Too Much Money Too Soon

by Bill Bonner
by Bill Bonner

"Don’t give your children too much money, too soon," say the old timers. "You may not care about the money itself, but you’d hate to see it ruin their lives."

Easy money can be as corrosive as battery acid or television, or as treacherous as a creeping tide.

At the beginning of the 16th century, Spain discovered easy money in the New World. All it had to do was to plunder it from the Aztecs and Incans. The Spanish crown was soon the richest and most powerful in Europe; the Spanish army pranced all over Europe. Only a few years later its fleet was washed up on the rocks of Scotland, and Spain itself was bankrupt. The Iberian Peninsula remained the poorest part of Europe for the next four centuries.

"In 1961, housewife Viv Nicholson won today’s equivalent of 3 million pounds on the pools [$5 million in the lottery]," writes Jeff Randall in today’s Daily Telegraph. She then "delighted the tabloids by telling them that she was going to ‘spend, spend, spend.’ In a matter of months, the woman was ‘skint’ [busted].

The report does not mention it, but we wouldn’t be surprised to find that she was also divorced, her children were in jail, and that she voted for Tony Blair. Easy money ruins people...and ruins whole nations.

Mr. Randall quotes our book, Empire of Debt, and then elaborates:

"Our see-it, want-it, have-it culture is creating a sad class of debt junkies who are in so deep that the bailiffs will need to hire Captain Nemo to find them." Randall continues, "Instead of confronting their problems, these feckless borrowers simply close their eyes and sign the chit."

"Plastic fantastic," he says is creating a whole new group of people who live with far more debt than they can comfortably carry. In the old days, a man who saved money was a miser; nowadays he's a wonder.

Mr. Randall refers to the British. Americans may be in worse shape. In America, debt has become an art form.

Last year, a new record was set for personal bankruptcies in the U.S. – more than two million people went broke. Right there, you might do a double take. There was no recession in 2005. There was no stock market crash. Employment was near its highest level ever. Why were so many people going belly up?

The Economist notes that, "consumer spending and residential construction accounted for 90% of GDP growth in recent years." Yet, consumer incomes did not rise. Real wages actually sank in the last two years. People are simply spending more. And why not? Money was easier to come by than ever before. Every time we turn on our computer we find someone willing to lend us money; people we’ve never even met! We can walk into almost any shop anywhere in the world and buy practically anything we want. We just give the merchant a piece of plastic. He has no way of knowing whether or not we can afford it. For all he knows, we are millions of dollars in debt, have hocked grandma’s jewelry, pledged the ancestral home three times over to all our friends and neighbors, and moonlight at Payless as a shoe clerk. But he doesn’t care. That’s someone else’s problem. He’s going to make the sale!

Meanwhile, we notice that the Feds are trying to make money even easier to get. In the last two weeks, the money supply has shot up $93.5 billion. In the last six weeks, $192.96 [??] worth of new money has come into the system. At the current rate, the U.S. money supply will balloon by about 20% over the next 12 months.

If this were the ’70s or ’80s, you’d hear investors howl. Back then, they knew that all this new money would raise prices. They would have dropped U.S. bonds – and the dollar – as if they were fire. But now, no one cares about consumer price inflation. For reasons never fully understood – at least...not by us – the easy money inflates asset prices, not so much consumer prices. Mainly it is because America’s empire has globalized labor rates. Anything that Asians can make and export is going down in price. This keeps prices low at Wal-Mart, but it also holds down the incomes of the people who shop there. It also puts pressure on prices for the things that Asians can’t export – such as houses, energy and healthcare. So, the working stiff is trapped between rising costs and falling income. He has to run twice as hard just to stay in the same place and fly if he wants to get ahead. His real cost of living is rising while his income is not. He’s had to borrow the easy money to stay even, but easy money has a way of turning hard. It runs out. Eventually, he can’t keep up with the interest payments...he goes broke.

If you owe $12,000 on a credit card, dear reader, and you make minimum payments of 1% of principal each month, it will take you 30 years to pay off your debt. And you will have paid more than $17,000 in interest. No wonder they’re hurting down in the lower depths of our economy. No wonder they’re filing for Chapter 11. No wonder they’re getting cross.

The rich, on the other hand, have been as happy as pigs in mud. They are the ones who own financial and real assets. And those assets have floated higher on this high tide of easy money. Spend, spend, spend – they can’t believe it will ever end.

They, too, will be ruined by easy money. We sit on the edge of our chair...waiting to find out how.

• Gasoline may go back to $3 a gallon, says a Bloomberg feature. Oil is moving up.

And now Iran says it will introduce a new oil market, calibrated in euros rather than dollars. Some people think this marks the beginning of the end for the dollar. Others think it marks the beginning of the end of civilization; the United States will use nuclear weapons if necessary, they say, to prevent Iran from selling oil in euros.

The U.S. invaded Iraq not to turn the desert tribes into Democrats, the argument goes, but to stop Saddam Hussein from pricing oil in euros. Oil is quoted in dollars. Since the entire world is forced to buy oil, it must exchange local currencies for dollars to do so. This is the real source of America’s imperial finance: it exchanges dollars at par, and then gradually devalues them by diluting the world’s supply with more. "An exorbitant privilege," said Charles de Gaulle. Saddam Hussein was taken out by U.S. forces because he threatened the empire’s money.

We cannot understand it. It may be true that oil is priced in dollars, but the United States has no way of controlling the rate of exchange. The Feds can control the quantity of dollars or the quality, but not both at the same time. The more they create, the less each dollar is worth. Foreigners could simply demand more dollars per unit of their own currencies. The market can erase the exorbitant privilege anytime it wants...by re-pricing the dollar, lower.

..............

January 23, 2006

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21^st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.

Copyright © 2006 Bill Bonner

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