The E-Z Money

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This year will be another year of “easy money,” says AFP. Asian exporters want to keep their currencies cheap to help exports. Europeans want cheap money to lift employment. Oil exporters have so much money they don’t know what to do with it. (Venezuela is so desperate to get rid of money, it is offering to lend to its neighbors. More below.) And, of course, Americans are printing the stuff in bulk. If the money supply in the United States were to continue expanding at the current rate, it would add more new money in 18 months than the current value of all the gold ever mined since the days of King Midas.

Why so much new money? The empire needs it.

Wars, floods, bread, circuses — an empire is an expensive business. The U.S. federal deficit was more than $300 billion last year. This year it is expected to rise to over $400 billion, perhaps even beating the record set in 2004. Meanwhile, in external commerce, the nation spends $700 billion more than it receives each year. Already, the net external debt of the United States approaches $3 trillion.

The exact day on which Alan Greenspan discovered easy money is recorded in our first book, Financial Reckoning Day. It was in the mid 1990s, the day after he made his famous “irrational exuberance” speech, in which he worried about over-valuations in the stock market. Congress called him in. “Do you know who pays your salary?” the pols asked him. His job was to pump up asset prices, they reminded him, not hold them down. The maestro stood up, waved his hands, and did what he was told to do. He never looked back. America has been a land of E-Z money ever since.

Richard Benson explains:

“After Alan Greenspan gave his famous ‘irrational exuberance’ speech about the stock market, he stopped being rational and prudent, and became rational and profligate. He discovered that the stock market bubble — fostered by too much easy credit — made consumers feel really wealthy. By letting money and credit run wild, the economy roared, and rising stock market prices created such a false sense of wealth that consumers stopped saving. By 2000, Americans had hardly saved anything and domestic savings to recycle didn’t exist. Around this time, Mr. Greenspan declared that ‘bubbles should not be popped’ but the Federal Reserve’s job would be to clean up the mess if the bubbles collapsed on their own. So, how does a popped bubble get cleaned up? With easy money, of course!”

But easy money, like easy virtue, has its time and place. A policy of E-Z money all the time, soon leads to too much money.

Alan Greenspan’s response to the tech stock bubble was easier money. Interest rates went to near zero…and stayed there for two years. The result was a new, bigger and more dangerous bubble — in housing.

“By 2004, it was time to help another sitting president to get re-elected,” Benson continues. “The housing market was booming and home equity extraction added about $800 billion (a year) to spending, even though this spending left a massive trail of debt.” In looking back now, you can’t help but notice how the economic model has changed. For decades, America had an economic model built around recycling savings into investment. In a few short years, those savings have simply vanished and our society has become comfortably cavalier about borrowing far more than they earn.”

But just as you never know when a woman of easy virtue will join the church choir, you never know when easy money will start playing hard to get. A test of just how easy money will be in 2006 is coming in the next 90 days, says Bloomberg. The United States is asking lenders for $171 billion in U.S. Treasury notes and bonds. The most recent auction of T-notes was a disappointment; there was surprisingly little demand.

Maybe lenders, mostly foreign, are getting tired of so much U.S. debt. If so, money won’t be as easy as everyone expects. Not that the dollar is likely to become an honest currency, but it might not give itself away so cheaply.

• Uh oh…the house-price boom seems to be over — even in Hawaii. Yes, on the island of Oahu, for example, the median house sold for $418,000 in November. That was 8% less than the year before.

“This is happening all over the country,” explains Dan Denning. “People’s houses are losing value all the time — and they don’t even realize it.”

“Folks who refinanced a year or two ago are finding out their homes are worth less than the appraised value. All over the country, appraisals have been inflated by lenders eager to make loans and real estate agents eager to close the deal whatever it takes.

“I predict that this appraisal scandal will explode soon in the mainstream media. When this mess falls apart, the whole country will discover how lenders and real estate agents have pressured appraisers to overvalue homes.”

• Get the E-Z money while you can. That seems to be the chant of America’s upper management. Who cares about the shareholders! Stiff the creditors! To heck with the employees! We read in yesterday’s paper that UAL executives will share out $115 million in a settlement with creditors, as the airline comes out of bankruptcy. The new CEO will get $8 million in salary, signing bonus and various other emoluments looted from their rightful owners. Plus, if we read it right, he will get millions more in stock options.

Could no one be found who would do the work for less? U.S. airlines tend to go broke — even when managed by the best industry professionals money can buy. Why not save some money and let them go broke under the direction of an honest mechanic?

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.

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