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From Thin Air

The feds' funny money...

THE OUTSIDERS make, writes Bill Bonner in the Daily Reckoning.

And the insiders take.

Nothing much happened last week. Except that Ben Bernanke told investors that the fix was in...and the stock market went up. The chief of America's central bank told the world that he was prepared for more QE whenever it was needed.

When will it be needed? When the stock market goes down!

So, why not? Why not buy stocks? What can you lose? If they go up, you keep the gains. If they go down...ol' Benny will be there with wads of cash to buck them up.

Cash...cash...cash... How much do you need?

A million? A billion? A trillion? Hey, the sky's the limit. Bernanke is ready. As much as you need...when you need it.

After so many years of fixes (it's been 5 years since the subprime crisis began) we're getting to know how the fixes work.

Let's start with the money. When a fix is needed, the feds come up with money. But everyone knows the feds are broke. So where does the money come from?

"Out of thin air," was an expression used by John Maynard Keynes. But how could that be? How can you get cash...money...out of nowhere? And what kind of money could it be...if you could get it at no expense? It must be a "funny" money...a zombie money...

It must be worthless, right? But it's not. That's the crazy thing...the Fed plucks this money out of the air...gives it to banks...and they can use it to pay for a pizza. Or an automobile. Or a sovereign bond.

The problem — especially now in Europe — is that the money that comes from nowhere goes nowhere. The ECB lent it to the banks. The banks lent it to the government. And pfhhht! It was back to where it came from — nowhere.

Now, The Financial Times reports that the banks are down to their last few billion. Sniff. Sniffle. Poor bankers. They better save their last billions to pay bonuses.

That's what they're thinking too. They're not buying government bonds the way they used to. Trouble is, the governments of Spain, Italy and others need the money. So, they go to the European Central Bank and ask for more of that 'nowhere money':

"You gotta give these banks more money so they can give us more money... Otherwise, we're going to default...and you can say goodbye to Europe..."

Whether that would be good or bad, we don't know... We're still wondering where that money came from. Where, exactly, is nowhere?

How could there be a place...like...nowhere? We mean, if it is nowhere...it can't be somewhere. So there can't be a place that is also nowhere. So, if money really does come from nowhere it is...like...really not there.

Can someone help us with this?

Lately, we've come to the conclusion that this whole thing is a scam. The money is a scam. The economics behind it is a scam. The way it is lent out...is also a scam.

Let's look again at where the 'nowhere' money goes...

In short, it is used by the insiders to scam the outsiders. Those who control the government scam those who don't. It goes to zombie industries — finance, health, education and the military.

In the news lately is the plight of the students. Everybody tells them they should go to college. But college is expensive. And since nobody has any money in America, they have to borrow. They end up with a worthless college degree and, on average, about $25,000 in debt.

The scam takes place on several levels. The whole nation gets scammed into thinking that "education" is a good thing.

Here's a typical newspaper article, this one from The Wall Street Journal:

"Education Slowdown Threatens US"

"Throughout American history," the article begins, "almost every generation has had substantially more education than that of its parents. That is no long true. When baby boomers born in 1955 reached age 30, they had about two more years more schooling than their parents, according to Harvard University economists Claudia Goldin and Lawrence Katz... But in 2010 they averaged only about 8 months more schooling than their parents."

The article goes on to tell us that college graduates have less trouble getting a job than those who only graduated from high school. But so what? Suppose everyone had a Ph.D. Would jobs suddenly appear for them?

"The wealth of nations is no longer in resources. It's no longer in physical capital. It's in human capital," says an expert quoted by the paper.

Elsewhere in the blahblahsphere, Larry Summers, former secretary of the Treasury, challenged Mitt Romney to present a budget plan, which among other things, included more "investment" in...yes...you guess it...education!

But "investments" in education have been increasing for the last 40 years...and for the last 40 years...there has been not one penny of return.

So, let's follow the money. The feds give students money...or give it to the universities directly. Either way, it ends up in the pockets of the education industry. Unemployment has gone up and down...with no relation to the supposed investments in education. Employees — including those with college degrees — have not earned a penny more in real hourly wages. And test scores show they don't know anything more than they did, at far lower investment, 4 decades ago.

Investments in education are losers. Why invest more?

Because the money comes out of nowhere. It's nowhere money. Might as well bailout the financial industry. And "invest" in healthcare too.

But the nowhere money is not with no cost. It looks just like other money. And it buys the same things. So, the guy who has it is able to use it to take away resources from other people.

Follow the money. From the Fed to the feds...to the favored, no-return industries — health, education, finance and the military.

The zombies get more money. The rest of the economy ends up with less.

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Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, 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 more recently the election of President Trump.

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.

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