CHAPTER 1
Fake Money, Real Danger - Massive Covid Stimulus Boosted the Boom and Will Bring on the Bust
If a book called Fake Money, Real Danger sounds a bit scary, let's make two things clear at the start.
First and foremost, the potential future dangers described in this book are not happening right now. The enormous level of government stimulus from massive money printing and borrowing (Fake Money), and the likelihood that Congress will keep borrowing and the Federal Reserve will keep printing, will keep us in high cotton, for now. Even if the stimulus declines, interest rates will stay low and asset prices will likely keep rising.
That means, at least for now, the sky is not falling. Not only is there no reason to panic, investors today still have enormous opportunities - if they move quickly and correctly in the near term.
And that brings us to the second critically important point: The near term will not last forever. All this Fake Money, and the asset bubbles it helps create, are not permanent. There is real danger ahead, and only those who see it coming and know what to do about it will be able to hang on to whatever gains they made earlier.
The purpose of this book is not to scare you into inaction, or to scare you into defensive actions that may not actually protect you. Through facts and charts, we want you to see for yourself the full degree and threat of Fake Money. Even better, you can see for yourself when the real danger will begin and what you can do about it.
While the full extent of the future is unknowable, we have developed a way to make substantial gains in the current Fake Money stock market, as well as how to protect yourself from the inevitable failure of the Fake Money economy.
Let's begin.
Just Like the 2008 Financial Crisis, Only Much, Much Worse
Remember the 2008 Financial Crisis? The housing bubble popped, stocks crashed, banks tanked, and the government responded with massive money borrowing and massive money printing - quintupling (five times) the US money supply.
As a result of such massive government borrowing and printing, many businesses and banks were bailed out, the economy eventually recovered, and the sagging stock market resumed its upward rise.
If that sounds a lot like what has been happening during the Covid Crisis, you're not wrong. Only this time the truly massive government stimulus - and the real danger it creates - is even bigger. Much, much bigger.
Congress Borrowed a Massive Amount of Money and Gave It to Everyone
Unlike during the Financial Crisis, when Congress primarily borrowed money to bail out financial institutions and banks, in the Covid Crisis, Congress borrowed unprecedented amounts of money in a very short period of time and gave it to just about everyone.
That's very different from the past, when much of the corporate and financial bailout money was eventually paid back. This time, Congress couldn't care less about getting repaid. It simply borrowed $3 trillion and gave it all away, no strings attached.
To put this giant giveaway into perspective, $3 trillion is about three-quarters the size of the entire government's annual budget. It's also about 15% of our GDP. So, even if our GDP had declined as much as 15% due to the Covid pandemic, there would be relatively little impact because Congress made up for all of it with so much borrowed money. In fact, in just two months in 2020, Congress authorized borrowing an amount almost equivalent to the entire federal budget for the year (Figure 1.1).
Figure 1.1 Huge Fake Money Giveaway in March 2020
Source: Federal Reserve Bank of St. Louis.
Covid relief spending authorized by Congress in March 2020 was almost as big as the federal government's entire annual budget in 2019.
This level of borrowing is totally different from the government's Financial Crisis response and much more powerful in its short-term positive impacts. Unfortunately, it will be much more powerful in its long-term negative impacts, as well.
Of course, few in Congress care about, or even see, any long-term negative impacts. Ask almost anyone in Congress if they expect the massive amount of money to be paid back and they will tell you no - and it doesn't matter if we don't.
And it's not just Congress. Most economists (who should know better) and most investment analysts (who should want to know better) think the same way: we are never going to pay it back, and there's nothing to worry about.
To Support All This Government Borrowing (and the Stock Market), the Fed Printed Massive Amounts of Money
Massive borrowing by Congress was made possible by massive money printing by the Federal Reserve. And if you think the Fed's massive money printing during the Financial Crisis was enormous, take a look at how much more massive money printing occurred (so far) during the Covid Crisis (Figure 1.2).
We call all this massive money printing and borrowing Fake Money because it wasn't created in proportion to real economic growth. Instead, it was created in enormous quantities to artificially boost economic activity and, most importantly, to support asset values.
The more Fake Money that we continue to borrow and print, the faker all this Fake Money becomes, creating vulnerable asset bubbles and vulnerable bubble wealth. And that's exactly what's been happening during the Covid boom.
Figure 1.2 Much More Money Printing in the Covid Crisis than the Financial Crisis
Source: Federal Reserve Bank of St. Louis.
In QE3 (the most recent previous round of money printing), the Fed printed about $85 billion of new money per month. In March 2020, money printing shot up to more than $1.5 trillion in just ONE month.
How We Know It's Fake Money: A Quick Look at the 1980 Chrysler Loan
Remember the government bailout of Chrysler in 1980? You might not, but it was a big deal then. Chrysler was asking for a $1 billion loan to get it through one of the toughest recessions this country had faced since World War II. Lots of people in Congress were skeptical. Even David Stockman, a young congressman whose congressional district in Michigan had a large Chrysler factory in it. In fact, he was so skeptical that he voted against it.
The debate was months long and tortuous. Many people agreed with Representative Stockman. They didn't want the government to get involved in bailing out private industry. Again, it wasn't a bailout, it was actually a loan. Despite lots of opposition and months of debate, in the end, it passed. And, it was paid back completely - early.
Thirty years later, in 2008, the question of bailing out almost every industry came before Congress. The banking and financial industries were at the top of the list, but the auto industry was there, too. It would take a lot of money - over $1 trillion, not $1 billion. Yet, unlike the extremely modest $1 billion Chrysler loan, there was only a month of debate and not much opposition.
Only a little more than 10 years after that, in 2020, Congress approved a $3 trillion giveaway with about a month's debate. It wasn't an industry bailout that could potentially be repaid or a loan that must be repaid; it was mostly a massive giveaway. And, it wasn't $1 billion, or $1 trillion. It was $3 trillion, decided quickly with no strings attached, that faced little opposition from Congress or the President.
Why almost no debate over a $3 trillion giveaway but so much debate over a $1 billion loan? Because everyone knows it is absolutely critical to quickly protect the economy and high asset prices from any significant threat. It is a silent recognition of just how fragile those high asset prices really are, and just how dependent the economy really is on those high asset prices. Without this massive influx of Fake Money, there is no solid economic or financial support for such high asset prices. These are bubbles, and they absolutely must have outside artificial government Fake Money support or they will collapse - immediately.
All This Government Stimulus, Plus Investor Enthusiasm, Created a Massive Stock Market Boom
The Fed's massive money printing during the Covid Crisis helped make the government's massive borrowing possible, kept interest rates low, and pushed the stock market bubble up and up (Figure 1.3).
Some stocks did even better. Tesla, for example, roared up 1800%, moving from $50 per share in mid-October 2019 to almost $900 per share in January 2021 (Figure 1.4).
Figure 1.3 Covid Fake Money Was Great for the Stock Market
Source: Standard & Poor's.
The S&P 500 rocketed higher during the Covid Crisis from March 2020 onward.
Figure 1.4 Kaboom! Tesla's Stock Price Explodes in the Pandemic
Source: Standard & Poor's.
It's been almost 14 years since the first Tesla car rolled off the assembly line, but almost 95% of its stock value as of June 2021 was created in the 20 months...
