Gold News

The Deep State's Best-Ever Con

It doesn't even exist, right...?

WE STARTED out last week with the best of intentions, writes Bill Bonner, reposing at Rancho Santana in Nicaragua with his Diary of a Rogue Economist.

We were going to take a rest and spend time recalling what we have learned so far.

The idea was to bring new readers into the conversation. And for the benefit of longtime readers (if there are still any left) get our bearings.

But the spectacle of President Trump proposing to defund up to 80 claptrap government programs was just too alluring – such low-hanging fruit, we had to stop and enjoy it.

We're sure now: Mr.Trump's program will not "drain the swamp" or "make America great again".

But it still may be fun.

And we're still not sure about Trump himself. Is he shrewdly calculating – creating diversions (the border wall...the "skinny budget"...the travel ban...Obama spying on him) – to push through some clever reforms amid the chaos?

Or is he a complete dumbhead jackass...blundering helplessly...wasting our most precious resources (time and energy) on fights without real meaning?

Who knows...?
But today (before getting down to work), we applaud the Deep State – the "shadow government" that runs the country no matter who sits in the Oval Office or which party controls Congress.

What a clever bunch of scoundrels.

First, they back Jeb and Hillary, and then (on election night!), they move swiftly behind Donald J. Trump.

It looks like the fix was in all along. Hillary was a proven friend of Wall Street and the military. "The Donald" turned out...was an even bigger friend.

The rest – at least from the Deep State's point of view – is all noise.

And then, the pièce de résistance: After the election, Mr.Trump tweets that the "Deep State" was spying on him.

Well...of course it was. The Deep State spies on everyone. That's what it does.

But the president makes it sound like a narrow partisan issue. It's as though the Deep State spied on him particularly because he, a Republican, threatened it.

The Democrat-leaning mainstream press took the bait in just the way you'd expect. "There is no Deep State," they say. Donald is just a "conspiracy nut."

Here's CNN's Tim Naftali:

"[White House Press Secretary Sean] Spicer's encouragement of public delusions of the existence of a super-secret, unelected "Deep State" supposedly intent upon sabotaging the new president was poisonous...But the "Deep State" concept is nonsense, a product of Soviet Cold War propaganda, domestic leftist and right-wing conspiracy thinking..."

Could the Deep State ask for a better outcome?

It has a better grip on power and money than ever before. And the very idea of its existence is being discredited. It's just a right-wing fantasy!

Truth is hard to come by in public affairs. Even a little bit of it is rare. And a little bit of it is all we have.

But we go with what we've got...

There are two groups of people in an economy: those who work, save, and invest honestly and create wealth...and those who try to take it from them.

The makers...and the takers.

The makers do win-win deals with one another. One exchanges a day's worth of labor. Another trades $50 of savings. Both learn. Both come out ahead.

The takers have a variety of business models, too. Some are freelance, sticking up liquor stores or stealing credit cards. But most ply their trades legally, using the government to crack heads as necessary.

They nest in the feds' "feel good" programs, like the Environmental Protection Agency (EPA) and the Securities and Exchange Commission (SEC).

They burrow into the Defense Department, too. And they particularly like the dark corners of the spook organizations – where they get power over people by spying on them...knowing their secrets...and threatening harmful disclosures, harassment, and lies.

But there are many more people in the Deep State than just the spooks; the swamp is full of them.

Some use regulations to take others' wealth. Some use legislation. Others use the feds' fake-money system.

Many of these – probably even the majority – are not even aware they are participating in a fraudulent conveyance.

They go to the best universities. They can talk about the Fed's "dynamic stochastic model." Or they simply invest alongside the great genius from the plains, Warren Buffett.

They think they are making money because they are smart. But they are not adding wealth; they are just taking it from the ordinary working stiffs who earned it...with the hidden help of the feds' fake-money system.

(Your correspondent speaks with some authority on this. In 1979, he stumbled into the business of offering alternative investment ideas. He is a man of modest talents. Yet his business has grown immodestly – far faster than GDP – and now has offices in 11 countries with hundreds of analysts and researchers.

Why? How? Unbeknownst to him, he had the wind of the feds' fake money at his back. The more it blew asset prices to dangerous and unrealistic highs, the more people wanted to know how to get in on it.)

And here we pause to explore how the Fed's "wealth effect" actually works.

The hypothesis behind boosting stock and bond prices with ultra-low interest rates is that it will cause financial asset holders to feel wealthier and rush out and spend.

With enough university training, an economist might find this idea fetching. But a philosopher...or simply a man with his head screwed on right...sees immediately that it is total nonsense.

If you increase asset prices by lowering interest rates – producing a "wealth effect" – you must also produce a "poverty effect" by lowering, proportionately, everything else.

Imagine the fellow who needs to save enough to supplement his retirement by $10,000 a year. At an interest rate of 10%, he would need $100,000 in savings. But at an interest rate of 1%, he'd have to save $1 million...which would take him 100 years!

And during this time, he would be taking money out of the consumer economy, offsetting the spending spree happening on the rich side.

That's why eight years of near-zero interest rates have produced such anemic economic growth. The rich get richer. Relatively speaking, families without stock and bond portfolios get poorer.

Based on the Dow, the rich guy's stocks went up 20 times over the past 35 years. The poor guy's wages went nowhere. And GDP rose only six times.

In other words, the people who owned stocks saw their assets increase three times faster than the real wealth of the economy. Now they can buy more of the poor man's stuff, including his most important asset: his time.

The system didn't make the economy richer. It has simply shifted wealth from the middle class to the rich. It is not a "wealth effect." It is simply larceny. makes the world go around. And today's fake money gives it a special spin – corrupting and misleading the whole economy.

The takers love it.

New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn



Market Fundamentals