Triple F

The new credit-based dollar created a credit-based economy, which grew by borrowing money that didn’t exist. Real money must represent goods, services, and real assets.

Monday, June 10, 2024 

Bill Bonner, writing today from Wales, in the UK  

The proposition on the table is provocative. And illuminating.  What if we Americans aren’t nearly as rich as we think we are? As outrageous as it seems, ‘fictitious wealth’ appears to explain why the richest country in the world still can’t pay its bills or win its wars. 

Simply put... the idea is that America’s fake money — introduced in 1971 — led to an economy with a lot of fake wealth. In short, much of US stock, bond, and real estate wealth... and much of the US economy itself (GDP)… was ‘f’-ed up --…fictitious, fraudulent, or fantasy.  

The new credit-based dollar created a credit-based economy... which grew by borrowing money that didn’t exist. Real money must represent goods, services, and real assets. But this new money represented nothing. It was just hollow credit, brought forth by the feds and the banks, and lent out at artificially low rates.  

It boosted GDP, stocks, bonds, and real estate... giving us the impression of great wealth... but the flip side of credit is debt... and the US now has almost $100 trillion of it. And as it increases, the interest expense rises too. Now, the US spends more on interest than on the Pentagon — an amount equal to half of the deficit for 2024. 

Much of the new credit-money was borrowed by the feds themselves. The part of the economy directly controlled (by spending), or be-muddled (by state, local or federal regulations), by government rose from barely 10% in 1930 to closer to 50% today. Government spending is included in GDP figures... 100% of it. But very little government spending or regulation produces the kind of real wealth you need to pay off past debt and contribute to current prosperity.  

Source: Ron Greiss, www.thechartstore.com

We’ve seen, too, that much of the wealth in the stock market is an illusion. Using very round numbers to avoid the pretense of precision, the market capitalization (the total value of all public companies) to GDP ratio for US stocks is historically around 80%.

Today, the measure is closer to 200% (see chart above). And if that traditional relationship between US output and the companies that produced it were restored, about $20 trillion in ‘fictitious’ stock market wealth would have to be stripped from the asset side of the nation’s ledger.  

That is just the stock market. If you’ll recall, the bond market topped out in July 2020. The downturn — in which the phony value in bonds is being erased — has been underway for almost four years. Charlie Bilello reports: 

The US bond market is in a very different place than the stock market. While the S&P 500 has been hitting 25 all-time highs this year, the Bloomberg Aggregate Bond Index remains 11% below its peak from the summer of 2020. At 46 months and counting, this is by far the longest bond bear market in history. 

Last week, Tom and Dan showed a chart, revealing the true value of America’s treasury debt. Adjusting current values to inflation (as measured by gold, not the CPI) we see that the real value of America’s debt has declined by about 75% since 1999 and by nearly 30% since bonds topped out in July 2020. 

Tom says this may be the most important chart in US market history; it shows us what the ‘full faith and credit’ of the US is really worth. US bonds are supposed to be the safest credits in the world.  

But — again — we see that the ‘face’ value... beef-caked up by trillions in credit money... is very different from the scrawny real value. 

But it’s not just Treasury bonds that pretend to have value they don’t actually have. All across the fixed-return world, there are unrecognized losses and make-believe wealth. 

We’ll take a look tomorrow...  

For now, Tom thinks the death spiral has begun. More and more borrowing drives up interest rates... making debt payments even harder to keep up with. What follows is a debt crisis, when much of what we thought was wealth is marked down, written off, or inflated away.  

We don’t know exactly when, what or how this will play out. But we’re willing to bet that many of our ‘here today’ assets will be ‘gone tomorrow.’ 

As for what happens to the nation’s political and social life, we leave you to use your imagination. Brookings says a third of the country lives ‘hand to mouth’ already. What happens when the mouth discovers that the hand is empty?  

More to come... 

Regards, 

Bill Bonner  

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Research Note, by Dan Denning

You can see the four years bear market in bonds in the chart below. AGG is the ishares Core Aggregate Bond Exchange Traded Fund. Since the last day of July 2020, it’s down almost 11%. Gold is up over 18% in that same time. Most of that return has come since March of this year. The S&P 500 is up 65%. Which asset class do you think will perform the best for the rest of 2024?