The Fed's post-gold bubble is a problem with no solution...
WE ARE having a cup of coffee at the Café de Paris near the center of town, writes Bill Bonner in his Diary of a Rogue Economist.
Chic women and gloomy men walk by, as they always do. Here and there, groups of tourists turn the corner toward the Palais Garnier opera house.
But Paris is another city with a problem. It relies on summer tourism for much of its money. And the tourists aren't coming like they used to.
Gendarmes with machine guns patrol the streets. After the attacks in Paris...and then Nice...the police have their eyes open.
But what are they looking for?
In Paris...armed men simultaneously invaded restaurants, nightclubs, even a sports stadium...and began firing.
In Nice, a single man with a refrigerated truck mowed down 84 people.
And in Munich, last weekend, it was a lone shooter in a mall who did the killing. Then a man blew himself up in Ansbach outside a music festival.
Europe is on edge. Where will the next attacker come from? What will be his target? Can this problem be solved?
We don't know. But it doesn't seem likely that it will be solved by getting tough on crime.
Whaddya gonna do? Pick up the pieces of the dead perp and throw the book at him?
Some problems don't have easy solutions. Some have no solution at all.
And here we beg for a few minutes of your careful attention...
This isn't easy to understand. It took us 30 years to get a handle on it. And most of the economists you read, including Nobel Prize winners, have no idea what is really going on.
We're talking about money. And the problem caused by the Fed's phony-baloney credit-money. It has led to a worldwide debt bubble – $300 trillion worth.
And like all bubbles, it's going to blow up. When it does, we predict, there will be Hell to pay.
The first thing to understand is what money is. It's not wealth. You could have a pile of Dollars...Euro...or gold...and if there were nothing to buy, it would be worthless.
Money is not wealth. It just measures wealth...like a clock measures time.
We know that a clock is not time. And you can't add time simply by painting an extra hour onto the face of your clock.
Wealth is what has been produced...what has been made available...what you can buy with money.
Confusing money with wealth is like confusing a ticket for the ballgame for the game itself.
So you see right away how "stimulating" the economy by giving it more fake money is a fraud. It doesn't stimulate the economy; instead, like a clock that has gotten out of kilter, it just causes you to miss your plane.
You hear economists say that a "strong Dollar" is good...or a "weak Yen" is bad. It is nonsense. The only thing that matters is that money be honest. Like a clock, you just want it to tell you the right time.
And since what you really care about is not money but what you can buy with it, real money cannot be separated from the real economy, where goods and services are produced.
This insight is at the heart of Say's Law: You buy products with products...not with pieces of paper.
Look what happened in Zimbabwe in the late 1990s, when the government separated its money from the real economy.
It printed trillions of Dollars of paper money. But this paper "wealth" just misled everyone.
People went to the local café with a billion Zimbabwe Dollars in their pockets – and discovered that they couldn't even buy a pack of cigarettes.
Investors put money into new businesses, hoping to make a 5% return. But when the numbers came back, hyperinflation had made them meaningless.
Business slowed down...output fell...within months, the supermarket shelves were barren.
Real money stays close to the real economy. If the economy produces more...more real money becomes valuable. Because it can buy more.
If the economy produces less, real money tells the truth: It becomes less valuable as output falls.
But in 1971, President Nixon – advised by leading "monetarist" economist Milton Friedman – made a fateful error. He cut the Dollar loose from the real economy.
An honest mistake?
Maybe. Friedman had come to the conclusion that the secret to good currency was to control the quantity of it.
How do you know if you have too much or too little?
You just look at consumer prices. If consumer prices aren't rising, you have nothing to worry about.
But it's not that simple. Stay tuned...