How the Fake Boom Ends
How the Fake Boom Ends by Bill Bonner – Bonner and Partners
RANCHO SANTANA, NICARAGUA – As we outlined yesterday, Americans are richer than ever.
U.S. household assets stand at $97 trillion.
All over the world, “wealth” is surging, too… with the value of global stocks near a record high of $100 trillion.
But there’s a hitch: We allege that this wealth was built on fake money. If we’re right, is the wealth fake, too?
Cometh the Grim Reaper
As longtime Diary sufferers know, the Fed’s ultra-low interest rates over the past eight years have created the biggest pile of debt in history.
Last week, the total U.S. debt hit a new record at $68 trillion… up from $29 trillion in 2000.
And yesterday, Fed chief Janet Yellen said she would take a stick to America’s debtors, increasing the cost of carrying that debt.
Already, the Fed’s rate hikes have boosted the interest cost of credit card debt by about $7.5 billion a year. That will rise by another $8 billion as future scheduled increases take effect.
Extrapolate to include all the nation’s debt – consumer, business, and government – and every quarter-point rate hike costs $170 billion extra in carrying costs a year.
Add a whole percentage point… and you are up to $680 billion – about equal to the Pentagon’s annual budget.
And so cometh, like the Grim Reaper, the end of the biggest fake boom ever. Inflated with fake money lent at fake rates… it will deflate when rates go up.
But “fake boom” is merely an allegation; we have to prove it. So let’s begin by exploring the “money” that made it possible.
“Sound as a Dollar”
Prior to President Nixon ending the exchange of dollars for gold at a fixed rate in 1971, the U.S. had a dollar that was connected to gold and silver.
Not perfectly. And not always. But precious metals, particularly gold, were there… in the background.
And that old dollar was the money which had existed, more or less unchanged, since it was created in 1792.
That’s when the U.S. government, with the Coinage Act, introduced a national currency backed by gold.
That is what the world came to know as “real money.” You could trust it. “As sound as the dollar” was not an ironic expression; it described the solidity of America’s currency.
Then, with hardly a by-your-leave, Tricky Dicky introduced a new dollar. It looked just like the old one. But it was an impostor.
This new dollar was not backed by gold or silver. It was a “Federal Reserve Note,” with nothing standing behind it except the full faith and credit of the United States of America.
It was a debt instrument, in other words… not cold, hard cash.