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November 7, 2016

Shackled to a Maniac: the Fed Can’t Withdraw Its Fake Money

By Bill Bonner, Bonner & Partners
RHINEBECK, New York – Here’s the latest from the Fed.
It just completed a two-day policy meeting and wrote in a press release:
The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.
What a shocker!
It’s been eight years since the Fed introduced its “emergency” zero interest rates.
And it’s been at least a year since we made our prediction: It will never return to a normal interest rate policy – at least not voluntarily.
Why? ’Cause we’re all crazy now!
According to the Fed, the emergency passed long ago. Still, it is biding its time… carefully managing the “recovery” and protecting the little green shoots of growth from the big, stomping boots of the real economy.

Hillary Country

We are up in Hillary country – about two hours north of New York City – four days before the election.
“Trump ought not to be able to claim that the election is rigged,” says a right-thinking, civic-minded Democrat. “It undermines the whole process.”
For all the candidates’ faults, this election has been nothing if not entertaining. “What will they do next?”… we all wanted to know.
It’s not over, of course. But most people seem to wish it were. “Voters are so done with this election,” reads a Bloomberg headline.
They want it to be over. And it may as well be. Because, whoever wins, the American people lose.
Why?
Trump is right: The election is rigged. Not necessarily the voting process itself, but the economy, the media, the government, the courts – practically everything is rigged in favor of the Establishment status quo. They’ve all been suborned to protect it and paid to act like half-wits… with about $35 trillion in make-believe bribe money.
That’s why the Fed cannot tighten. It helped rig the system. Now, like a magician who has handcuffed himself to a desperate lunatic, it goes where he wants to go.  
But so do we all.  We cannot turn to the left. We cannot turn to the right. We cannot go back. We can only go farther… until we have gone too far.
Significantly higher interest rates would be a disaster – at least in the short run.
And except for a few outliers, such as Libertarian Party candidate Gary Johnson… no president… no politician… no CEO… almost no one… can refuse to go along. Their businesses, their careers, their fortunes, and their reputations have all been built on dishonest money.
And no one wants to see it go away.

No Limits

We’ve seen how the feds’ fake money distorted everything, even family life.
Not so. It has been shaped by the feds’ own funny money. First, it gave them delusions of wealth and power. And then it made them crazy.
With the pleasure of repeating ourselves: When you have a money system backed by gold – as was the Bretton Woods system that practically existed up until 1968 – there’s a limit on how much credit you can put into the system.
Most people date the demise of the gold-backed dollar to 1971, when President Nixon defaulted on America’s promise to convert foreign-held dollars to gold at a fixed rate of $35 an ounce. But it was President Johnson who removed the requirement for the Fed to back its notes with gold with the passage of the Gold Reserve Requirement Elimination Act of 1968… thus freeing up the Fed to issue paper currency at will.
Before that, each dollar had to be “backed” by gold. And gold was limited.
Gold tied the dollar to the real economy of stuff… services… resources… labor… and profits and losses.

Credit Runs Wild

Under the gold-backed money system, the ratio of credit to GDP was fairly constant.
Until the 1970s, it was about 1.5 to 1.
More than anything else, this signaled the abiding connection between the dollar, credit, and real economic output. You couldn’t lend what you didn’t have.  And you couldn’t have it if you didn’t earn it (GDP). But take away the gold, as the feds did in 1968 and 1971, and you take away the limit. Credit could run wild.
Now, the ratio of credit to GDP is about 3.2 to 1. For every dollar of real GDP output, in other words, there are more than three dollars of debt.
That represents about $35 trillion of unfinished transactions – borrowing and buying (but not repaying) – over the last 40 years that shouldn’t have happened.
You see traces of it now in the houses, shopping malls, corporate debt, golf courses, wars, prisons, bonuses, credit card bills, mortgages, apartments, and cruise lines – $35 trillion worth of  things that wouldn’t exist had it not been for the Fed’s fake money.
And now, the Fed can’t withdraw its fake money… or its cheap credit. The economy depends on it. And so does almost everyone in the economy.
And now, no matter who is elected president, the feds will respond to the next crisis with more of it.
Courtesy of Bill Bonner, Bonner & Partners
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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