Follow her down to a bridge by a fountain
Where rocking horse people eat marshmallow pies
Everyone smiles as you drift past the flowers
That grow so incredibly high

– The Beatles, “Lucy in the Sky with Diamonds”

BALTIMORE – We’re drifting in fog. Have been for years.

And what’s this?

A vague silhouette… the outline of something… coming into focus.

Yes… it’s the strange Isle of Peculiarities and Impossibilities.

When it rains on this island, the water comes up from the ground. When the sun shines, you have to put on your galoshes. The plants growl… and the rocks weep.

We threatened to explore the Fed’s fabulous monetary policy today. So, let’s cast off… and row to the shore and see what we can find.

Oddball Creature

When the Fed announced its QE program almost eight years ago, we didn’t know quite what to make of it.

Animal? Vegetable? Mineral?

“Money printing,” we called it.

“No, it’s not money printing at all,” said a number of voices, including some on the Bonner & Partners research team. It was an entirely new species, they said…

They were right. It wasn’t “money.” And central banks weren’t “printing” it.

Instead, the Fed was simply replacing long-term debt (Treasurys and government-backed mortgage bonds) with short-term debt (“cash” reserve balances).

The idea was that the extra demand would push up bond prices and push down yields. (Bond yields and prices move in opposite directions.)

Because the banks couldn’t spend their reserve balances. And they didn’t need them to make loans. Plus, it’s up to central banks what rate of interest they pay banks on those reserves.

Then it got weirder.

Central banks began talking about… and later experimenting with… paying a negative rate of interest on those reserves.

What was this oddball creature?

Like the platypus or the pink fairy armadillo, we first thought it was a joke. It couldn’t exist. And yet, there it was.

Nobody knew what these strange beasts would do, either. Were they dangerous? Poisonous? Nobody had ever seen one before.

But in the bars of lower Manhattan and the pubs of the City of London, heated arguments broke out as economists and traders tried to figure out this new ecosystem.

But time has brought the whole thing into sharper focus. And now, we see… What is really happening on this fantasy island?

Apparently, we were right all along. It is money printing!

Warm Up the Choppers

Even establishment economists are starting to come around.

Here’s the managing director of Capital Economics, Roger Bootle, writing in the London Telegraph:

Under QE, the central bank buys financial assets in the markets (usually government bonds) with money it issues itself, thereby increasing both sides of its balance sheet [asset and liability].

In practice, hardly any extra notes are printed. Rather, the extra money is created electronically. But since deposits at the central bank are interchangeable with notes, to describe this as “printing money” is acceptable shorthand.

The research department of French investment bank Natixis goes further with its analysis:

Some people call for putting into action a plan of “helicopter money”: the distribution of money [by the government… with no offsetting taxation or borrowing].

But in reality, quantitative easing already is helicopter money.

When a government gives out money – say, to the poor – explain Natixis analysts… and funds that spending with central bank purchases of government bonds… it is no different from just “printing money.”

The feds have gotten a credit, with no real debit. They have money to spend, but they don’t need to pay their debt.

In fact, the way it works now is that the Fed returns the interest on the government’s bonds – as feeble as it is – to the Department of the Treasury.

Free Money!

It would be a bit like borrowing money to buy a car.

Then, the lender sends your interest payments back to you… and keeps rolling over the debt, presumably forever.

You would have a free car!

Which is exactly how economist Richard Duncan at Macro Watch describes it.

Not only is the new money the feds get free… the central bank can also make past borrowing disappear.

Duncan says that when a central bank buys a U.S. government bond, it effectively cancels the debt.

Interest payments are returned to the debtor… and the principal is never collected. QE is “debt cancellation,” says Duncan.

Let’s get this straight: You borrow… you spend… then your debt is cancelled.

It’s almost too good to be true, isn’t it?

As a precaution, we’re getting back in our boat. This island gives us the creeps.



Bill Bonner

Further Reading: The feds’ oddball QE scheme is just the final act of a crackpot credit scheme that began 45 years ago. And now, it’s coming to a head…

In his online presentation, Bill pulls back the curtain and shows you just how broken the entire system has become… and how it is now on the verge of collapse. He also gives his personal advice for how to avoid the worst of it. Watch it here now.

Market Insight


One thing underpinning stock prices is the extra yield they pay over bonds.

As you can see from today’s chart, the supposedly “risk free” 10-year Treasury note yields 1.9%.

The dividend yield on the S&P 500 is 2.2%.

Featured Reads

12 Keys to Picking Great Stocks
As Bonner & Partners analyst Chris Mayer says, investors don’t buy stocks, they buy companies. Here are 12 great insights to make you a better stock picker.

Top Economist: Get Ready for a Return to Volatility
Mohamed El-Erian, the chief economic advisor at Allianz, says negative rates hurt savers and push people out of the financial system. And that this will lead to increased market volatility.

Bigger Than a Bear Market
There’s a malaise in the market, but it’s more than just a general grumpy mood. It is something bigger… deeper… something unstoppable.


Wow! Yesterday’s Diary – titled “Who’s Anti-American?” – really hit a nerve…

The entire establishment is Anti American, outdated and rotten to the core!

– Karl K.

This is why I fly my American flag upside down. Not out of disrespect but to symbolize that our country is in distress, as per military custom.

I’ve nearly been in a few fist fights over this display of concern for our country. Keep being the watchman on the wall and keep your powder dry!

– Bruce W.

Bill, you’ve hit another homerun. Bravo. I’ve read no one in my nearly 70 years who is more consistent and on-point, or humorous, regarding important realities than yourself.

I was born and grew up a northerner. But later, as a liberty lover, came to see the wrong side prevailed in the American “Civil” War. My wake-up view is, of course, the exact opposite of what I was taught.

As a real freedom guy, I’m no supporter of slavery. On the contrary, far from it. But I’m a deep devotee to true liberty and self-determination. It amazes and sickens me to hear those in power in the U.S. shouting into the wind that people should be free to choose their own life pursuits and their government. Pontificating about the protections of the Constitution, while at the same time invading and overthrowing sovereign national leaders… and praising Lincoln and his “liberation” dictates enforced at the end of a gun against his fellow brothers and sisters who were seeking those same freedoms right here on this same soil.

Forgive me if I don’t join in the chorus right now of: “Yeah, USA.”

– Terry P.

Excellent. The best thing I read every day is Bill’s Diary. Thank you.

– Shirley A.

Keep up your good work. It helps some people understand better what is happening…

– David Z.

I do not see the slightest evidence that Bill is anti-American. As members of the Deep State and other national players reveal their agendas, my internal reality calibrator tends to move. Some spectra have seen huge shifts, while others not so much.

One huge shift in my view of history is the American/anti-American nature of the participants in the Civil War. It was a given as a young Minnesotan, fed the acceptable view of history, that the north was “right” and the south was “wrong.” But the more I learn about the circumstances at the time and compare them to the current state of the nation, the less real that assessment seems.

A Federal government forcing states to come under heel seems much more repugnant to me now, at a time when I can envision revolution if the nation continues down this ruinous path.

I’m sorry to say that I have no answer to this: not Trump or Hillary. I only have the optimism of an American that hopes to have the will to do what I think is necessary when I think it is time to do so.

– Brian B

The mailbag indicates that your audience is full of world improvers. God help us. I have to believe that the silent majority of your readership appreciates your humorous and inquisitive nature as we explore, not solve, serious issues.

I would probably stop reading if you started presenting solutions. Probably. Maybe if your solutions were humorous enough…

– Chris J.

In Case You Missed It…

Earlier this week, Bill’s friend and business partner Mark Ford hosted a private online discussion to explain the strategy he used to amass a multimillion-dollar fortune.

For a limited time, Mark and his team are making the replay of this exclusive event available to Diary readers.

To hear Mark’s battle plan for building a stream of extra cash flow, tune in now.