Trump Can’t “Prime the Pump”

“The U.S. Economy Is Back on Track,” read a Bloomberg headline over the weekend.

Apparently, inflation and consumer spending picked up last month.

We are so glad to hear it.

And last week, New York Fed President William Dudley said the U.S. central bank might begin lightening its load of bonds this year.

Or maybe not.

Or maybe they will add to it. Who knows. It depends.

Priming the Pump

The Fed stopped buying bonds via its quantitative easing (QE) program in 2014.

But the Bank of Japan and the European Central Bank (ECB) have kept up their QE programs, adding to the world’s money supply.

Last week, ECB assets rose to $4.1 trillion, making it the biggest single holder of unpayable debt in the world.

The Fed, the ECB, and the Bank of Japan are running neck and neck in this madcap race to bankruptcy. Together, these three central banks own about $12.5 trillion in assets.

What does this mean? Why is it important? Who cares when the Fed sells its bonds?

President Trump, interviewed by The Economist, claimed he had invented a key metaphor. Yes, he came up with the idea of “priming the pump… just a couple of days ago.”

He must have been pulling the reporter’s leg. The idea has been around since the 1930s; the president must have heard it before.

“Yeah,” he explained. “What you have to do is you have to put something in before you can get something out.”

The trouble is economies are not machines. There is no pump. And governments have nothing to prime it with anyway; you can’t prime a pump (if you had one) with water you don’t have, either.

But wait. Why not just borrow the money… spend it… and prime the pump that way? Isn’t that the tried-and-true formula?

Yes, that’s the formula. But let’s look at it more closely. When the feds borrow money, they must take it away from other uses. Then what do they do with it?

They spend it on the same things they always spend it on – boondoggles, giveaways, and pointless wars. These are designed to enrich the few at the expense of the many.

Net gain = zero. Or less.

But the feds keep at it. The three largest central banks have added $9 trillion of pump-priming liquidity since 2008.

This gush of money has produced the weakest “recovery” in history… and a U.S. economy that is now barely growing at all.

Pharaoh’s Tomb

Let’s back up a moment…

When we speak of the Fed’s “assets,” we’re talking about (mostly) the Treasury bonds the Fed bought.

From an economic point of view, the transactions were hollow and meaningless.

A bank held a U.S. government bond. It sold the bond to the Fed for cash (in the form of reserves). Now it has cash equal to the value of the bond. No change in its balance sheet.

The Fed, meanwhile, has an additional asset (the bond)… which sits in its vault as lifeless as a grain of wheat in a pharaoh’s tomb.

The central bank had no real money to buy the bond. It created the money out of thin air by increasing reserve account balances at banks – which is where the story gets a little hard to follow.

This “money from nothing” is not the sort of “something” you need in order to get something out of it. The net effect was to raise bond prices and lower their yields so that borrowers won and lenders (savers) lost.

Bad Idea

This is a bad idea.

Economic progress depends on saving, not spending. Saving real money is the “something” that provides the capital for new factories, new buildings, new services, new jobs, and new productivity.

But that’s not what the feds did. Lowering real interest rates, they discouraged real saving. And the real economy slowed down.

Meanwhile, artificially lower borrowing rates – and $9 trillion in new central bank cash – had a dramatic effect on the financial economy. What to do with all this money?

The banks and other large players had few choices.

What could they do with it?

Buy stocks! The stock market boomed.

So what would happen if central banks now withdrew this cash?

Imagine they now turn the liquidity valve in the other direction. Instead of buying bonds, they sell them. Instead of putting money into the system, they take it out. Instead of encouraging investors to buy stocks, they encourage them to buy bonds.

Then what happens?

What happens to world stock markets when the $9 trillion goes away?

What happens when the “something” the feds put in becomes the same “something” they take out… when they un-prime the pump… when they reverse the great stock market liquidity boom of 2009–2017?

Ai yi yi.

Nobody wants to find out… least of all the central bankers who made this mess.

Avalanche Notes: Bill believes these same “easy money” policies and insider deals will have the same fate for the U.S. He is so adamant about the disaster that’s coming, he writes daily posts on Bonner & Partners to help you prepare for the consequences of decades of reckless Fed policies.

Bill Bonner: The problem with phony money…

SALTA, ARGENTINA – Yesterday, we visited the museum in the center of Salta.

It is a museum of the history of the city and the province, set in the repurposed town hall in the main square.

We had begun the day by going to mass in the old cathedral across the square – an ornate and opulent example of Spanish colonial architecture.

The cathedral is magnificent. It is a classic cruciform building with barrel-vaulted ceilings and a large cupula in the center.

Behind its altar, in the apse, is one of the most spectacular, over-the-top sanctuary adornments we have ever seen.

There is so much gold leaf over so many decorative elements, sparkling, shining, reflecting light in every direction; it takes your breath away.

Spain First

Salta had never seemed like an attractive city.

But yesterday, we were surprised. After mass, we stopped for coffee at one of the outdoor cafes on the plaza.

The arcaded square – with the cathedral on one side and the town hall on the other – was splendid. In the center was a park with palm trees, green grass, and a huge granite monument.

Couples necked on the benches and families with young children strolled by. Nearby, a blind accordion player gave us fine renditions of tango favorites. The weather was perfect.

The museum is large with collections focused on three periods.

There is the pre-Hispanic period, with clay pots, arrowheads, and petroglyphs, some thousands of years old. Then there is a display of the colonial period followed by one of the War of Independence.

It was the colonial period we found most interesting. In particular, one room showed us samples of money used in the colonies and explained a bit about how the economy of the era worked.

We learned two things that may be of interest.

First, phony money always causes problems.

Second, “Spain First” didn’t work well back then, either.

Motley Crew

To put these insights in perspective…

Francisco Pizarro and his army had butchered 2,000 Inca in the Battle of Cajamarca in 1532.

But his motley crew of adventurers and desperadoes were soon at each other’s throats, jealous of each other’s booty, fame, or honors.

Six years later, Pizarro defeated his former partner Diego de Almagro in battle… and had him garroted and then beheaded. Later, Almagro’s followers assassinated Pizarro.

The best way to deal with this restless and murderous energy was to channel it into more exploration and conquest. There were more cities of gold to be found, they believed… and so they set out.

In 1582, Salta was founded by Spanish conquistador Hernando de Lerma. The Inca had conquered this area of present-day Argentina about 100 years before the Spanish arrived.

Rather than reconquer it, the Spanish simply took over from the Inca, leaving the locals as vassals. Other conquistadores romped through what is today Peru, Bolivia, and Chile, leaving the Spanish crown with a vast empire in the New World.

The immediate and obvious effects were beneficent. Longer-lasting and less obvious consequences were not. Especially when the Spanish made their Trumpish policy decisions.

Gold Mine

The New World was literally a gold mine for the Spanish crown.

Pizarro demanded the Inca fill a room about 22 feet long, 17 feet wide, and 8 feet high with gold, and twice with silver, over several months as the price for letting the captive Inca emperor, Atahualpa, go free.

The Inca dutifully filled up the room. But Pizarro had Atahualpa strangled anyway.

The first ships, riding low in the water with heavy cargoes of gold and silver, were not long in leaving for the royal treasury in Spain.

Free money, like free love and free booze, is thrilling – at first. The headaches come later.

The gold, arriving from the New World, greatly increased the money supply in the old one. Prices rose, slowly, all across Europe… with the general price level up 500% from 1550 to 1700.

In Spain, though, the damage was much greater. The free money made many of richest and best-connected families richer still – without additional work or effort.

Without producing anything, they were then able to buy goods and services. Economic historians claim that this led to a decline in Spain, leaving it the “poor man of Europe” for the next 300 years.

As Spaniards became accustomed to the influx of new money, they needed more and more of it to keep up with rising prices.

According to the museum in Salta, this led them to squeeze every ounce of gold… and later silver… from their colonies.

So although Spain soon had too much money, Salta had too little. This forced the royal governors to operate an economy without real money. Instead, it declared base metals – copper, iron, etc. – as “money.”

The short explanation alongside the display of colonial coinage describes the results: The phony money did not provide accurate and stable price information; it did not give people a way to preserve and protect their wealth; “it created much confusion and many errors.”

In short, it did what the credit-based U.S. dollar has done since the 1970s. You could buy the average house in 1970 for about $25,000. Now, it’s about $200,000 – seven times more.

Plus, the phony dollar has distorted the rest of the economy, created bubbles, misdirected investments, and wasted valuable time and resources…

Nothing new there, in other words…

Inevitable Consequences

The other thing that greatly retarded economic progress in the Spanish colonies was the “Spain First” policy.

Then, like now, the crown and the cronies thought they could gain an advantage by forcing people to trade on their terms. They wanted win-lose deals, with themselves as the winners.

So they set up a monopoly on trade with the colonies – carefully controlled so that only Spain (and its insiders) could benefit.

This, too, led to the inevitable consequences.

The museum commentary tells us that all trade had to be funneled through specific ports, such as Buenos Aires, where it was approved and taxed by royal administrators.

Shortages, delays, and higher prices on both sides of the trade resulted. It also helped create an entire industry whose purpose was to dodge the regulations.

Foreign ships, foreign entrepreneurs, and foreign bankers were soon gaming this system, establishing their own system of contraband commerce.

“Spain First” slowed economic growth in the Spanish colonies. But it probably sped up the development of Britain’s hustling merchant fleet.

Avalanche Notes: Bill believes these same “easy money” policies and insider deals will have the same fate for the U.S. He is so adamant about the disaster that’s coming, he writes daily posts on Bonner & Partners to help you prepare for the consequences of decades of reckless Fed policies.

An Amazingly Simple Investing Strategy

We don’t do real stock analysis.

We just look for Really Simple Patterns (RSPs).

The simplest we’ve discovered so far: If a market is cheap now, it will probably be less cheap before you get around to investing in it. If it is very expensive, it will probably be less expensive before you get out.

Simple Strategy

This RSP came to mind when Bonner & Partners analyst Chris Mayer, who advises us on our family portfolio, reminded us how much money we made on his latest recommendation.

For our family account, we keep one portfolio made up of country stock market ETFs. We select the countries based on this RSP: We look for the cheapest ones.

As recently as March 30, Chris advised us to put money into five cheap country stock market ETFs. And yesterday, imagining our delight, he sent us the following email update:

Amazing, it’s such a simple a strategy and yet works so well…

So far (since March 30), you are up almost 10% in Turkey, almost 9% in Spain, 8% in Italy, and 5% in South Korea. The only downer is China, down 1%.

Overall, you’re up over 6%… since March.

The only trouble is… we never got ourselves together to make the investment. And on April 15, we suddenly needed the money we had set aside for it to pay the IRS.

Trade of the Decade

But let’s look at another trade, our Trade of the Decade.

This had nothing to do with careful analysis, study, or insight. Just another RSP: Markets that go down for a long time have a good chance of going back up over the next 10 years.

At the debut of the 21st century, we had no trouble identifying a promising setup. Gold had been going down, more or less, for nearly two decades. U.S. stocks had been going up.

So our Trade of the Decade was simple: Sell stocks, buy gold.

It turned out that both sides went our way. Between 2000 and 2010, gold rose about 143%, making it the best-performing major asset class of the decade. And the S&P 500 fell about 25%.

Our next Trade of the Decade was not so simple.

By 2010, gold was no longer a bargain. And U.S. stocks had been beaten down by the 2008 crisis. There was little to be gained by squeezing that orange any further, we reasoned.

What then?

Goofy Program

By the second decade of the 21st century, Japanese stock prices had been falling for 20 years.

Japanese government bond prices, on the other hand, had gone nowhere but up. Why not bet on a reversal?

And so we did in our new Trade of the Decade: Sell Japanese bonds, buy Japanese stocks.

This was based on two other RSPs: (1) Markets that go down a lot tend to go up a lot later, and (2) over time, governments will always destroy the value of their paper currencies.

How has it done so far?

Well, before we get to that, we would like to thank the Japanese government – or, more specifically, the Bank of Japan (BoJ) – for this result.

The Japanese feds have worked tirelessly to boost prices on their stock exchange and send investors fleeing from their bond market.


It’s just part of their goofy program that is supposed to improve the economy. If they can get the rate of inflation up, they will devalue the yen and make Japanese exports more competitive.

This, in turn, will improve exporters’ sales… leading them to buy more, hire more, and stay in line behind the ruling party.

Claptrap Policies

Accordingly, the familiar claptrap policies were brought on stage.

Shinzō Abe, the country’s prime minister, explained how more “stimulus” – both fiscal and monetary – would surely light a fire under the economy.

It did not. Instead of falling, the yen rose, leaving the Japanese economy soggier than ever.

It must have been then that Mr. Abe and the BoJ decided to go full retard.

They wouldn’t wait for Japanese companies to sell more products and earn more profits. They would simply buy stocks themselves.

Financial blog Zero Hedge:

A year ago, we noted that The Bank of Japan (BoJ) was a Top 10 holder in 90% of Japanese stocks. In December, we showed that BoJ was the biggest buyer of Japanese stocks in 2016. And now, as The FT [the Financial Times] reports, the real “whale” of the Japanese markets is stepping up its buying (up over 70% YoY [year over year]), entering the market on down days more than half the time in the last four years.

Since the end of 2010, The FT notes that the BoJ has been buying exchange traded funds (ETFs) as part of its quantitative and qualitative easing programme. The biggest action began last July, when its annual acquisition target was doubled to ¥6 tn [$8.7 billion].

Since then, the whale designation has seemed pretty obvious: the central bank swallows a minimum of ¥1.2 bn [$10.5 million] of ETFs every single trading day (tailored to support stocks that further “Abenomics” policies), and lumbers in with buying bursts of ¥72 bn [$632.5 million] roughly once every three sessions.

Since the Bank of Japan began this program, investment bank Nomura estimates that it has boosted the Nikkei 225 Index – Japan’s equivalent of the S&P 500 – some 1,400 points.

Thank you very much.

So how are we doing?

Since the start of 2010, the Japanese stock market is up about 33% in U.S. dollar terms… and about three times as much for yen-based investors. As for Japanese government bonds, they have not cooperated.

Try as he may, Shinzō Abe has still not been able to destroy his nation’s currency or degrade its credit.

But we will not despair. The Trade of the Decade still has three years to run. And Mr. Abe is still trying!

Avalanche Notes: Bill believes these same “easy money” policies and insider deals will have the same fate for the U.S. He is so adamant about the disaster that’s coming, he writes daily posts on Bonner & Partners to help you prepare for the consequences of decades of reckless Fed policies.

Why Does the Left Support Wall Street?

Leftist Rhetoric vs. Reality

The rhetoric from the Left is intransigent in its denunciation of wealth. As long as someone is wealthy, there is inequality. This is because there has always been and will always be someone who is poor. So the very existence of a rich man serves as a rebuke to the Left’s worldview, and a fly in the social justice ointment.

An example of a false choice offered by Germany’s communists in the 1920’s: the poster reads: “Voters, decide! Do you want the dictatorship of Stinnes, or the dictatorship of the proletarians?”. In other words, no matter how you choose, there’s only dictatorship for you. Stinnes was a winner of the inflationism of the post WW1 era – a prototypical state-capitalist. However, the poster still backfired, as he happened to be highly popular with his workers.

However, Leftists in power behave differently than their rhetoric would lead us to expect. They enact legislation and regulation which actually helps enrich crony businesses, such as big banks. The common refrain is that these politicians are corrupt, and on the take. Wall Street is simply buying their favor.

While this is true to some extent—certainly Wall Street spends a lot on lobbying—it’s not a satisfying answer. How do we fully explain the seeming anomaly between ideas and action on the Left?

A Devious Strategy

It is no anomaly at all. To see why, look at it from the Left’s point of view. It has to be frustrating when the voters reject the policies of Marxism. Unlike in many other parts of the world, the American people do not hate wealth—not yet. If you were a Leftist, how would you go about changing this?

Even today, many Americans if not most of them, feel at a basic gut level that if you work hard you can get rich, and you deserve it. The Left has to find a way to undermine this. The Left wants to migrate Americans to the attitude held in socialist countries: the feeling that if someone is rich then he must be on the take.

151013092704-hillary-wall-street-banks-780x439Hillary Clinton – a left-wing politician who in stark contrast to her rhetoric, is well known for being funded by Wall Street banks (according to CNN, “Wall Street has made her a millionaire”). As Ludwig von Mises once noted: “The struggle between the two systems of social organization, freedom and totalitarianism, will be decided in the democratic nations at the polls. As things are today, the outcome in the United States will determine the outcome for all other peoples too. As long as this country does not go socialist, socialist victories in other parts of the world are of minor relevance.”

If you wanted to devise a strategy to get the population on board your socialist agenda, I can think of no better way than to create a class of very rich people who get their riches off the backs of the people.

Create thousands of real-life fat cats whose villainy is infamous. Show the people that this is what it means to be rich: to be on the take. That the rich do not produce, but amass a fortune at the expense of others, at your expense. Put that in the public spotlight.

Once the voters believe this, deep down in their hearts, it’s over. The free market is done. Stick a fork in it. Support for the rights of property or contract will fade away. Then, the path is paved for some kind of socialist takeover and totalitarianism.

Image captions by PT

The above article originally appeared on, written by Keith Weiner.

Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.

How Cheap Oil Could Wreck The Economy

Thanks to our enlightened economists and their careful management, we’re told, the U.S. economy is doing quite well. Reports the New York Times:

On Friday, the Labor Department reported that U.S. payrolls rose by 321,000 jobs in November and that hourly wages jumped, easily beating economists’ expectations. This year will be the best for job creation since the boom years of the late 1990s.

Meanwhile, federal deficits are falling. And you can buy a gallon of regular gasoline for $2.71 – only five times the price of when Ike and Dick were “sure to click.”

The Fed says falling prices are bad. They are adding trillions of dollars to the monetary base to make sure the consumer price index rises by its target of 2% a year.

But falling oil prices are a good thing. Do we have that right? Sometimes we can’t remember.

Let’s see, Americans can spend less on gasoline, leaving them more to spend on other things. Heck, we don’t need no stinkin’ QE anymore. Now we have cheap gas!

Wait. Since the crisis of 2008-09 about one-third of capital spending by S&P 500 companies went into energy. And as much as 20% of the high-yield market (junk) now is concentrated in the energy sector.

That boom was built on low interest rates and a high oil price. Without cheap money, cheap gas wouldn’t be possible. And when gas gets too cheap, the cheap money suddenly gets very dear.

Nearly a trillion dollars of spending worldwide is focused on new energy production. And with oil prices down nearly 40%, much of that spending… and all the subprime energy debt… is in danger.

Unless oil prices go back up soon, there could be hell to pay.

The Saudis seem to be determined to keep on pumping, despite plunging crude oil prices. The only way they can protect their market share is by remaining the low-cost producer.

U.S. frackers are likely to keep fracking too. They’ve bet big money on forcing crude out of grudging rock. They won’t give up easily. Instead, they’ll borrow more heavily to stay in business. But the more they pump… the longer oil prices stay low.

Paying $60 to extract a $50 barrel of oil is not a good business – no matter how low interest rates are. Already, the gods have smashed the oil companies, the drillers, the transporters and almost everything else that reeks of gasoline. Soon, they’ll whack at their subprime debt too.

Will they bring down other stocks? Bonds? The economy? Only a fool would pretend to know.

As to twerking, your editor hasn’t made up his mind. But as to the Fed and its meddling in the markets, he is sure: Less is more.

Trying to manage an economy is like trying to manage the love life of a teenage daughter, it’s just going to make things worse.