Gold News

Magic Money Tree to the Moon!

If it don't exist, how come everyone's shaking it...?

LAST WEEK, while all eyes were on the impeachment show, the feds increased the nation's debt by about $20 billion, writes Bill Bonner in his Diary of a Rogue Economist.

Who will pay it? When? How? No one asked.

During the British election of 2017, Theresa May famously said "there is no magic money tree." But both the Federal Reserve and the US government are shaking the hell out of something...

And America's President thinks they should shake it even harder. He wants "some of that money" too.

We were up in New York for the first part of last week. You need a magic money tree on the Upper East Side. Every time we paid a bill, we were shocked. A modest hotel room for two nights – $1400. Breakfast for two – $69. A 10-minute cab ride – $29.

This weekend we spent back on the family farm, cutting firewood. We've got three old chainsaws. You need three, because two of them usually won't work. Either the chain hits a stone or it just won't start. The trouble increases when you're away for long periods of time; when you get back, you find dead batteries, dull blades, and missing tools.

Our old '52 Chevy pickup wouldn't start either. We charged the battery and spun the engine over...but it didn't seem to be getting any gas.

One of the nice things about these old machines is that you can tinker with them. The truck has been sitting for a long time with its front higher than the rear...most likely, the gas just drained out of the lines. We're going to turn it around, so the gas can run downhill to the motor. We'll let you know if that works.

As technology advances, it gets further and further beyond our ken. We can take a carburetor apart and usually fix it. We have no idea what to do with an electronic ignition.

But modern technology clearly works, even if we don't know how. So we're tempted to think that modern economics works too. And maybe we shouldn't laugh when we hear that someone is studying "post-structuralist queer theory."

And maybe, just maybe, there really is a "magic money tree".

Something is making stocks go up. Despite a vicious fight in Washington for control of the government, an ongoing trade war with China, and increasing signs of an impending economic recession...still, the prices of America's capital enterprises rise.

How come?

Economist Richard Duncan explains. It's the "magic money tree":

"On September 17th, overnight interest rates in the Repo Market shot up to 10%, four times higher than they should have been. [...]

"The Fed responded by urgently injecting money into the financial markets through a series of Repurchase Agreements ["repos"] and by announcing it would resume buying Government Securities, initially at a pace of $60 billion per month. By November 6th, the Fed had created $280 billion. This new money restored calm in the Repo Market and pushed all the major US stock market indices to new record highs."

CNN elaborates:

"Whether it should be considered QE4 or not, in the eyes of the market it's just semantics," Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a recent note to clients. "Markets view any increase in the size of the Fed's balance sheet as QE [quantitative easing] and the $250B increase in just two months is no doubt helping to lift stock prices."

The Dow has climbed about 1,600 points, or 6%, since the Fed announced on October 11 it would start buying T-bills. The CNN Business Fear & Greed Index of market sentiment recently hit "extreme greed".

Could it be? Yes it could. Something's happening. Something, well, not so good. David Graeber, writing in The New York Review of Books, offers an insight:

"There are plenty of magic money trees in Britain, as there are in any developed economy. They are called 'banks'. Since modern money is simply credit, banks can and do create money literally out of nothing, simply by making loans. Almost all of the money circulating in Britain at the moment is bank-created in this way. Not only is the public largely unaware of this, but a recent survey by the British research group Positive Money discovered that an astounding 85% of members of Parliament had no idea where money really came from (most appeared to be under the impression that it was produced by the Royal Mint)."

Perhaps even more amazing is that David Graeber has no idea where money comes from either. After all, he is the author of Debt: The First 5,000 Years, which we reviewed in this space a few years ago.

And the delusion is widely shared. Everyone believes it...even the President of the USA.

Everyone thinks "money" is something the feds or the banks can "create". And that we'd all be better off if they created more of it.

But is it true? Is there really a magic money tree? Family: tree. Genus: money. Species: magic.

Stay tuned...

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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