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Financial Holy Water

Sprinkle here, sprinkle there...

"CHINA Plans Stimulus," says a headline at Bloomberg, writes Bill Bonner in his Diary of a Rogue Economist.

So while the casinos stay closed in Macau, they're still doing a hot business at the New York Stock Exchange.

As long as that universal panacea – inflationary stimulus – is's pull the the dip...and "party on!"

The Dow jumped, "back in the black" for 2020. The Nasdaq hit a new high. And Amazon pushed over $1 trillion, joining Apple and Microsoft in the "13-digit club".

The three companies combined have a valuation higher than the GDP of Britain or France or India. And based on the current price-to-earnings (P/E) ratio – which measures how much investors are paying for every $1 of a company's earnings – an Amazon buyer will wait 87 years for the company to earn its stock price.

Yes, Dear Reader, nothing will be allowed to stop this hullabaloo. Neither hail, nor sleet, nor dark of night. Neither acts of God nor acts of nature. Neither plagues of locusts in Africa, nor raging fires in Australia. And certainly not a pestilence in Asia.

For whatever affliction or curse befalls stock markets, whether the president should stub his toe or aliens invade from space, central banks have vowed to deliver whatever it takes – money...bags of it...tons of up the wazoo – to cure it.

Everybody loves inflation. Businessmen inflate their numbers. Politicians inflate their promises. Men want to inflate bank accounts and their...well, you know.

We count on inflation today the way we once depended on holy water and the sign of the cross. We trust it to ward off the devil, depression...the coronavirus...unemployment...recession, and (most important) stock market sell-offs. As for vampires, we stick to garlic.

Inflation is the name of the game. Because, once you're on that road, the only other choice is deflation....It's inflate-or-die. And who wants to die?

But wait. Inflation is easy. According to former Federal Reserve chief Ben Bernanke, "a determined government can always create inflation."

But if that is so, how come we don't inflate more? How come inflation didn't stop the German economy from dying in 1923? Or the Zimbabwean economy from dying in 2006? Or the Venezuelan economy from dying today?

Meanwhile, copper closed down last Monday for the 13th day in a row, the longest downturn in its history. You don't have to be a genius to figure out why. The biggest user of copper is China. If the Chinese economy is slowing down, demand for copper will go down.

Copper is sometimes called "the metal with a PhD in economics." It gets bought long before the refrigerator or the pipe or the automobile that it eventually ends up in. So, a big drop in the copper price is like a death. It tells us that the end is near.

And with $44 trillion in debt, with millions of empty apartments (our man on the ground, Tom Dyson, followed that story in his Postcards From the Fringe e-letter), and too much capacity in almost every major industry, China is in an inflate-or-die trap, too.

If it lets markets "normalize" its economy, it will mean a disastrous economic contraction and possibly the end of communist party control. It has no choice; it has to inflate.

But inflation comes with a lit fuse.

In 1927, Chiang Kai-shek's government was deeply in debt. Nearly half its expenses were covered by borrowing.

It took only a few years for lenders to recoil, refusing to lend more money to the Chinese government. Then, Chiang – head of the government at the time – passed a law requiring them to buy government bonds.

Until 1935, money in China was real – backed by silver. Then, the banks were gradually taken over by the government and given the power to issue their own legal tender. This was regarded as a step toward a modern monetary system, very similar to what the US did in 1971.

The Japanese invaded Manchuria in 1937. China fought back with printing-press money. Local printers couldn't keep up, so it was printed in England and had to be flown over the Himalayas.

The Japanese surrendered in 1945, but inflation continued, now financing a new war between the nationalists and the communists. But by this time, the Yuan had fallen from 3 per Dollar in 1934 to 23,000 per Dollar in 1949.

By then, the people were tired of being ripped off by Chiang and his inflation. They turned to Mao. His successors still run the show in China. Now, it is they who are ripping off the public with inflation.

Yes, Dear Reader, inflation is no cure-all. It is just a rip-off.

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

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