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October 22, 2021 | An Elite Economy: Like Traffic Lights on the Fritz

Is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and author of the daily financial column, Diary of a Rogue Economist.

BALTIMORE, MARYLAND – God? Or man? Who should take the rap?

God will defend Himself – tomorrow. Today, we continue with our case against man.

It’s classic, isn’t it? A group is successful. It expands its wealth and power. The wealth softens it… the power corrupts it.

And then, its elites begin running the whole system just to keep the jig up, so as to preserve their wealth and power.

The elites control the “traffic signals.” Their role is not to tell others where to go, but simply to make it easy for them to get there.

Remember what it takes to create a prosperous, fair economy? Honest money (that no one can fiddle)… honest judges (protecting freedom and property rights)… and honest prices (set by buyers and sellers, not by the government).

That is, the signals have to be neutral and true. Like traffic lights on the highway, they should not favor any special group… or any special cause… but rather, help everyone get home, safely.

Simple Maths

Instead, America’s elites have falsified the signals to benefit themselves. As we reported yesterday, the top 10% of the population now owns almost all U.S. businesses – 89% of the stock market.

So when stock prices rise… almost $9 out of every extra $10 goes into their pockets.

Let’s do some simplified math…

If you buy a U.S. Treasury bond with a 10% yield, it’s roughly the same as buying a whole company with a price-to-earnings (P/E) ratio of 10. Either way, you’d expect to earn back your investment in 10 years.

But if the feds push the bond yield down to 1%… it will take you 10 times as long to earn back your money, 100 years.

Who wants to wait 100 years? And who knows what the dollar will be worth a century from now?

That’s why the smart money borrows at low interest rates… and rushes over to more promising assets – stocks, cryptos, and even NFTs.

That’s why the P/E ratio on the S&P 500 is about twice its long term average. And that’s how the elite got so much richer than everyone else.

False Signals

So, how do you force up stock prices? You falsify the signals.

The simplest way is to push down bond yields… which is what the Federal Reserve has been doing, vigorously, for the last 12 years.

Everybody knows that rigging the bond market is an idiotic thing to do. Price fixing is always a disaster, whether it is done by Emperor Diocletian in the third century, in his Edict on Maximum Prices… or by Richard Nixon in his “wage and price controls” of 1971.

Typically, you need an “emergency” to cover your tracks.

In 2008, the big emergency was the collapse of the mortgage finance bubble.

10-year T-bonds were trading with a yield around 4%. The Fed knocked that to the floor; the 10-year yield hasn’t topped 4% since then – even as inflation went to 5% this year.

Even with the emergency over, the stock market roaring back, and the “greatest economy ever,” according to Donald Trump… the Fed has continued to hold the yield down (it’s currently 1.65%).

Assets Gone Wild

But now, the deciders are acting out of greed and self-interest, not the public interest.

Absurdly low bond yields – like traffic lights on the fritz – sent asset prices into nutty territory. The Dow is up 450% since its 2009 low.

And as we showed you yesterday, House Speaker Nancy Pelosi gained $74 million. Senate Majority Leader Mitch O’Connell gained $31 million.

Overall, the stock market added some $40 trillion in value from its 2009 low to today (based on the Wilshire 5000, which tracks all American stocks actively traded in the U.S.)… while the economy barely limped along.

And since 9 out of 10 of these new dollars went to the elite top 10%, it gained a total of about $36 trillion from this stock market manipulation alone.

Meanwhile, cryptos went wild… NFTs went crazy… meme stocks went bananas

…and serious speculators went broke, waiting for a correction.


But the phony traffic signal didn’t just make rich people richer. It also snarled traffic in all directions, caused gridlock in key sectors… and major pile-ups in others.

The U.S. government owed $10 trillion in September 2008. Now, only 13 years later, the debt is $28 trillion.

U.S. corporate debt, too, has surged way beyond its traditional levels… to $11 trillion. That’s nearly double what it was in 2008.

Businesses borrowed, not for new investments that would produce more goods and services, but to buy back their own stocks. And to pay their managers big bonuses. And even to speculate – like MicroStrategy – on bitcoin.

And as businesses shifted from the hard work of producing valuable goods and services to making money by gambling with cheap debt, real output declined.

After 2008, manufacturing went into a slump and never recovered. Even in nominal terms, manufacturing output is lower today than it was 13 years ago.

No Return

And now… it’s “inflate or die.”

The feds inflate by buying bonds. Buying bonds keeps interest rates low. With $85 trillion in total debt, every 1% increase in real interest rates costs the nation $850 billion in extra debt service. A 5% increase (back to more normal rates) would cost $4.2 trillion.

If the feds stop printing money and allow Treasury yields and interest rates to return to normal, in a matter of seconds, the whole flimflam blows up.

And yet, “inflating” is eventually fatal, too.

And as the debt grows larger, it takes more and more debt to have any effect.

When total debt was around $25 trillion, as it was in 2000, another $1 trillion of money-printing could give the economy a big boost. Now, at $85 trillion of total debt, $1 trillion more is hardly noticed.

That’s why the Biden Administration proposed $3.5 trillion in additional spending. It needs big numbers – and big deficits – to keep the party going.

Congress balked. But come the next “emergency,” hold onto your hat.




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October 22nd, 2021

Posted In: Bill Bonner's Diary

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