by Bill Bonner, Casey Research:
OUZILLY, France – We came back from South America poorer but wiser.
For the first time ever, we have had to face the reality of politics; up until now, it was never more than an abstract, theoretical matter.
We read about the French Revolution, the Bolshevik Revolution, and the passage of Obamacare.
We knew politics was corrupt and repulsive. But except for a brief stint on the board of governors of our local church, we had nothing to do with it.
Now the wolf is in our own backyard… so close that we can smell its hot breath and hear the clicking of its pearly teeth as it snaps at our heels.
More as it develops…
But wait… money sometimes goes “full politics,” too.
Take poor Kenneth Rogoff at Harvard.
He wants a dollar with a voter registration card, a U.S. flag on its windshield, and a handgun in its belt – the kind of money that supports the Establishment and votes for Hillary.
Writing last month in the Wall Street Journal under the headline, “The Sinister Side of Cash,” he noted that “paper currency, especially large notes such as the U.S. $100 bill, facilitates crime: racketeering, extortion, money laundering, drug and human trafficking, the corruption of public officials, not to mention terrorism.”
Of course, large notes do make it easier for criminals to operate. Like cellphones. And sunglasses. And automobiles with air-conditioning.
But that’s what money is supposed to do: make it easier for an economy to function. You use it as you please.
Yes, dear reader, we are back to our regular beat. Money. But what’s this? Finally, we’re beginning to see some action.
You’ll recall that the markets have been eerily quiet… with less movement in stocks than we’ve seen in the last 100 years.
Perhaps it was the calm before the storm. The Dow fell nearly 400 points on Friday. We don’t know. It could be the calm before the storm. Or it could be the calm before more calm.
How It All Ends
There’s something fundamentally tranquilizing about having a central bank that gives out the word that it’s got your back.
The Bank of Japan is buying bonds AND stocks (by way of exchange-traded funds)… pushing up prices for both.
Under its €1.7 trillion ($1.9 trillion) QE program, the European Central Bank bought so many government bonds, it ran out of new bonds to buy. So, this summer, it added corporate bonds to its shopping list.
According to Reuters, it will soon run out of corporate bonds, too. Then it will have to follow the Bank of Japan’s lead… and wade into the stock market… if it wants to keep its QE program going.
And in the U.S., the Yellen Fed continues to jive and diddle… teasing investors with the threat of “normalizing” interest rates, but having neither the desire nor the fortitude to act.
We’ve been wondering how it ends. Bear markets are facts of life. But if the central bank has set its face to stopping them, then what?
Central banks – in the current system – can create unlimited amounts of fake money. They can use this money to buy real financial assets.
Theoretically, they could buy all the world’s stocks and bonds. And theoretically, they can leave the feds with almost complete ownership of the planet’s capital.
The rich get richer (selling their assets to the feds at inflated prices). The poor get poorer (as the misallocation of capital increases… price signals are distorted… and real wealth is wasted).
What goes wrong?
Everything. As in politics, the gap between theory and practice is as wide as the Sargasso Sea.
The Next Crisis
Even with the largest bidder in the world on their side, investors can still panic.
That would mean a big drop in asset prices, high-profile bankruptcies, and a new crisis.
Things move fast. The feds may step in with more QE buying, but they may be a dollar short and a day late.
A 20% drop in stock prices is equal to a loss of about $5 trillion in the U.S. alone.
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