all be as rich as Midas, since the Mugabe government runs the presses night and day.

Von Mises died in 1973 – long before this boom really got going – let alone cracked up. He may have never heard of a hedge fund… or even a derivative, for that matter. A world money system without gold? He probably couldn’t have imagined it. People spending millions of dollars for a Warhol? Twenty million for a house in Mayfair? Chinese stocks at 40 times earnings? He would have chuckled in disbelief. He understood how national currency bubbles expand and how they pop, but he probably never would have imagined how insane things could get when you have a whole world monetary system in bubble mode.

He’d have recognized the beginning of this bubble…and he’d have recognized the end, but the middle…or the beginning of the end – that would have dumbfounded him. During his lifetime he saw a Crack Up Boom in Germany in the ’20s…and a few more here…but he never saw a worldwide Crack Up Boom.

No, dear reader, no one, anywhere, has ever seen a worldwide Crack Up Boom. We’re the first, ever. Pretty exciting, huh?

Bill Bonner
for The Daily Reckoning

WHY QE WILL NOT BE TAPERED

This Credit Event Could Crush the Stock Market

By Bill Bonner, Chairman, Bonner & Partners on January 16, 2014

Now our nerves are settled. We can sleep at night. There’s nothing more to worry about. Christine Lagarde, head of the IMF, has reassured us.

Madame Lagarde tells us that further scaling back of QE won’t mean a thing, as long as the Fed goes about its tapering in a gradual, measured way, which of course it will.

“We don’t anticipate massive, heavy and serious consequences,” she said.

But wait…

She must be wrong about that. If the Fed were to continue to cut back its bond-buying, the stock market and the economy would go into withdrawal shock. The economy would wobble. Stocks would fall. And Janet Yellen would promptly go into a huddle with other Fed governors and come out with an announcement: more QE!

A New Depression?

We don’t know whether Madame Lagarde is aware of it or not. Fed economists must be. They must know that the only thing keeping the economy from slipping into recession is the Fed’s EZ credit.

The following figures were shown to us by economist and author of The New Depression: The Breakdown of the Paper Money Economy, Richard Duncan. He spelled it out for us…

Since the 1980s, we have had an economy that grows on credit. In 1964, the global economy owed only $1 trillion. By 2007, total global credit had expanded to $50 trillion. The global economy depends on it.

But instead of stimulating a real, healthy recovery, the Fed has only been able to simulate one.

When credit growth slows, so does the economy.

How much credit growth does it take to keep the economy chugging ahead? Duncan says it needs an increase of at least 2% after inflation, or the economy goes backward. Every time credit growth has fallen below 2%, he says, we have had a recession. No exceptions.

A growing, expanding economy naturally leads to more credit. Households borrow for new homes and appliances. Businesses borrow for new plants and machinery. Investors borrow to finance startups and speculations. Government borrows, too, to cover deficits. And all this borrowing is what leads to new demand, new jobs and new output.

But instead of stimulating a real, healthy recovery, the Fed has only been able to simulate one. The real economy limps along. Real per capita disposable income has risen just 0.7% a year over the last five years. The personal savings rate is only 4%. (It was 10% in the 1980s.) And although the consumer deleveraging cycle is over (for now) much of the new credit creation is once again in the subprime category. (Last year, Wall Street secured $20 billion in subprime auto loans!)

Although the Fed has been unable to do much about the real economy… in the financial economy it’s wrought wonders! That’s the secret to understanding the markets, Duncan explains. It depends on the difference between how much credit the economy needs and how much it gets. The excess is what drives up asset prices.

The Rich Get Richer

That’s why the rich have gotten so rich lately…

The markets take excess credit and use it to bid up asset prices. Stocks rise. Real estate prices go up. (The average house price is back at over $200,000.)

Household net worth – heavily concentrated in the upper reaches of the socio-economic pyramid – rose $8 trillion in the last 12 months. It’s now greater than it was in 2007. And that huge increase appears to be the only thing keeping the economy from sinking.

Take away the QE, and you take the biggest single buyer out of the bond market. Bond prices fall (and yields rise). Stocks fall. Housing prices fall. And the economy, no longer buoyed up by the phony “wealth effect,” is suddenly pulled under by a real “poverty effect.”

Duncan tells us that all borrowers put together are likely to ask for $2.2 trillion worth of credit this year. That is a 3.8% increase. But that’s before inflation. Take off 2% for rising prices, and the real increase falls short of the 2% needed to avoid recession.

So, here’s what happens. The Fed has to keep peddling cheap credit, or the economy falls into recession. Some of it is absorbed by the bond market (mostly US federal deficits). Anything more than is needed to fund credit demands is the “excess liquidity” that drives the asset markets. Stocks soared in 2013 because the Fed overfunded US credit demands (the US budget deficit declined).

“The Fed is driving the economy,” says Duncan.

The feds broke it. Now, they own it.

Over the next six months, Duncan sees no problem. There will be enough excess liquidity to keep asset prices moving up.

But then, watch out.

Regards,

Bill

DETROITIFICATION OF AMERICA

Detroit was first. It won’t be last. It will be followed by Chicago, Philly, Baltimore, LA, and hundreds of other bankrupt zombie cities. And eventually it will engulf the nation.

Goodbye, Motor City

by Bill Bonner.

Posted Jul 29, 2013.

Gold is not the only money. But it’s the only kind the works in our extended economy.

Today, we approach the same story from a different angle.

It is the story of what happens next — when the growing power of zombies meets declining available resources.

Motor City has been flattened. Now it’s being scrapped. The largest municipal bankruptcy in history. Detroit was once one of the richest…and most dynamic…cities in the world. And it was the centre of America’s most profitable industry: automobiles.

German and Japanese automakers had the good fortune to be bombed out in World War II. But Detroit grew bigger…more prosperous…and full of zombies.

Yes, dear reader, Detroit is a zombie story. Since 1971, almost all big stories have a zombie angle. Because the credit-based monetary system that Richard Nixon put us in is a perfect habitat for zombies.

The New York Times has the report:

‘Detroit, the cradle of America’s automobile industry and once the nation’s fourth-most-populous city, filed for bankruptcy on Thursday, the largest American city ever to take such a course.

‘Not everyone agrees how much Detroit owes, but Kevyn D. Orr, the emergency manager, has said the debt is likely to be $18 billion and perhaps as much as $20 billion.

‘For Detroit, the filing came as a painful reminder of a city’s rise and fall.

“It’s sad, but you could see the writing on the wall,” said Terence Tyson, a city worker who learned of the bankruptcy as he left his job at Detroit’s municipal building on Thursday evening. Like many there, he seemed to react with muted resignation and uncertainty about what lies ahead, but not surprise. “This has been coming for ages.”

‘Detroit expanded at a stunning rate in the first half of the 20th century with the arrival of the automobile industry and then shrank away in recent decades at a similarly remarkable pace. A city of 1.8 million in 1950, it is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets.

Yes, the handwriting has been on the wall for a long time. But what does it say?

We’ll answer that without hesitation. It says ‘Beware of Zombies’.

And here we offer a simple test so Dear Readers can tell which side they’re on.

Ask yourself: In the absence of government would people still willingly give you money to do what you do? If the answer is no, you are probably a zombie.

Here’s how it works…

When people realise they can use the police power of the government to get other people’s money, they rarely hesitate. In the case of the Motor City, unionised workers found that they could use government to back their demands. Gradually, wages and benefits rose…

After World War II, Germany and Japan built new auto industries, with factory workers who were willing and able to turn out better cars at lower prices.

Light manufacturing was fleeing the country — to China, Southeast Asia and Mexico.

The heavy industry — car making, steel, mining — was a sitting duck. It couldn’t protect itself from zombies. The zombies soon got control over the government…and then preyed upon fixed industries.

Only four years ago, the US federal government bailed out GM. Or rather, it bailed out its zombified labour unions — guaranteeing wages and benefits the company couldn’t afford to give.

What was happening in the motor business was happening even faster in the Motor City.

As Detroit zombified, productive businesses and taxpayers moved out. Zombies were all that was left. People on welfare. People working for the government. People who were disabled. Crooks, malingerers, shysters — they were all there, getting money for nothing in the age-old zombie fashion.

Was there no way to turn Detroit around?

Of course there was. It was obvious how to do it. But who wanted to do it?

The more dysfunctional the city became the more money the city’s sleaze-ball leaders got from the federal government. That’s how zombieism works: The worse things get the better they are for the zombies…

Zombieism is like drug addiction. You rarely just ‘give it up’. Instead, you have to go all the way…and hit bottom.

Detroit may be hitting bottom now.

And how long will it be before Baltimore and Chicago go broke too?

It depends on how fast interest rates rise. The higher they go the harder it is for these cities to keep up with their promises to the zombies. And since interest rates are probably embarking on a long-term secular rise…it is just a matter of time before they all go broke.

That is when the jig is up. Zombies fall. The credit-based money system collapses…

Gold rises.

Regards, Bill Bonner

Original article posted on Daily Resource Hunter

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.

THE AGE OF MAMMON (Featured Article)

“Financiers – like bank robbers – do not create wealth. They merely distribute it. While the mob may idolize holdup men in good times, in the bad times it lynches them. What they will do to the new money men when their blood is up, we wait eagerly to find out.” – Mobs, Messiahs and Markets

As our economy hurtles towards its meeting with destiny, the political class seeks to assign blame on their enemies for this Greater Depression. The Republicans would like you to believe that Bill Clinton, Robert Rubin, Chris Dodd, and Barney Frank and their Community Reinvest Act caused the collapse of our financial system. Democrats want you to believe that George Bush and his band of unregulated free market capitalists created a financial disaster of epic proportions. The truth is that America has been captured by a financial class that makes no distinction between parties. These barbarians have sucked the life out of a once productive nation by raping and pillaging with impunity while enriching only them. They live in 20,000 square foot $10 million mansions in Greenwich, CT and in $3 million dollar penthouses on Central Park West.

These are the robber barons that represent the Age of Mammon. The greed, avarice, gluttony and acute materialism of these American traitors has not been seen in this country since the 1920’s. The hedge fund managers and Wall Street bank executives that occupy the mansions and penthouses evidently don’t find much time to read the bible in their downtime from raping and pillaging the wealth of the middle class. There are cocktail parties and $5,000 a plate political “fundraisers” to attend. You can’t be cheap when buying off your protection in Washington DC.

Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal: But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal: For where your treasure is, there will your heart be also. No one can serve two masters, for either he will hate the one and love the other; or else he will be devoted to one and despise the other. You cannot serve both God and Mammon. – Matthew 6:19-21,24

It seems that Lloyd Blankfein, the CEO of Goldman Sachs, may have been overstating the case in saying his firm is doing God’s work. With his $67.9 million compensation in 2007 and payment of $20.2 billion to his co-conspirators, Blankfein appears to be a proverbial camel trying to pass through the eye of a needle. This compensation was paid in the year before the financial collapse brought on by the criminal actions of Lloyd and his fellow henchmen. After having his firm bailed out by the American middle class taxpayer at the behest of fellow Goldman alumni Hank Paulson, Lloyd practiced his version of austerity by cutting compensation for his flock to only $16.2 billion ($500,000 per employee) in 2009. I’m all for people making as much money as they can for doing a good job. But, I ask you – What benefits have Goldman Sachs, the other Wall Street banks, and hedge funds provided for America?

Never have so few, done so little, and made so much, while screwing so many.

In 2005, the top 25 hedge fund managers “earned” $9 billion, or an average of $360 million. One year after a financial collapse caused by the financial innovations peddled by Wall Street, the top 25 hedge fund managers paid themselves $25 billion, or an average of $1 billion a piece. For some perspective, there were 7 million unemployed Americans in 2006. Today there are 14.6 million unemployed Americans. While the country plunges deeper into Depression, the barbarians pick up the pace of their plundering and looting of the remaining wealth of the nation. Bill Bonner and Lila Rajiva pointed out a basic truth in 2007, before the financial collapse.

“On the Forbes list of rich people, you will find hedge fund managers in droves, but no one who made his money as a hedge fund client.” – Mobs, Messiahs and Markets

Ask the clients of Bernie Madoff how they are doing.

1920’s Redux

The parallels between the period leading up to the Great Depression and our current situation leading to a Greater Depression are revealing. When you examine the facts without looking through the prism of party politics it becomes clear that when the wealth and power of the country are overly concentrated in the clutches of the top 1% wealthiest Americans, financial collapse and depression follow. This concentration of income and wealth did not cause the Stock Market Crash of 1929 or the financial system implosion in 2008, but they were a symptom of a sick system of warped incentives. The top 1% of income earners were raking in 24% of all the income in America in 1928. After World War II until 1980, the top 1% of income earners consistently took home between 9% and 11% of all income in the country. During the 1950’s and 1960’s when average Americans made tremendous strides in their standard of living, the top 1% were earning 10% of all income. A hard working high school graduate could rise into the middle class, owning a home and a car.

From 1980 onward, the top 1% wealthiest Americans have progressively taken home a greater and greater percentage of all income. It peaked at 22% in 1999 at the height of the internet scam. Wall Street peddled IPOs of worthless companies to delusional investors and siphoned off billions in fees and profits. The rich cut back on their embezzling of our national wealth for a year and then resumed despoiling our economic system by taking advantage of the Federal Reserve created housing boom. By 2007, the top 1% again was taking home 24% of the national income, just as they did in 1928. When the wealth of the country is captured by a small group of ruling elite through fraudulent means, collapse and crisis becomes imminent. We have experienced the collapse, while the crisis deepens.