GUALFIN, ARGENTINA – The Dow rose 174 points yesterday.

And Treasury Secretary Steve Mnuchin said we’d have a new tax system by the end of the year.

Animal spirits were restless. But which animals?

Dumb oxes? Or wily foxes?

Probably both.

But what caught our attention were the central bankers strutting across the yard and crowing with such numbskull cackles that even barnyard animals would be embarrassed by them.

Honest Profession

There was a time when central banking was an honest profession.

Central bankers provided financing for the government. They backed the banking system, too, by holding savings as reserves, which they lent to solvent member banks in emergencies.

They were tight-lipped, tight-laced, and tightwads. Their role was to say “no” more often than “yes.”

When the king wanted money to fight in a war… or build a bridge… the banker would give the terse reply: “Sire, we don’t have any.”

Real money was backed by gold. And credit had to be backed by real money, which meant it had to be saved. Savings were limited, as was money.

Savings backed 100% of U.S. credit needs until about 1973… two years after President Nixon first announced that the dollar would no longer be backed by gold.

Then, almost unnoticed, a new financial system took over… with new central bankers in control of it.

Forty-five years later, America saves scarcely 20% as much as it issues in new credit.

The other 80% is “funny money” – credit created out of nowhere by the Fed, by banks, and by foreign central banks (mostly recycling trade surpluses).

Doomsday Bug

Haruhiko Kuroda, governor of the Bank of Japan, says he’s going to put out a lot more of this funny money. Bloomberg:

The Bank of Japan will continue with very accommodative monetary policy and maintain the current pace of asset purchases for some time, Governor Haruhiko Kuroda said in an interview.

While Japan’s economy is doing better than thought a few months ago, the inflation rate is still quite sluggish, Kuroda said in New York on Thursday. 

“The target is 2%,” said Kuroda of the rate at which the BOJ hopes to destroy its own currency. “We’re still around 0%. So it’s a long way to go,” he said.

The Bank of Japan already owns 40% of outstanding Japanese government debt. It apparently sees no barrier to buying all of it ­– financing Japan’s deficits with make-believe money.

This is not going to happen. Readers will be quick to remember why. Our little secret: Unlike the real-money system that prevailed until 1971, this system – with its heavy reliance on credit – is, surprise, surprise, extremely vulnerable to the credit cycle.

This is the “doomsday bug” buried in the world’s money system.

When the credit cycle turns – when people begin to notice that the whole system is FUBAR and become reluctant to lend – the world’s money disappears…

…and the whole thing blows to smithereens.

Cockamamie Project

But back to honest central bankers…

Another key responsibility of the pre-1971 central banker was to protect the national currency.

Money was limited. Everyone knew it. You couldn’t afford to waste it. Or lose it. Or depreciate it.

And if a banker failed, he was disgraced, fired… and ruined. In ancient England, a banker who lost the kingdom’s money was castrated.

Times have changed, as they say. Now, central bankers are more secure in their private parts and public illusions. They are no longer expected to act within an economy, but upon it.

They are no longer expected to be the lender of last resort, but the lender of first, second, and every other resort.

Nor are they expected to confine their credit – the precious savings of the realm – to solvent institutions that will pay it back.

Instead, they are encouraged to spread their fake money far and wide, scattering it like manna upon every half-wit and spendthrift in the empire.

Do the feds have some cockamamie spending project? Does a corporation want to borrow to buy back its shares? Do the baby boomers want more medical benefits?

Hey, no problem… says the Fed. There is plenty of this fake money for everyone.

No need to dip into the nation’s savings to fund the fool projects. Now the central bank can conjure up credit money – out of nowhere!

Gabbing Lunatics

Cometh the new money, cometh the new central bankers.

Gone are the tight lips and carefully chosen words. Now they will say anything, gabbing away like inmates in a special asylum for lunatic economists.

Japan’s central banker thinks he can replace real savings with phony credits, indefinitely.

Today, the world’s major economies, twisted and befuddled by central bankers’ policies, depend on debt. In the U.S., $2.5 trillion in new credit is required every year – just to stay in about the same place.

Less than that causes a recession… which sets off a credit contraction, the last thing the feds can tolerate.

But total savings in the U.S. amount to only about $500 billion.

Uh… you can do the math later.

Meanwhile, Bloomberg reports that the U.S. Fed is less likely to “blink” than in the last tightening cycle:

U.S. central bankers appear to be on course to raise interest rates twice more this year and remain confident in their forecast for growth of around 2 percent despite a series of weak first-quarter reports…

“I still think the median of three rate increases for this year – we’ve already done one – is still a good baseline,” Dallas Fed President Robert Kaplan, who votes on policy this year, told Bloomberg Television’s Michael McKee in an interview Thursday.

“If the economy develops a little more slowly then we can do less than that, if the economy is a little stronger we can do more.” 

Blink?

The Fed will put out both eyes with a ballpoint pen before it will allow a return to honest finance.

It’s not going to happen.

Regards,

Signature

Bill

Editor’s Note: Last night, our friends at the Palm Beach Research Group held one of their biggest events ever.

Nearly 10,000 people joined our colleagues Teeka Tiwari, Doug Casey, and Bob Irish to learn all about cryptocurrencies – one of the most exciting new markets available today.

Unfortunately, our friends also experienced severe technical difficulties.

Once they opened the doors for folks to subscribe to Teeka’s research service and claim their $200 of bitcoin, their system went haywire. It couldn’t handle the surge in traffic.

Because of this, the team at Palm Beach Research Group have agreed to extend their bitcoin giveaway and special until 3 p.m. ET today. You can get all the details here.

Global Insight


By Doug Casey, Founder, Casey Research


Just as the breakup of the Soviet Union had a good effect for both the world at large and for Americans, the breakup of the EU should be viewed in the same light. Freeing an economy anywhere increases prosperity and opportunity everywhere.

And it sets a good example. So Americans ought to look forward to the breakup of the EU almost as much as the Europeans themselves. Unfortunately, most Americans are quite insular. And Europeans are so used to socialism that they have even less of a grasp of economics than Americans. But it’s going to happen anyway.

Initially there’s going to be some chaos, and some inconvenience. Conventional investors don’t like wild markets, but turbulence is actually a good thing from the point of view of a speculator. It’s a question of your psychological attitude. Understanding psychology is as important as economics. They’re the two things that make the markets what they are. Volatility is actually your friend in the investment world.

People are naturally afraid of upsets. They’re afraid of any kind of crisis. This is natural. But it’s only during a crisis that you can get a real bargain. You have to look at the bright side and take a different attitude than most people have.

Once the EU falls apart, there are going to be huge investment opportunities. People forget how cheap markets can become. I remember in the mid-1980s, there were three markets in the world in particular I was very interested in: Hong Kong, Belgium, and Spain.

All three of those markets had similar characteristics. You could buy stocks in those markets for about half of book value, about three or four times earnings, and average dividend yields of their indices were 12–15%—individual stocks were sometimes much more. And of course since then, those dividends have gone way up. The stock prices have soared.

So I expect that that’s going to happen in the future. In one, several, many, or most of the world’s approximately 40 investable markets. Right now, however, we’re involved in a worldwide bubble in equities. It can go the opposite direction. People forget how cheap stocks can get.

I think we’re headed into very bad times. Chances are excellent you’re going to see tremendous bargains. People are chasing after stocks right now with 1% dividend yields and 30 times earnings, and they want to buy them. At some point in the future these stocks are going to be selling for three times earnings and they’re going to be yielding 5%, maybe 10% in dividends. But at that point most people will be afraid to buy them. In fact, they won’t even want to know they exist at that point.

I’m not a believer in market timing. But, that said, I think it makes sense to hold fire when the market is anomalously high.

The chaos that’s building up right now in Europe can be a good thing—if you’re well positioned. You don’t want to go down with the sinking Titanic. You want to survive so you can get on the next boat taking you to a tropical paradise. But right now you’re entering the stormy North Atlantic.

– Doug Casey

Editor’s Note: There’s more turmoil ahead as the French vote for a new president on April 23. The fallout from the election could be the final nail in the coffin for the EU.

Most investors can’t handle that sort of chaos. But Doug Casey and his team know how to turn it into huge profits. They’re sharing need-to-know information about the coming global economic meltdown in a time-sensitive video. You can watch it right here.


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Mailbag

Yesterday’s Diary, about central banks’ $13 trillion problem, has gotten readers thinking…

I agree that central banks are not going to be able to sell the debt. So one solution is to write it off. Treasury has effectively defaulted on this debt anyway by Fed forgiving the interest payments on it, so it’s no big deal to write it off. One stroke of the electronic pen and the debt problem goes away.

Then all they have to do is remove the budget deficit so no new debt is raised at the higher interest rate that the treasury would face post the write down. Admittedly I don’t like this solution as there is never a free lunch, but they could do it.

– A. Campbell

“The hangover will be just as much fun as getting drunk. The divorce will be just as exhilarating as the affair that caused it. Getting hanged for murder will be just as satisfying as shooting the bastard.”

I loved these lines, especially the last one.

– B. Bronson