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Bonner: Bubbles Are Set to Burst and Who’s to Blame? It’s the Fed, Stupid

Bonner: Bubbles Are Set to Burst and Who’s to Blame? It’s the Fed, Stupid

It always ends this way. It always, always, always ends this way. It’s depressing. Rome… Ming Dynasty… Zimbabwe… this end game that we’re talking about.

The financial arrangements of the state are no longer sustainable… Government will not voluntarily let itself go out of business; it will use all its powers available to fund itself.

— Former Director, National Economic Council, Lawrence Lindsay

BALTIMORE — Every empire finds its Berezina.

Trying to enforce his trade war against the English, Napoleon crossed the Neman River and attacked Russia. But the Russians used a strategy that would later be made famous by Mohammed Ali — rope-a-dope.

They let the French advance… even to Moscow. Then, they set fire to the city. The Grande Armée, with few supplies and winter setting in, realized it was in a trap…

Grim Days

We’ll come back to those grim days of 1812 in a minute. In the news Friday morning, two stories caught our eye…

On the AP newswire is a flash from the Ukraine. The prime minister resigned after he was caught on tape saying he thought his boss, the president, knew little about economics.

Thank goodness we have lower standards in the U.S. If every cabinet member who thought the president was an economic moron resigned, there would be no one left.

Meanwhile, the Financial Times gives us this headline:

The Federal Reserve is the cause of the bubble in everything

Stocks up? Gold? Investor sentiment?

You think it’s the trade deal? The economy? Retail sales?

It’s the Fed, stupid. The Federal Reserve is inflating the currency, pure and simple.

This week, our heavy artillery has been focused on the Fed. But our real objective — much more elusive and hard to target — is the flimsy line between good and evil… and between very smart and spectacularly idiotic.

A sample question: Knowing that the money is fake (it just came off the printing press)… and knowing what happens when a country tries to pay its expenses with fake money (Zimbabwe, Venezuela… et al.)… what kind of a malevolent jackass would do such a thing?

Hold that question…

Finest Soldiers

On the 19th of October, 1812, Napoleon’s coalition of the willing began a 1,700-mile retreat, on foot, with temperatures falling to minus 36 degrees Fahrenheit… and the Cossacks picking off the starving stragglers.

In such cold, “to sleep was to die,” as Armand de Caulaincourt — Napoleon’s close personal aide — put it. Still, the soldiers were so exhausted, they begged to be allowed to lie down in the snow and join their dead comrades.

When they finally reached the Berezina river, in what is today Belarus, the trap sprung shut. Napoleon’s surviving troops had the icy river in front. And the Kutuzov and his Cossacks behind.

The ice on the river had thawed. With no way to cross, or to get more provisions, it was just a matter of time before the French would be annihilated.

But the French and their allies were the world’s finest soldiers. Loyal. Disciplined. And ready to sacrifice themselves.

In the freezing cold, Dutch engineers stripped off their heavy clothes and went to work, building a bridge across the river. Each man lasted only about 30 minutes before his limbs froze, hypothermia stunned him and he was swept downriver. But then, another man jumped in to take his place.

It was a remarkable feat… and the bridge, rickety though it was, was completed… and it saved a remnant of Napoleon’s army.

Still, the losses from the Russia campaign — some 380,000 men, abandoned artillery, discarded wagons and tens of thousands of horses — couldn’t be replaced. And Bonaparte’s empire, which stretched from the Iberian Peninsula to the gates of Moscow, never recovered.

Winning Combination

Incredibly, the Third Reich (which also included all of Europe, from the Pyrenees to the middle of Poland), couldn’t resist playing with the same sharp object — Russia.

And in Stalingrad, it found its Berezina… where 91,000 starving, freezing, hopelessly surrounded German soldiers were forced to surrender. (Only 6,000 of them survived.)

Every empire finds a way to destroy itself. And for the Soviets, central economic planning… and Afghanistan… did the trick. Worn out and hopeless, they renounced their empire and retreated back to Mother Russia in 1989.

And the U.S? Wars overseas… and inflation at home? Always a winning combination, right?

Let’s take a closer look…

Stiffing the IMF

The biggest increase in “money printing” by the Fed happened between 2008 and 2015 — with $3.6 trillion of new money added.

But that was said to be an “emergency” caused by the crisis of ’08-’09. Reluctantly and sluggishly, the Fed then began “normalizing” by raising rates and reducing the money supply.

Here at the Diary, we predicted that “normalizing” would never be realized. Sure enough, the program came to an end in July of 2019 when the Fed began to cut rates again.

And then, on September 17, without a cloud in the sky, it “cranked up the presses” to add about $100 billion a month over the next four months — simply to cover U.S. deficits.

That’s inflation. Pure. Simple. The kind of thing that governments do to fund their boondoggles and stiff the IMF (International Monetary Fund).

Remember, “inflation” refers to adding to the money supply, not specifically to the kind of “inflation” that people don’t like — consumer price inflation.

First comes the money-printing. Then come asset price increases. Sharply rising consumer prices are usually the last and most spectacular phase of an inflationary disaster.

And then, the Berezina…

Always Ends This Way

In Weimar Germany (1919-1933), prices rose at a 29,000% annual rate.

In Greece in 1944, prices doubled every four days.

And in Venezuela today, prices are up some 53 million percent since 2016.

No one knows for sure how or why, precisely, these hyperinflations happen. But everyone is pretty sure it won’t happen to him.

And the most interesting thing is this: You don’t have to be a malevolent jackass. Hyperinflationary disasters happen to good people as well as to the bad guys. They happen to smart people as well as to morons. And they can happen in North America as well as south of the Rio Grande.

Governments don’t go out of business. At some point, their backs to the Berezina, they print money.

In America, Europe and Japan, consumer price increases are still relatively few… while asset price increases are many. Everybody’s happy.

But it’s the Fed, stupid. It crossed the Neman. And now our ablest officers… our most magnificent economists… our stable genius politicians — all the king’s horses and all the king’s men — will all make the smart moves… and it will still lead to disaster.

“It always ends this way,” as Lawrence Lindsay put it. Doesn’t matter how smart you are. Once you cross the river, you’re on your way to Hell.

Next week, we’ll see why.

Regards,

Bill

• This article was originally published by Bonner & Partners. You can learn more about Bill and Bill Bonner’s Diary right here.