Confessions of a One Percenter, Part II

12/18/2015 10:26

 by Bill Bonner



Bill Bonner is president and CEO of Agora Publishing, one of the world's largest financial newsletter companies. He is the creator of The Daily Reckoning, a financial newsletter with more than 540,760 readers of six different global daily editions, including French and German. Bonner coauthored with Addison Wiggin the international best sellers Financial Reckoning Day and Empire of Debt and coauthored his third New York Times best-selling book, Mobs, Messiahs, and Markets. In 2011, he authored Dice Have No Memory: Big Bets & Bad Economics >From Paris to the Pampas. Most recently, he coauthored Family Fortunes: How to Build Family Wealth and Hold on to It for 100 Years with his son Will. He files his Daily Reckoning dispatches from a ranch in Argentina, the home office in Maryland, various joint ventures, and other hot spots around the globe.

More money printing… more credit… more redistribution, taxes, and regulation… Those are the kinds of things that play right into the hands of the 1%! The rich may be scared and powerless in the face of a real market correction. But regulations and taxes are things that their lawyers, lobbyists, and political connections can deal with.  

Money talks, as they say, and politicians have an acute sense of hearing. Besides, we didn't get to be so rich entirely by our own efforts; these same "reformers" helped greatly. Gina Rinehart, one of the richest women on the planet, can tell the poor that they need to "stop drinking, stop smoking, and work harder."  

Not only is it a convenient myth… it's also a useful one. Earning money the old-fashioned, honest way is still your best bet… unless you've got the government or the central bank in your pocket.  
In economics, the phenomenon is known as the "Cantillon Effect." Richard Cantillon was an associate of John Law, the world's first fully modern central banker. Cantillon noticed that Law's new paper money—backed by shares in the Mississippi Co.—didn't reach everyone at the same rate. The insiders—that is, the rich and the well connected—got the paper first.  

These insiders competed for goods and services with it… just as though it were as good as the old money. But by the time it reached the laboring classes, this new money had been greatly discounted—eventually, to the point where it was worthless. 

Cantillon was a beneficiary of this very phenomenon. He speculated in Law's Mississippi Co. shares. Then, foreseeing disaster, he sold out at the top. This so enraged the buyers, who were ruined that they plotted to murder him. Cantillon may have staged his own death to escape them.

A version of the Cantillon Effect was observed in Soviet gulags and German concentration camps. Victims reported that the secret of survival was to be close to the kitchen. The food often ran out before it reached those at the extremities—those who labored in the harshest conditions rarely survived.

The concentration camps and the modern monetary system are versions of command economies. The people in command decide who gets what.

First in Line 

Now we have the central banks running their printing presses—handing out money to those closest to them. The banks are first in line. Since the financial crisis struck, Western world governments have poured $1.7 trillion into banks through capital injections, cheap loans, and asset purchases.  

They pass the booty throughout the financial community—boosting prices for financial assets, which are owned by… you guessed it… the 1%. Speculators and investors make money. This is why I—as the owner of MoneyWeek magazine—benefit. And the rest of the financial media are beneficiaries too. John Maynard Keynes, writing in 1921: 

Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some… Those to whom the system brings windfalls… become "profiteers" who are the object of the hatred… the process of wealth-getting degenerates into a gamble and a lottery.  

Keynes was talking about inflation. But it is not just consumer price inflation that has this effect. Inflation of credit and the monetary base (the total amount of a currency either circulated or in the commercial bank deposits held in the central bank's reserves) has run rampant ever since the Nixon administration shifted the world from a gold-backed monetary system to a new system John Law would have recognized as his own.  

Total credit market debt in the U.S. rose more than 30 times since the end of the 1960s. As a percentage of GDP it went from 150% to 350%. U.S. equities rose 12 times and are now reaching toward a new nominal high.  

The New Lords of Finance 

This tide of easy money and credit changed the economy and changed who got wealthy. Since the 1980s, wealth building in America shifted from making things to financing things. And the 1% has changed too—from the bold captains of industry to the clever lords of finance.  

You can see the change in the difference between Mitt Romney and his father. George got wealthy by making automobiles. Mitt made his money in finance. As Keynes predicted, the system degenerated—turning the process of wealth building into a casino.  

The Wall Street Journal looked at 77 of the deals done by Romney's Bain Capital during the 1980s and 1990s. The rate of investment return on 67 of those deals was below what you could have gotten from the S&P 500. But 10 were hugely profitable. Bain sold out and took its money off the table. Later, 4 of those 10 home runs for Bain went bankrupt.  

Fortunately for me, as the system degenerates, more and more people want information and advice about how to get the soup. They want to know how to get in line to get their fair share of the rewards… while dodging the bad gambles and bankruptcies. They turn to us: the financial press. The worse it gets, the more our subscription income rises.  

And here, I'd like to offer special thanks to the editorial team at the influential Financial Times for encouraging more "stimulus" measures! Yes, keep the "stimulus"—the TARP… the TALF… the QE… the Twist… the EFSF… the ESM… the LTRO… the OMT—coming! 

Keep it up. We "one percenters" need the money! 

We're All Keynesians Now 

It was President Nixon (I remember the day) who proclaimed, "We're all Keynesians now." He was almost right. I wasn't a Keynesian. Then again, I wasn't too sure what a Keynesian was.  

Since then, I've realized that there is a gulf between those of us who tend to see things in moral terms… like the economists of old… and those who see the economic world as though it were an engineering challenge.  

The "two Scottish Adams," Adam Smith and Adam Ferguson, the founders of economics as we know it, did not even call themselves economists. If they had business cards to hand out, they would have listed their profession as "moral philosophers." They studied the data… the case histories… the evidence… not for the numbers, but for the moral of the story.  

But most economists today think they work in a branch of science, not a branch of philosophy. They think they face bounded problems that can be reduced to numbers and then manipulated and solved.

Of course, they are not. There are no reproducible results. The initial conditions were never controllable. And you can never disprove a hypothesis.  

Even Keynes's basic insight was a moral insight… not a mechanical or scientific insight. It's based on the Old Testament story of Pharaoh's dream.

John Maynard Keynes had revolutionized the profession in the early 20th century. It was he, more than anyone, who changed it from being a refuge for observers and willowy philosophers to a hard-charging phalanx of men of action. Keynes's big insight came right out of the Book of Genesis.  

Pharaoh had a dream. He was standing by the river. Out came seven fat cattle. Then seven lean cattle came up out of the river and ate the fat cattle. A similar dream involved ears of corn, with the good ears devoured by the thin ears. Joseph advised him to store up grain in the fat years… so he would have something to give out when harvests failed.  

Keynes put forward the idea that modern governments should act like Pharaoh. They should run countercyclical policies. In the fat years, they should store up surpluses. In the lean years, they should open the doors of the granaries so that people might eat.  

This seems sensible enough… until you realize that modern governments do not run surpluses. Only deficits. The U.S. hasn't run a real surplus (not including Social Security payments) since 1969. That's 43 years without closing the granary doors! Not surprisingly, you can look in there. You won't find anything. Except IOUs. Instead of storing up grain in the fat years, the feds ate it. Now, come the years of famine, they have no grain to give out.

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That might have been the end of the story. But it's not. Economists insist that the feds can follow a Pharaonic policy even with their bins empty. How? By borrowing money… and in the extreme… printing it. You are probably getting ahead of me here. You are wondering whether that would have worked in ancient Egypt, whether Pharaoh could have borrowed grain too. What would be the harm in that? 

Well, there's only so much grain available. Borrowing it from those who still have some doesn't help. It just moves it around. The definition of a famine doesn't include imbalances between borrowers and lenders. It is about not having enough grain. Pharaoh could only solve that problem by actually storing grain so that it would be available in the lean years.

Nor could he solve the hunger issue by handing out sawdust and pretending that it was whole wheat bread. It had to be digestible.  

But economists developed elaborate theories and mathematical proofs that allowed them to believe what everyone knew was not so. The government may be deeply in debt. But it could go further into debt during the lean years, said the neo-Keynesian economists, to offset the contraction in the private sector. Then, in a pinch, it could even print up some extra money.  

It didn't matter to them that this money had no more to back it up than a counterfeiter's $100 bills. Like Pharaoh's sawdust-based bread… paper money is a wood product. It's a kind of money that literally does grow on trees.

What is this money worth? Zero.  

Know Thy Limits 

Before Keynes and econometrics, the classical economist was a patient, neutral observer.  

The old economists knew their limits. All they could do was describe the conditions under which people had jobs… and come up with some general rules and principles that explained why some people had jobs and others didn't. But you could not say with any precision how many people were unemployed.

But today, economists tell us not only how many people are looking for work, but also what to do so that more of them find jobs. How? The easy slight of hand would be to redefine what the workforce means… reduce the workforce and you automatically increase the employment rate. That's what economists and their numbers can do for you. During the Obama administration, a record number of people left the workforce, substantially lowering the unemployment rate.  

But now, if you want to get your face on the cover of Time magazine as a hero of some sort, you've got to come up with some other, craftier subterfuge. How about this: Raise the taxes on overtime pay! This is exactly what Francois Hollande has done in France. He says it will increase employment. And he's probably right. Because now it is more expensive to pay someone to work overtime than it is to hire someone new. So, with a little luck, the unemployment numbers may look better in France.

If these guys were building a bridge, none of us would want to drive over it. If they were building cars, we wouldn't buy them. And if they were running the phone company, and we needed a telephone number, we could call Directory Information. They'd estimate it for us.

But really I am grateful to them. I'm grateful to all the economists who rigged up the system… and to the central bankers and policymakers who have followed their crackpot formulae.

So, to Bernanke, Draghi, King, Shirakawa, and to central bankers everywhere—keep it up! It's good for business. A Berkeley economist says we captured 93% of all the income gains since the "recovery" began. Is that all? Maybe we can do better as it stumbles forward.