BY BILL BONNER
CHAIRMAN, BONNER & PARTNERS
On Friday, when we left you, we were carrying out exploratory surgery on the Frankenstein-like modern money system. Here is where the going gets tough. So many ugly organs, so much revolting internal plumbing, but let us cut to the heart, pull it out, and have a closer look.
At the heart of any economy is money. Money is the measuring stick. It tells us what things are worth, how much we can afford to invest, what is worth doing and what is not.
Money – especially the rate of interest it earns – tells us when to expand and when to contract. It tells us when to work harder and when to ease off. It tells us which direction to go.
Money is not just something you use when you need to buy a pack of cigarettes. Money provides the key information that a free economy needs. Without honest money, we all might as well be a member of Congress or a Fed governor – hopelessly lost and misinformed.
Well, in fact, we are. In 1971, Nixon ended the direct convertibility of the U.S. dollar to gold. The post-1971 dollar looked for all the world like the pre-1971 dollar. But it was an imposter. A fraud. It no longer represented real wealth or real savings.
Instead, it was a counterfeit dollar… based not on wealth that had been created and stored… but on credit, which depended on future production for its value. This was the government’s money… or more precisely, the money of the “Parasitocracy.” (For more on how America became a Parasitocracy, read Thursday’s Diary here.)
Crime of the Century
It was a little like the difference between a house that you own and one that you have mortgaged 100% of its value. They look the same. They provide the same service – you can live in either one... You have to paint the shutters of the one just as you do the other.
But when push comes to shove, they are very different. And push comes to shove in a credit crisis. Then you can live happily in the one you own. It is your asset. The other, as you will quickly discover, is a liability. We have charged the Parasitocracy with using the new dollar to rob the rest of us of our real money and our real independence.
How much money has been stolen? It is hard to say… maybe $50 trillion since the system was set up. If we look at the center of the Parasitocracy, Washington, D.C., we see that their houses are worth more than twice the houses of the rest of us – with an average over $500,000.
Their salaries are higher, too – with household incomes twice the national average. And on Wall Street – another important node of the Parasitocracy – the gap is even wider.
The Scandal of Money
Over the weekend, we listened to a talk by author and economist George Gilder at Freedom Fest in Las Vegas. He is a genius. We regretted having made fun of him back in 1999. Back then he had been carried aloft by excessive enthusiasm for the dot-com revolution. His head in the cosmosphere, he seemed a bit moonstruck. But now his feet are back on the ground. And he has done us a great service, helping us to connect even more dots.
“Money is not wealth,” he said. “It just measures wealth.”
Or as Steve Forbes (we met him there, too!) put it, money is supposed to be like a clock, reliably counting out the hours and minutes and seconds of the day. But the Fed pretends that money is real wealth. By trying to inject more money into the economy (by making it easier and cheaper to borrow)… it is as though it was slowing the clock to make the day seem longer!
“After 1970,” writes Gilder in his new book, The Scandal of Money, “the financial industry nearly tripled its share of the U.S. economy, and private credit nearly tripled its share of advanced-country GDP.”
The feds’ new faux dollar distorted the entire system. The inflation of credit drove up asset prices… and greatly rewarded the people who traded in them. It also rewarded the people who owned them – the rich. The top 10% of wage earners took 33% of national income in 1971. By 2010, they were taking nearly 50 cents on every dollar.
Meanwhile, the median wage for an American man of working age has dropped 27%. For the man without any college education, the loss is catastrophic: He has lost nearly half his real income.
“A failure of capitalism,” say the Nobel-winning economists, the policy wonks, the best-selling authors, and former Treasury secretaries.
But this post-1971 system wasn’t capitalism. It was central planning and cronyism. And its measuring stick – the dollar – was no longer real money. It was phony.