Gold News

What's Real vs. the Fed

Lacking an anchor, ever more money turns unreal...

"THIS area is going to grow for a long time," said a real estate agent yesterday, reports Bill Bonner from Rancho Santana, Nicaragua in his Diary of a Rogue Economist.

We've been looking at property for sale. We like it down here in Nicaragua. And we have a feeling the agent is right. This could be like Florida in the 1920s – bubbly, but still with a long period of growth ahead.

"We were selling those lots on the beach for just $50,000. That was ten years ago. Maybe a bit more. Now, they're selling for $500,000."

Up and down the beach, there are new restaurants. Property here may or may not be a good investment. It could go up...or not. But it's not likely to go away.

In the worst case, we can build a beach shack and enjoy it.

After all, it is "real".

This week, we have been looking at real money...and real prosperity.

We've seen that you only know if something is real money or not ex post facto.

We've seen, too, that today's Dollar is fundamentally different from the Dollar the world trusted as "real money" before 1971 (when President Nixon severed the Dollar's last ties to gold).

Few realize how it has changed; fewer still realize what it means.

But the change is fundamental: Today's Dollar anticipates wealth that may or may not come in the future, rather than wealth that was already earned in the past.

In a properly functioning stock market, prices are "discovered".

No one ever knows in advance exactly what stocks are worth. But they find out...every minute that markets are open.

Investors look at what corporations earn...and what they expect them to earn...and find a mutually agreed price by bidding against each other.

This process used to be based on what people thought the stock was really worth, that is, on how much the company would earn. The stock market tethered the stock to the financial world. And the discovered price tethered it to money. And gold anchored money to the real world of energy, resources, labor, time, skill, luck...and profits.

But then...the anchor began to float.

The new money, no longer connected to the real world by gold and silver, was set adrift.

So far in the 21st century, central banks have added some $20 trillion to the world's monetary base.

This would have been impossible before 1971. There was not enough new gold; miners have added only about $1.8 trillion worth of gold during the same 17-year period.

With some exceptions, central banks bought government bonds from large financial institutions (via "quantitative easing" or QE). This left these institutions with more cash.

But what to do with it?

Invest in competitive, risky, low-return businesses? Or buy more financial assets?

And here is where it gets interesting...

Markets don't discover stock and bond prices in the vacuum of space. They are found on Earth...taking into account how much real money (wealth) is available to buy them.

Interest rates – the cost of borrowing money – are discovered, too.

When money is "tight" (in short supply) interest rates rise...and financial asset prices fall. If you could earn 20% a year on your bank balance for example, why would you want a stock with a 2% dividend yield?

When money is "loose," on the other hand, interest rates fall...and asset prices rise.

Interest rates affect everything – asset prices as well as the economy itself. If interest rates can't be trusted, neither can any other price.

Since 1987...and even more so since the 2009 panic...the feds have diddled interest rates. Now, their ultra-low interest rates (often below zero!) have distorted almost every price in capitalism.

Prices floated on a once-in-a-lifetime ebb tide of fake money and phony interest rates.

Prices rose, not because the real economy justified them, but because the water underneath them buoyed them up. Meanwhile, the economy slowed...

Corporate profits can be finagled – which became more and more popular as the fake boom gathered force. But it is hard to flimflam sales revenues.

They've been growing at about 4% a year for this entire century. But adjust for inflation and they come down to about 2% – only about half the rate of the 1980s.

Here's another thing that's hard to fake: the number of hours worked.

In 1979, the average employee worked almost 39 hours a week. Today, he works 33 hours a week.

Or how about this?

According to Ronald Reagan's budget advisor David Stockman, there were 72,729,000 jobs in manufacturing, finance, insurance, real estate, transportation, information, or trade paying $45,000 or better during the cyclical peak in 2001.

Today, after 17 years of "growth", there are just 72,800,000.

Since the 2008 financial crisis, the only job categories to see significant increases are those in low-pay service jobs – bartenders, car parkers, hotel and restaurant workers, and nursing home staff.

And the number of people with jobs compared to the population has gone down.

There are about 250 million adults of working age in the US In 1987, 65% of them had jobs. Today, that's fallen to 61%.

That four-percentage-point swing represents 10 million people who have slipped out of the productive economy.

That also helps explain why household income, too, has flatlined.

When you account for inflation, the average US household had 1.1% more income at the turn of the millennium than it has today.

What kind of boom is it where stock and bond prices roughly double...but incomes, sales, and jobs go nowhere?

Oh, dear reader, ask us something harder! It's a financial, not an economic, boom.

How will it end?

Oh, c'mon! Another softball question...

The difference between the financial economy and the real economy is like the difference between bitcoin and a beachfront house. The price of bitcoin can be cut in half in seconds.

In a rising-interest-rate world, America's investors could discover that their stocks and bonds aren't worth half of what they paid for them. But you can still get a tan on your front deck.

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.

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