Where Does All the Money Come From?

by Bill Bonner
by Bill Bonner

Where does all the money come from?

We asked ourselves the question this morning. Once again, before we had had our coffee, we had encountered so many absurdities in the newspaper we were in stitches.

What particularly caught our eye was a page of advertising in the International Herald Tribune. Allan Schneider Associates sells property in the Hamptons, Shelter Island and the North Fork, New York. We're sure it must be jolly good fun living in these places. Nevertheless, we tend to think current prices are a measure of the cash and credit in the United States, rather than the level of endorphins in the drinking water.

For example, there is a photo of a plain-looking cottage, the sort that might have been built as a vacation place in the '50s and re-outfitted in the '80s, situated on a "shy acre" in Wainscott. We don't know why the acre is so shy. Perhaps it needs a little something else in the water. But at least, it has a sort of modest charm. And there's nothing modest about the price – $2.4 million. That is the cheapest house on the page. Over in Amagansett, you will pay $10,250,000 for what appears to be a perfectly satisfactory – but by no means extravagant – house on two less shy acres. And in Mecox Bay is a "barn style" house ...including a two-story kitchen that is a "chef's delight" [we don't know what is so delightful about running up and down stairs to cook a hamburger]...the property on three extroverted acres...at a price of $14 million. Why anyone would want to buy a barn for $14 million is one of those mysteries that must be reserved for the gods themselves. But readers who want to take advantage of these opportunities before summer, and before the real estate bubble pops, are invited to go to Allanschneider.com.

Where does all the money come from, we ask again?

We find the answer in an article by Richard Duncan.

In early 2002, America's system of imperial finance faced a challenge. The U.S. seemed to be sinking into Japanese-style deflation. The NASDAQ had lost 70% of its value. The homeland economy was in recession. The Fed was alarmed. It knew how to fight inflation; it could raise interest rates over 100% if it wanted to. But it knew no easy remedy for deflation. The Bank of Japan had tried the usual elixirs. Overnight money was free in Japan. Two-year loans could be had at 1/10th of 1% interest rate. Plus, the government had put into action so many public works programs that nearly half the country was already under concrete.

But the Bank of Alan Greenspan had a solution. Fed Governor Ben Bernanke proposed "global cooperation" in a November speech. Then, in May of 2003, he went to Japan urging concerted action. The Fed was prepared to sacrifice the solvency of American consumers, he told the Japanese. Tax cuts and low interest rates could still induce them to buy things they didn't need with money they didn't have. But Japan had to help hold down U.S. interest rates – by buying up dollars and dollar-denominated assets, notably U.S. Treasury bonds.

What happened next, according to Mr. Duncan:

"In 2003 and the first quarter of 2004, Japan carried out a remarkable experiment in monetary policy – remarkable in the impact it had on the global economy and equally remarkable in that it went almost entirely unnoticed in the financial press. Over those 15 months, monetary authorities in Japan created ¥35 trillion. To put that into perspective, ¥35 trillion is approximately 1% of the world's annual economic output. It is roughly the size of Japan's annual tax revenue base or nearly as large as the loan book of UFJ, one of Japan's four largest banks. ¥35 trillion amounts to the equivalent of $2,500 for every person in Japan and, in fact, would amount to $50 per person if distributed equally among the entire population of the planet. In short, it was money creation on a scale never before attempted during peacetime."

Why did the Japanese create so much money? Because they needed to buy from their citizens the dollars they had accumulated by selling things to Americans. Had they not done so, their currency would have gone up – making their products less competitive on the U.S. market. Had they not done so, the dollar would have fallen much further against other currencies. Had they not done so, the Japanese would not have had the dollars to buy U.S. Treasury bonds. And had they not bought so many of them U.S. interest rates would have risen...consumers would have had less money to spend...and probably the whole world would have had an economic crisis.

"Intentionally or otherwise," Duncan continues, "by creating and lending the equivalent of $320 billion to the United States, the Bank of Japan and the Japanese Ministry of Finance counteracted a private sector run on the dollar and, at the same time, financed the U.S. tax cuts that reflated the global economy, all this while holding U.S. long bond yields down near historically low levels.

"In 2004, the global economy grew at the fastest rate in 30 years. Money creation by the Bank of Japan on an unprecedented scale was perhaps the most important factor responsible for that growth. In fact, ¥35 trillion could have made the difference between global reflation and global deflation. How odd that it went unnoticed."

May 21, 2005

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21^st Century.

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