The Fed’s Doomsday Device, by Bill Bonner

The Bill Bonner version of debtonomics, and one of the few that at least partially gets the difference between real money and fiat debt. However, he errs when he says that banks create money when they create loans. They create debt. See “Real Money,” SLL. From Bonner, at


BALTIMORE – Barron’s, in a lather, says the market is facing the “Two Horsemen of the Apocalypse.” Huh?

Supposedly, the so-called Brexit – the vote in Britain this Thursday on whether to leave or remain in the European Union (EU) – and uncertainty over where the Fed will take U.S. interest rates are cutting down stocks faster than a Z-turn mower.

But Brexit is a side show. As our contacts in London explained in last week’s issue of Bonner & Partners Inner Circle, Britain will do just fine outside of the EU. It will even thrive.

As for the Fed’s fumbling, it is a consequence, not a cause, of falling stock prices. The real threat to this market is more basic, more dangerous… and completely unavoidable. It is a “doomsday device” – hidden in plain view – in the feds’ fiat money system.

It took us a long time to understand how this works. For many years, we referred to the Fed’s EZ money policies as “printing money.” Finally, we realized that this metaphoric description of the Fed’s role probably hides more than it reveals.

The Fed is not printing money. If it were printing money, we’d have more money around and higher consumer prices. Instead, when the feds went to a “paper” money system in 1971, they did it very cleverly.

Yes, their new system is totally fraudulent and absolutely ruinous – just like an old fashioned money-printing scheme. But the fraud takes much longer to uncover, and the ruin is only obvious at the end. It is a “bezzle”… where you only become aware that you’ve been had when it blows up.

Unlimited Credit

Here’s the deal…Instead of printing money itself, the Fed allows banks to create an almost unlimited amount of credit (providing they meet certain capital requirements).

Contrary to popular belief, banks don’t act as “warehouses” – taking in deposits and then lending them out again. Instead, banks create new deposits (aka money) when they make a loan.

US true money supply TMS-2 – we [Pater Tenebrarum at] actually have to disagree with Bill on one point: while normally, the bulk of credit and money supply expansion is indeed left to commercial banks, the Fed can and does “print money” directly if it deems it necessary. In fact, this happened during the three iterations of QE – every time the Fed purchases a security from a non-bank (and the primary dealers are legally non-banks), new deposit money is created to the extent of the purchase. You can catch up on the details here: “Can the Fed Print Money?”

All it takes is a few strokes on a keyboard, and account balances – along with the money supply – go up.0 At first, this new credit-money acts much like printing-press money: It gives people money to spend that nobody ever earned. Everybody is happy.

But if you keep on creating more and more paper money, the fraud is soon obvious. Prices rise. People realize that they have no more purchasing power than they had before.

In the meantime, businesses and consumers have all made bad decisions, based on the apparent increase in “demand.” After a while, all those mistakes have to be flushed out… in a recession or a depression.

To continue reading: The Fed’s Doomsday Device


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