The central bank money-printing party
As the world's central banks print money and buy each other's bonds with abandon, very few seem to realize the implications for the world's finances -- or their own.
On Tuesday, Japan announced that it intends to buy European Stability Mechanism bonds using its foreign exchange reserves in order to help weaken the yen.
This is not new news that Japan will be buying this paper, as it has purchased European Financial Stability Facility issues in the past. But I thought the juxtaposition of this with how government finances and currencies around the world have devolved made a poignant statement.
Just think: The Japanese have told us they are going to print as much paper as it takes to generate more inflation and drive the yen lower (which is also the unstated aim of the rest of the G-7 central banks).
They are then going to use this literally worthless paper they have conjured up to buy the bonds of an organization that is backed by the same insolvent entities that are issuing the paper that it intends to backstop. The whole concept is rather comical, but to me this one act is a perfect illustration of where we are in modern-day finance.
The fact that the gold market doesn't go berserk on a daily basis just shows you that an enormous chunk of the G-7's population is still oblivious when it comes to this sort of lunacy.
I don't want to call the bond bull market a bubble, because it has not precipitated the behavior change that goes on in bubbles among the masses. However, this idea that central banks can simply print up the money to finance government deficits is completely absurd, and if it wasn't, John Law would be one of financial history's great success stories instead of one of its great con men. (Learn about John Law and the Mississippi bubble on Bing.)
At least we're not that bad . . . are we?
I've highlighted this example from Japan in light of the news there, but lest we forget, Federal Reserve Chairman Ben Bernanke plans to buy $1 trillion worth of government paper (offsetting 70% to 100% of our deficit). That folks are bullish on the dollar, bonds and/or stocks with those policies at work just goes to show that even after our stock and real-estate bubbles, the citizens of the U.S.A. remain sound asleep.
Meanwhile, Wednesday's Wall Street Journal carried a front-page story about the absurd lengths to which the Swiss National Bank has gone to weaken the franc. It is truly remarkable (which is why I keep remarking on it) how incredibly enormous and powerful -- yet ignored -- these central bank activities are when one goes down the list of actions the G-7 central planners are doing, as they are operating at a multitrillion-dollar run rate of monetization.
As I noted above, I don't think one can characterize the central bank buying and the long-running (though possibly ended) bond bull market as a bubble, because it hasn't really warped the behavior of the public, though it has allowed governments to continue their wrong-headed ways worldwide.
It is also quite likely, given the rampant money-printing around the globe, that at some point Asia may "catch a bid" and start moving. Given Japan's current policy plans, and if China decides to get serious about stimulating its economy, it is hard to see how that won't affect other countries in the region -- especially considering that many Asian currencies are in effect pegged to the dollar, so the Fed's policies abound there as well.
You're going to need a bigger boat
To say that there is a sea of paper money out there is an understatement; it is more like an ocean. All of that is quite likely the reason the Standard & Poor's 500 Index ($INX) is as firm as it is, that coupled with the fact that too many in the paid-to-play (i.e., professional money management) crowd had too much angst about the recent fiscal soap opera and now are scrambling to own however many equities they need to catch up to their beloved benchmarks.
In any event, I believe that the result of all this madness will inevitably be much more inflation and a worldwide bond bear market, though as we learned in both of our bubbles, and Japan's before that, when crowd psychology is this disoriented, it is impossible to predict exactly when sanity will return.
At the time of publication, Bill Fleckenstein owned gold.
there was this island with ten people on it. each of the people owned 10% of the land. a foreign banker came to the island and told the people "I will loan you all $100,000.00 each at 5% for one year so you can build houses and factories and build up the economy of your island". The people all did this because is sounded so great. But how will the people pay back the loan? They owe the banker $1,050,000.00 but there is only $1,000,000.00 in the system. It can only be done if the new people that move to the island take out more loans to buy the houses and products that were built thus paying the principle and interest on the first round of loans. But now we have an even bigger problem. There is not enough money to pay the interest and principle on the second round of loans because it is also short the interest for BOTH the first and second round of loans. So a third round of loans must be taken out that will pay the interest and principle of the second round plus be minus the interest of the first round. So now a fourth round of loans must be..........
I have just described a fiat money system just like the one we use in the United States orchestrated by the Federal Reserve. It creates COMPOUND DEBT! It grows slowly at first and then gains size faster and faster. We are in the final stages of a collapsing fiat money system. The whole world is. It is gonna get ugly!!!!!!!!!!
Q: What's the difference between a centrally planned economy (ala China) and an economy with a centrally planned monetary system?
A: Nothing really.
David Carver, you are a typical Lib., who is feeding you your wisdom? Must be your UNION STEWARD.
Illinois is full of your kind of sheeps who can not think or read for yourself.
Our financial system is based on unsustainable addiction to consumption and debt. Anyone who thinks that "their" political party has the answers is brainwashed...both dems and republicans bow to wall street and facilitate, or at best turn a blind eye to, the financial abuse going on since its quid pro quo between washington and wall street. People should wake up and think for themselves rather than letting forces like fox news or CNBC do the thinking for them. Just look at the facts...the national debt and deficits have grown exponnetially for past 40 years regardless of political party in the white house.
gold stocks are getting killed and lost their shirts since 2009 when stocks skyrocketed from 777 to 1450. Big companies hoard 2 trillions of cash and booming. The shorts are getting killed and gold bugs are licking the wounds. Stock buyers are eating steaks and lobsters. What is going on and wrong with your argument?
This is not capitalism. Once upon a time the Fed managed monetary policy by setting a target Federal Funds Rate - which in turn influenced Money Market Rates. However, by actively manipulating the Bond Market in such a manner is an example of Central Planning rather than Capitalism.
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ABOUT BILL FLECKENSTEIN
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
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As the devil-may-care bravado of Wall Street marches on, history warns that -- in the end -- there will be the devil to pay.
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