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The Daily Reckoning | Friday, November 12, 2010 A $600 billion promise to speculators fails to support asset prices, The most "ignorant remarks ever made by a central banker," Plus, Bill Bonner on Fed-sponsored prestidigitators and their assault on your wealth... On Making People Feel Richer The Real Effects of Printing Money and Creating Debt Bill Bonner Reckoning on this day from London, England... "Debt delenda est," we told our audience in London this morning. "This is a debt story. It's not a liquidity story. It's not a 'capitalism has failed' story. It's not a regulatory story. It's the story of debt. Too much debt. Too much to pay back. "So how does the story develop? That's what we're watching. Ultimately, when you have too much debt, there's no point in refinancing it. There's no point in rescheduling it. There's no point in delaying the inevitable. You need to destroy the bad debt. As fast as possible." The Dow was down 73 yesterday. Where is the follow through? Hmmm... The Fed promises $600 billion to speculators. Alan Greenspan, writing in yesterday'sFinancial Times, says the Fed is out to lower the value of the dollar. Ben Bernanke says the Fed wants to increase asset prices. And still stocks don't go up. They go down. What is the meaning of it? The whole idea of pumping money into the bond market - Bernanke admitted himself - was to get asset prices up. What else could it be? Higher asset prices are supposed to make people feel richer. Then, they're supposed to act richer. What do rich people do? They spend money! And before you can say "prestidigitation" they WILL be richer. How exactly does that work? Oh never mind the details...it's...like...magic! Ben Bernanke, one of the world's leading economists...and certainly the most powerful economist in the world says it works. Do you believe it, dear reader? We don't. If you could make people richer simply by printing money well, heck, we'd print it night and day. Maybe even weekends too. But of course, it doesn't work. So what DOES all that money printing do? Well, that's what we're going to find out. One thing it doesn't seem to do - at least not yet - is the very thing it was supposed to do: raise asset prices. Instead, investors seem to be wary. It is as if they didn't trust it. And why should they? Investors aren't stupid. They can put two and two together. Sometimes. They know as well as we do that all this money printing MIGHT do is to create a speculative, short-term bubble. As it looks now, they don't seem to have an appetite for that kind of thing. So, as near as we can tell, our Great Correction hypothesis is still the best explanation of what is going on. The US (and other nations) went into bubble mode in the 2002-2007 period. The bubble blew up. And now they're paying the price. It will take years to clean up the damage - even under the best of circumstances. With Bernanke and the Feds doing even more mischief, it could take decades. But the big risk is that the Feds will make so many mistakes...and such big mistakes...that it will be impossible to correct them in a calm, orderly way. The private sector can fix itself up. All the feds have to do is to get out of the way. The banks and corporations that can't stand on their own two feet will fall down; we'll be better off without them. That's the way it has always worked. The markets can destroy bad debt. They don't need any help from the feds. It won't be painless. It may not even be fast - about 7 to 10 years was our estimate. But if it is allowed to happen, the economy can once again get on solid ground. But enter the feds...the ever earnest, world-improving meddlers...power-mad and reckless. They really believe the economy would be much better if it would just do as they say. "Stop destroying debt," they tell us. So, they stopped the wobbly banks from going bust. They saved Fannie and Freddie - at a cost of a third of a trillion dollars, according to the latest estimate from the Federal Housing Finance Agency. They pumped. They bailed. They jury-rigged. And they commanded. "Let there be light," they say. And darkness covers the economy. The economy responds to these commands - just like any economy would respond to such central planning: it slumps and gets worse. While the private sector cuts debt, the feds add to it. This latest $600 billion from the Fed sounds like free money. But it is debt. These are Federal Reserve Notes they're issuing. They are claims against the wealth of the US government directly and against taxpayers indirectly. If you have these notes, you can exchange them for goods and services. They're lawful tender...it says so right on the green paper. You can use this "money" to get toaster ovens or granite countertops...or a cup of coffee. But the more of this "money" there is...the fewer goods and services are available to it. Simple, huh? A classic case, right? The dollar goes down; the price of stuff goes up. Private debt goes down. Public debt goes up. And then, the markets destroy public debt too. The Daily Reckoning Presents Junk Science by Bill Bonner "The most ignorant remarks ever made by a central banker." "When I started my economics studies at 16," wrote Paul A. Samuelson not long before he died last year at aged 93, "Carlyle was right to call economics a 'dismal science.' Thanks to modern science and better economic knowledge, this Malthusian curse has been vanquished. Good modern economics make economics the Hopeful Science. At last!" Lucky professor Samuelson! Like an aparatchik who joined the shades before 1989, he went to his reward with his delusions intact. This week, the scientists began to have doubts. Like the pope wondering about the resurrection, or the Mormons questioning the veracity of the angel Moroni, the head of the World Bank, Robert Zoellick, shocked the learned world. It's time to start discussing a gold-backed currency, he said. Maybe the crown of creation of modern economics - its centrally managed money - was not such a good idea after all. Like Christianity, the dollar only has value as long as people have faith in it. But that is true of almost every trick up the modern economist's sleeve. If people stop believing, the spell is broken and they're worthless. Two years ago, when the financial world was melting down, we were told that the volcano needed to be appeased. Without immediate injection of funds, the whole system would blow up, they said. Where was the science behind that? The financial system melted down countless times in the past. No central bank came to its aid before the 1930s. Or how about the corollary article of faith: that the public had to rescue the big banks, a tout prix? It was practically a universal constant - like the Golden mean or Brownian motion. When bankers make profits, it is theirs to keep. When they lose money, the losses are moved onto the public. The US bailed out its banks. Britain, Ireland, and Iceland did the same. But where was the evidence that bank failures were so horrible? During America's Great Depression 9,000 banks failed. And history is full of the wrecks of banks that were "too big to fail." A hick Congressman from one of the corn states once proposed to round off pi to 3 to make it easier for schoolchildren to remember. He must have been joking. In the world of science, water boils at 212 degrees Fahrenheit, at sea level, whether you believe or not. Pi is always a long string of digits. The mathematicians can sweat and shake all they want; it doesn't change. But modern economists take the joke seriously. They think they can command water to run uphill and reset the Periodic Table with fancier china. That's why they hate gold: they can't control it. And it reminds them that they imposters, no more effective than witchdoctors or marriage counselors. As of this writing, it takes more than $1,400 to buy a single ounce of gold - a new record. Why? Isn't it obvious? People are losing faith. Last week, the US Federal Reserve said it was creating another $600 billion to buy US Treasury debt. That will mean a total of $2.3 trillion added to America's monetary footings since the Fed began its QE program almost two years ago. This will also mean that Ben Bernanke has added three times as many dollars to America's core money supply as ALL THE TREASURY SECRETARIES AND FED CHAIRMEN WHO CAME BEFORE HIM PUT TOGETHER. "Easier financial conditions will promote economic growth," wrote Mr. Bernanke, in The Washington Post, "...higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion." Where is the proof? Where is the controlled test? Where is the peer review? Such an extravagant assertion ought to be accompanied by extravagant evidence. But there is none at all. Throwing virgins into a volcano would be no less scientific. The virgins appeased the gods; that was the theory. Mr. Bernanke has a voodoo theory too. He says all that new money will make people feel richer...and then they will act richer...and then they will be richer! John Hussman, also an economist with a loyal following of his own, read Mr. Bernanke's explanation and pronounced judgment: "the most ignorant remarks ever made by a central banker." The latest $600 billion gamble may or may not increase stock market prices, he says. Even if it does, it is unlikely to produce the "wealth effect" that Ben Bernanke is counting on. People spend and borrow when they think they have permanent wealth. World stock markets have suffered two major shocks in the last ten years...with no net gains for investors. An increase in stock prices now - driven by the Fed's printing press - is unlikely to create the kind of expectations that lead people to spend money. Especially when they don't have any. Which makes us wonder too. If modern economists are scientists, it makes us suspicious of the rest of them. What about the physicists? The molecular biologists? The archeologists? Are they all quacks too? Bill Bonner, for The Daily Reckoning Joel's Note: A week or so ago, the Fed pledged another $600 billion in funny money to entice speculators into the market. The idea, as Bernanke himself admitted, was to support asset prices. And the net result so far? As of this writing, stocks were back to around about where they were before the chairman's announcement. Maybe they'll go up from here. Maybe not. But that $600 billion is pretty much squeezed toothpaste. It ain't going back in the tube. So what can you do? For one, you can take charge of your own financial situation instead of leaving it to the printing press-tidigitators and government meddlers. To learn what Bill is doing with his own money, check out this invitation to his Bonner & Partners Family Office program. Your membership won't stop government officials from making stupid economic decisions...but it will help to protect you from them. Bill Bonner The Last Guardians of Ancient Literature by Bill Bonner Oh yes...we were having a drink with Caroline. She runs a business for us in Paris called Les Belles Lettres. It's one of the oldest book publishers in France...publishing what must be the oldest books in the world - the classics from the Greek and Latin periods. She publishes them in the original language, with a translation into French on the facing page. Caroline explains: "We've really got the entire field to ourselves. Of course, it's a tiny field. Fewer and fewer people can read the ancient languages. It's a shame. But this is the source of all our ideas...our way of thinking about things. You don't really understand who you are unless you understand where you've come from. In the Western world, this is where we've come from - the books that we have left from Aristotle, Virgil, Xenothon, and the rest of them. "We had two competitors. But they're dropping out. "You know, there are only about 1,300 known, existing works from the classical period. Only about 1,000 of them have ever been published in modern form. Of course, it takes a scholar years to 'establish' the text...to check the words...to compare the sources...and so forth. We commissioned one book in the 1950s. The manuscript just came in a couple years ago. "It's a tedious business. And then, when we get a book out...we only sell a few hundred copies - to university libraries, mostly. "So that's probably why our competitors are dropping out. One of them was bought by a big firm. They probably had accountants who put a stop to it. "But this goes beyond money. We're the last guardians of the temple. We can't give up. We have to stick with it. We have to protect this heritage." "Yeah...and find some way to make money at it," we replied. Regards, Bill Bonner, for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com Government Spending: A Lesson in How to Go Bankrupt Let’s see. A trillion here. A trillion there. It starts to add up. And pretty soon, your political system is corrupted by it. You can’t correct the situation. Too many zombies on the payroll. And the zombies vote. So, what happens when you spend more than you can afford? First, your credit rating goes down. Then you go broke. When the Markets Wise Up Economic Irony: Creating Bubbles to Maintain Stability Why Some Think a Gold Standard Wouldn’t Work I was intrigued with the title of the essay by James West, at midasletter.com, which was, “Buying $600 Billion in Debt with Debt,” which I had hoped was an instruction manual on how to make a lot of money, fast, using no money of my own, and (hopefully) without doing any work or taking any risk. Prepare for Mass Inflation Money Creation and Price Inflation Cause Justified Paranoia Dagong: US Solvency on the Brink of Collapse Founded in 1994, Beijing-based Dagong Global Credit Rating Co. is making headlines once again... this time for downgrading US debt from its already world’s lowest, if not most credible, assessment of double-A, to a lower by one level A+ with negative outlook. The lowered rating is mainly due to round two of Fed quantitative easing. Ben Bernanke: The Chauncey Gardiner of Central Banking The Dollar or Toilet Paper... Which is Shrinking Faster? The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor