“Well, I don’t think it’s officially called bubble bath if the bubbles happen accidentally, but whatever, Shawn.” – Psyche
The Four Horsemen of the Wilderpocalypse®, now in living color!
The world is in a weird place. Very weird. And that’s just what it says on my performance review.
What’s really weird is money. Money, capital, whatever you call it, is in a vast oversupply. How much of an oversupply?
Interest rates on about $15 trillion (not that brightly colored wrapping paper some countries naively use for money, but real dollars) is negative. Negative. In my bank account, I loan the bank my money. In turn, the bank gives me a little extra back each month. Not much at all, in comparison to historical standards, but a little.
Alas, there will be no Christmas Goat in Zimbabwe this year.
In Germany, if you loan the government €100 (which is like a metric dollar for feminists) you pay 0.593%, or €0.59 a year for the privilege. If you think this is a really good deal, come on down to John Wilder’s Toddler Knife Juggling School and Bank®. I’ll only charge you €0.25 a year. Plus you get to see videos of all the toddlers learning to juggle knives. I’ll maintain that I’m giving you the much better deal. Well, it’s a better deal depending upon what your insurance deductible is and how coordinated your toddler is.
Heck, keeping the cash in a box under your bed is a better deal than paying the Germans to watch it for you. Why on Earth would you give someone piles of your hard-earned cash and be happy that you got less back,? Well, some pension firms are required to invest in government securities, and some (probably German funds) are required to invest in German bonds. In terms of deals, this is the functional equivalent of a Mafia bargain: “It’s an offer you can’t refuse,” but in this case spoken with an accent like Colonel Klink in Hogan’s Heroes®.
But the shear sum is mindboggling – I could come up with lots of really meaningless descriptions of what a trillion dollars is worth – a football field full of pallets of $100 bills stacked 8 feet high, enough to fill 1.8 miles worth of semi-trucks, almost enough space to hold Charlie Sheen’s spare virus load. So, we as humans can’t really understand a trillion dollars in any meaningful way – and $15 trillion is how much money that’s parked in government bonds earning negative interest. This is a travesty while my toddler juggling students are in desperate need of a prosthetics and eyepatch fund.
Also 50% off vision, but that’s no charge.
When I was just dating The Mrs. (The Mrs. was just The Miss then), we visited her house so her parents could thump me like a melon to make sure I was ripe. In her bedroom I noticed a box of toys. On top was a plastic plane that I assume belonged to her older brother. The plane didn’t look like the one below, but it was of a similar quality – very cheap plastic. If I were buying that toy today, I’d expect it would be $1 or $2. Not much, since it couldn’t be more than five pieces of cheap molded plastic.
I still miss lawn darts. If you’re going to make a hazardous toy, go all out and make it really hazardous.
As I recall, this particular toy plane still had the sticker on it from when cashiers used to manually punch in the prices – not a bar code in sight. The sticker had a price of (I seem to recall) about $7.95. A silly price for a cheap toy today, but in 1978 or so, maybe it was a good deal.
This is what stickers used to look like before iPhones. Or before I was old.
Inflation and Led Zepplin® ravaged the 1970’s, but nobody drank a pony keg and toked up to get psyched up for inflation. A big part of the inflation was the oil shocks as the United States hit (then) peak oil production and OPEC® found they could dictate energy prices. Another big part of inflation was because Nixon pulled the United States off of the gold standard. I know people blame Nixon (and I have done so myself) for taking us off of the gold standard, but the alternative was giving all of our gold to the French. The French. They would have just spent it all on baguettes, berets, cigarettes, and mime school, so it was for their own good that Nixon said, “nope, no gold for you.”
Also, he’s missing track shoes to run from ze panzers.
But as the dollar went from being nominally backed by gold to being backed by governmental promises, there was a messy, messy decade as prices adjusted. I believe this led to many economic horrors. And disco. Eventually the dollar became the currency everyone used to trade with – if you wanted to buy Brazilian waxes and ship them to Japan, the Japanese would have to first trade yen for dollars, and then pay the Brazilians in dollars. The Brazilians would then trade the dollars for more wax, or maybe matches to keep that pesky rainforest burning so it wouldn’t grow back.
The dollar became the required currency for world trade, especially in oil. In the meantime, we had too many dollars chasing everything in the United States, and prices of everything went up. So did interest rates. Pop Wilder once told me that he was going to try to buy a $100,000 Treasury bond when the interest rates peaked back in 1981. He said that it would have paid him $17,000 a year for twenty years, and then would have paid the $100,000 back to him. But, his boss wouldn’t loan him the money while he sold some stock and moved some money around – Pop had the money, but he couldn’t get it that week. That one bugged him for years. He certainly wasn’t planning on paying the Treasury to take his loan.
After the Great Recession, the central bankers at the Federal Reserve® flew around dropping money by buying up mortgage-backed securities. How much? $1.8 trillion at last count – they discontinued the data. And then the Fed went started buying US treasuries so the interest rates would stay low – peaking at $2.4 trillion from a starting point of less than $0.5 trillion.
This was called “Quantitative Easing” since that sounds much more sober than “panicking and throwing money on the fire to try to put it out.” The Fed© pumped through just these two mechanisms over $3.7 trillion into the economy from 2008 to 2015. It’s not like they wanted to keep the party going for a specific president, is it? Nah.
Anyway, the Fed® pumped money, manipulated interest rates, and what happened?
See, it’s topical, it’s current, and it’s a scary sewer clown. Ma Wilder told me these were the three basic elements of humor. Oh, and toddlers juggling knives.
This time, the world currency reacted entirely different – the money was in the hands of the already rich. So what did the rich do? Invested it. Prices went up, but in this case, it was the price not of cheap plastic airplanes, but of investments. Money began chasing profits. As such, the stock market increased a wee amount, going from about 10,000 to over 28,000 today. For those that didn’t major in math, that was an increase of 2.8x. During the same time, the economy grew about 33%, or, 1.3x. Bond interest rates plummeted – that means that bonds were in demand, since it takes a lower interest rate to get someone to buy a bond.
And now you have to pay to buy a bond.
Money has been chasing assets that can be invested in. The stock market. Bonds. Farmland. San Francisco condos. Because of the investor money looking for profits, these have all grown much faster than the price of a Big Mac®, though that seems to be heading up now, too. College and medical costs have gone up as well, but that’s mainly because government gets involved and “helps out” with student loans and generally screws up medical care entirely.
Most of the other things needed for day-to-day living in the heartland haven’t gone up that much – cheaper energy has certainly helped the entire economy. And housing prices in Modern Mayberry have stayed as flat as your sister for the last decade, if not declining a bit.
But the stock market can’t outpace real growth in the economy forever, and the Fed™ has stopped injecting money into mortgage-backed securities, and investors seem to want to by Treasury notes, so the Fed© can stop buying those for a while.
I’m thinking she may do better at math than the Fed®.
To me it seems clear that our economy is in a bubble where investors are willing to spend a lot of money to buy a little bit of profit, or a little bit of interest return. We are in a bubble – a bubble where the assets are those things that can produce income, or at least a return on investment. In this particular bubble, capitalism itself is the commodity that is over inflated, aided and abetted by bankers that seem to want to keep the economic party going forever.
Hey, it’s still working for Zimbabwe, right?
