Tilling the Soil in the Garden of Catastrophe

YOUGHAL, IRELAND – There comes good news this week: The inflation rate in Venezuela is going down.

From Zerohedge:

Annual inflation in the country has dropped below one million percent in May for the first time since 2018, Reuters reports. And how did the country magically start to rope in inflation? The central bank restricted the domestic money supply – imagine that.

Consumer prices for the 12 months ending May were up “only” 815,194%, according to the opposition-run congress. This compared to 1.3 million percent in April. Prices were up 906% in the first five months of the year, according to the data.

Legislator Angel Alvarado said: “They are slowing inflation through greater economic contraction.”

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This comes on the heels of not-so-good news, from which we learned that the opposition leader, Juan Guaido – bizarrely recognized by the U.S. as the legitimate head of state – bathes from a bucket. Running water is unreliable, even in the best neighborhoods of the capital city, Caracas.

(Former Venezuelan president Hugo Chávez once blamed water shortages on people “singing in the shower.”)

Electricity is in short supply, too; in what might be the most energy-rich country on Earth, rolling blackouts leave millions of Venezuelans in the dark.

And despite having some of the largest oil reserves on the planet, Venezuelans are waiting in line at gas stations for days to fill up their cars.

Millions of others have simply left the country, carrying whatever they could on their backs as they waded across rivers into Colombia or Brazil.

Garden of Catastrophe

How did Venezuela get to be such a mess?

Long-term suffers of our Diary know that we are connoisseurs of disaster.

The great vintages – a Weimar 1921, for example… or a Zimbabwe 2008… or, of course, a nice Venezuelan blend from 2018 – are always a pleasure to sip and slosh around on the tongue… as you wonder: How can smart people foul an economy so badly that people go hungry… water stops running… riots break out in the streets… and governments collapse?

And the answer is always the same: slowly… and then, all of a sudden.

The “all of a sudden” part is well reported… the object of amusement, ridicule, and finger-wagging.

But it is the “slowly” phase that is most interesting… and important. For that is where the spadework is done… the soil is tilled… and the seeds are planted and watered. It looks to most people like honest labor, trying to coax fruit out of a grudging ground.

Few notice that it is not an Eden that is being prepared… but a garden of catastrophe. That only becomes apparent later, in the “suddenly” phase, when the evil vines grow up and choke every living thing for miles around.

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Ingredients for Catastrophe

And yet, the process is very simple and could be spotted years in advance.

First, the government must control the currency. If it uses gold, or a gold-backed currency, the vile crop will be stunted. With price controls and central planning alone, the feds can cause a 10-year Great Depression or a 70-year Soviet-style economic failure.

But if you want a full-blown financial catastrophe, you need fake money, too.

Second, you need leaders who are both ignorant and/or ego-maniacal. These are the jefes with plans!

As we noted yesterday, these centralized plans undermine the decentralized plans that create real wealth. Pretty soon, you have declining real GDP.

Weimar Germany is a special case. It wasted its resources in World War I (a good example of central planning). And then, the victors – the U.S., France, and England – required it to pay reparations, in gold, which effectively wiped out the country’s money supply. It was only then that it resorted to fake money… and set off its infamous hyperinflation.

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Classic Script

But Zimbabwe and Venezuela followed the more classic script. Each had its own fake currency. And each had a dynamic, Big Man leader – Robert Mugabe and Hugo Chávez, respectively. Both put their crony friends in charge of key industries and imposed goofy plans on the economy.

The centralized plans misallocated resources and interfered with private, decentralized plans, thus reducing output, while government expenses rose. The more damage they did to the real economy, the more stimulus they needed to add to the fake one.

The big banks, International Monetary Fund (IMF), and the World Bank usually help nations move along faster on the road to ruin by lending them money, guaranteed directly or indirectly by taxpayers in more prudent countries.

But after a while, credit ratings go down, interest rates rise, and no one wants to borrow or lend. The only option left is printing money, the third and sine qua non requirement of a modern financial catastrophe.

Gideon Gono led the Central Bank of Zimbabwe during the whole period… from when the seeds were slowly planted and watered to when the first shoots of vines appeared… to when, suddenly, these vines strangled almost every business, consumer, and investor in the country.

Between 2006 and 2008, for example, Gono increased the nation’s money supply 20 million times. Asked why he had done such a thing, he replied only that he hadn’t done anything the major central banks around the world weren’t doing.

He was right… about which more anon.

An old friend visited Gono in Harare a few years later. (Gono is banned from traveling to the U.S.) Our friend was curious, too. What kind of man would destroy a whole economy… one that used to be the “Jewel of Africa”?

But instead of a monster, he found himself in the company of a person who was as “friendly, knowledgeable, and intelligent” as Jay Powell or Elizabeth Warren.

Politically Impossible

Why, then, do apparently compos mentis people, who are not stupid, do such things? The answer is simple, too.

Once the “slowly” part of the formula has run its course – with central planning, falling real GDP, credit crises, price controls, huge debts, and trade restrictions – the “‘suddenly” phase leaves the planners with little choice.

They can admit failure and let the economy collapse in bankruptcies, defaults, market crashes, public humiliation, and depression.

Economically and financially, the only sensible choice is to fire the bankers, drain the swamp of bureaucrats, throw the bums out of office, and go back to real money backed by gold.

But politically, it is impossible. Too many people, rich and poor alike, are now dependent on the fake money. They must have more of it. So the feds put on more price controls and tariffs, draw up more Four-Year Plans, and add more zeros to the currency…

And Gideon Gono was right. Every major central banker is doing the same thing – adding fake money. But they are still in the “slowly” phase.

“Suddenly” is still ahead…

Regards,

Bill

By Dan Denning, Coauthor, The Bonner-Denning Letter

Recently, the Financial Times published an op-ed with the title “Why the Bank of England (BOE) should target climate risks.”

The authors’ argument was pretty straightforward: The central bank of Great Britain should add “[addressing] issues like climate change, inequality and asset price inflation” to its mandate.

These issues would contribute to the financial instability of the country, the FT argues. The BOE, therefore, has a responsibility to solve them!

Precisely HOW the BOE would “solve” climate change is also simple, according to the authors. Simply restrict the flow of credit away from companies that pump out carbon emissions and towards companies with “social and environmental objectives.”

As Bill shows regularly in the Diary, centralized planning has never worked… not once in history.

But for years, we have centralized the allocation of credit in the economy and given more control to the central bank. The argument from the FT is an almost unavoidable outcome if you follow quantitative easing (QE) and Modern Monetary Theory (MMT) to their logical conclusions.

Now, you have so-called serious people arguing that the central bank should restrict the flow of credit to industries and sectors. In this case, fossil fuels, because of climate change.

As I wrote in the May issue of The Bonner-Denning Letter [paid-up subscribers can catch up here], these are what science fiction author Robert Heinlein called “the crazy years.”

We are fast descending into national madness. The collective wackiness and disease that infected academia and politics over the last two decades is now moving into finance.

How can we be sure?

You hear the same language used (“privileged industries” are a second cousin of privilege based on race or gender). You hear the same zany calls for a “revolution.”

The loss of political independence by central banks (they were always acting for private interests anyway) will result in their complete politicization and their use for a specific political agenda (not just propping up a bogus stock market with fake money).

We tend to think of financial repression as a way of keeping individuals in check by limiting where they can take their money (borders), how they can spend it (your cash is no good here), or what rate of interest they can earn on it (increasingly, the prospect of negative interest rates).

But it’s going to another level. If the lunatics on the op-ed pages have their way, financial repression will be used by the central bank against businesses that don’t conform to the political agenda du jour.

At that point, it’s not just the central bank that’s lost political independence. It’s corporate America that’s become fully politicized (a trend that’s been taking shape in “socially conscious” corporate boardrooms for years). And then, there’s the financial aspect.

A politicized central bank gives corporations a purely rational incentive to “financialize” their business and use the balance sheet to generate profits (so far from win-win capitalism, it’s on another planet). Bill has discussed the “financialization” of corporate America at length in the Diary. It’s picking up speed.

It means an entire global energy industry would be choked out of capital markets if a politically motivated central bank (in charge of capital allocation) decided that fossil fuels were a danger to the planet.

It’s pure Soviet BS, to be direct.

You can see why the crypto people have the right idea – decentralize money and get it out of the hands of the centralizing, revolutionary, political zealots… before they take us all back to the Stone Age, where we’re cold, hungry, and in the dark.

This is what I mean when I tell readers of The Bonner-Denning Letter that “we’re doomed.” It’s not a fatalistic point of view. It’s a realistic one.

I mean there’s very little we can do, as private citizens, about big historical and monetary trends – except to think about them, connect the dots, and follow them through to their logical conclusions.

We’re witnessing the deliberate mass impoverishment of an economy and the systematic destruction of all the institutions which allowed it to flourish. I’m talking about private property, sound money, the rule of law, limited government, and win-win trade.

All you can do, all you SHOULD do, is try not to get wiped out financially (in the fake market) or caught up in the mess politically (resorting to what James Madison called “faction”).

That’s why I’ve been telling readers to “definancialize” their life. That means moving more of your money out of a financial system that is vulnerable to collapse.

An overzealous, politically motivated central bank is a danger to your wealth. Physical things that you own – especially gold and silver, of course – are one way to fight back.

Something is happening. Call it whatever you like. Call it socialism. Call it MMT. Call it the death of win-win capitalism. It’s the same thing. And it’s coming faster than you realize.

– Dan Denning

P.S. If what I just described worries you, then there’s something else you should know. I believe there is a real possibility that America is on the verge of another major shift in its money. The plan in a nutshell: to bring all the money in your bank account squarely under government control.

This “Chicago Plan” is still theoretical at the moment. But make no mistake, it’s being discussed among influential academics and central bankers as I write this. Get the full story of what I see coming right here.

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Today in the mailbag, readers respond to our essay on the real source of inequality… with blame for the “magical Fed wizards”… and a solution for our current crisis…

“That is why we have ‘inequality’ in the U.S. The feds pushed up prices for rich folks’ assets… but not for the common man’s time. Most people – who have nothing but time to offer – are relatively worse off.” Bill, your succinct boiling-down of the root cause of our widening wealth gap qualifies you for the King Solomon Wise Man Club, in my not-remotely-humble opinion. Or at least a Hit-Nail-On-Head merit badge.

Because this wealth gap is only getting worse, what is the remedy for the common working stiff? The no-brainer solution – working more hours – requires no brains and only digs the hole deeper. The only viable solution is to figure out a way to trade brains for money instead of time for money. Working smarter, not harder, is actually easier today than ever before, with e-commerce, internet marketing, and even real estate wholesaling now within reach of any enterprising soul willing to reinvent himself or herself and learn some new tricks. There is no shortage of how-to gurus out there offering business models and mentoring for motivated students.

Thanks for making it crystal clear that trading time for money has a depressing future… unless the Fed can invent a way to inject “stimulus hours” into the working stiff’s day. If we suddenly had 36 hours per day instead of 24, one could work the extra 12 hours and finally get ahead.

Oh wait… Unless the Fed knows how to slow down the Earth’s rotation, that would mean each hour would have 40 minutes instead of 60. No problem. Just work 50% faster and nobody will notice. Should be all in a day’s work for the magical Fed wizards who do the impossible for a living.

– Gary C.

A crazy thought just occurred to me. I’m no economist, so let me know if I’m talking through my hat, Bill… Do countries really need a “central bank”? Before the Federal Reserve was established (one of the worst mistakes in history, in my opinion), the United States printed its own money… money that was backed by gold and silver. Now, we have funny money “Federal Reserve Notes.” Your endless refrain decries the idiotic policies of the Fed and how it is responsible for all of our woes.

What if the U.S. and every other country on Earth got rid of their central banks and just let the free market determine interest rates? Would that eliminate “bubbles,” “corrections,” “crashes,” “inflation,” and all of the other economic missteps that occur, or am I insane?

– Dale A.

Meanwhile, yet another reader writes in with praise after enjoying our specially made, high-altitude wine…

I purchased a half case of your wine, primarily as a thank-you for the many splendid essays you post on a daily basis. Here is the problem, though: The wine is so good, you can’t just stop drinking it! Reminds me of the old Lay’s Potato Chip commercials of the 1960s: “Bet you can’t eat just one…” I’m warning you, you just can’t stop with only one glass. Folks, I recommend Bill’s 2017 Malbec highly – but just don’t drive or make any important decisions after opening it.

– Jerry G.

Editor’s Note: Remember, as Jerry G. pointed out above, this Malbec is stronger and bolder than the wines you’re probably used to. The Argentines eat it with their big steaks. And, there are still a few cases of Tacana Malbec left. If you’d like to try a bottle before we run out, go right here to place your order. Otherwise, you’ll have to wait until next year.

Did you see the “Early Stage Tech Summit” last night?

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