4/16/2012 7:49 PM ET|
A new era of bad money
As countries continue to create money out of thin air to dodge debt crises, where will this all end? And how can investors prepare?
So how does this end?
I don't mean the current Spanish debt crisis or even the euro debt crisis. I think we know what the "solution" will be to that.
And I don't even mean the U.S. debt crisis or the Chinese debt crisis. I think we know what the "solutions" for those will be as well.
But what about the meta crisis? The one that's been created by the current round of "solutions." How does that end?
I'd suggest that we all brush up on Gresham's Law, the 16th-century description of what happens to strong currencies when they meet up with bad money. In a nutshell, Gresham's Law says that the bad currencies win. Figuring out what to do about that is important as investors head into era of bad money as far as the eye can see.
Creating new money
I think it's clear by this point in the aftermath of the global financial crisis that all the various local crises have been "solved" to date by the creation of vast sums of money essentially out of thin air on the official balance sheets of central banks such as the Federal Reserve and the European Central Bank and on the unofficial balance sheets of, say, China's banking system. I think it's equally clear that, for all the talk about economic reforms creating growth, or austerity creating growth, or financial market confidence creating growth, the most likely "solution" going forward is the continued creation of vast sums of money essentially out of thin air.
It's still an open question if the "solution" will work. In the case of Spain, for example, the European Central Bank fixed the crisis for a while by giving banks access to 1 trillion euros in three-year loans in December and February. But by late March the crisis was back, and the yields on Spanish and Italian government bonds had started to rise again. Now we're looking at another program of bond buying by the central bank to lower yields or another program of three-year loans to banks to give them the money to buy more bonds in order to lower yields.
To condense what I wrote in my Friday, April 13, column, "Why Spain scares the market," on the current state of the art in the Spanish crisis, Spain and the eurozone are likely to fall back on a series of increasingly desperate work-arounds by the European Central Bank, other global central banks and, finally, the International Monetary Fund. Each of those fixes would require that somebody print money -- either the European Central Bank, the International Monetary Fund or some combination of the Federal Reserve, the Bank of Japan and the People's Bank of China. Print enough and the immediate Spanish crisis goes away again as bond yields sink and governments get more breathing space to propose economic reforms and budget cuts.
At some point, though, the bill for these solutions comes due. I hope that point comes after some semblance of economic order has returned to the eurozone and when growth has recovered in the United States and China. But even if Spain -- and Italy, Portugal and Ireland -- win back enough confidence to be able to sell bonds in the financial markets again, the world will still be looking at the bill for this crisis. And we'll still be looking at unsolved budget and balance-sheet problems in the United States and China.
How big is the bill?
The grand total depends on how many central banks we want to include in our reckoning.
At the least we should count the balance sheets of national central banks. For example, the Banco de España, Spain's central bank, showed an increase in its balance sheet for net lending to 228 billion euros in March from 152 billion in February. The March 2012 lending total was up from just 42 billion euros in March 2011.
Go up another level to the balance sheet of the European Central Bank. At the beginning of March, that bank's balance sheet hit a record 3.02 trillion euros (roughly $4 trillion). That was nearly one-third bigger than the German economy.
The only thing good about the rapid expansion of the European Central Bank's balance sheet is that it makes the Federal Reserve's balance sheet, at $2.9 trillion, look positively conservative.
Deleveraging those balance sheets will be extremely dangerous. Central banks will have to sell bonds and other assets back into the financial markets to reduce the size of their balance sheets. That will reduce the money supply and cut into growth. At the same time, governments that haven't yet dealt with their outsize budget deficits and their own debt will have to raise taxes, cut spending or both. The two-track effort, even if successful, will be a huge drag on national economies and on the total global economy.
I think we can assume, however, from the behavior of national governments and central banks during the crisis so far that they will do all they can to put off any significant deleveraging.
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1990's = billions
2000's = trillions
Look out quadrillions, here we come...
just a matter of time before all the monopoly money these central banks are printing, around 7+ Trillion in the last couple of years, falls apart. Elections here won't matter as whomever wins will have another mess to deal with. We can't print our way out of everything.
The only thing you can be sure of is there will be QE3. It will artificially prop up the stock market until the election so Bernanke can keep his job. Romney said he would replace him if elected and helicopter Ben only stays if Obama wins. Then get ready for more inflation which will probably kick into high gear next year. Sigh :-(
Monetary policy has no place near or at the top of anyone's list of things to adjust or fix if a country has a ray of hope of getting back on it feet. In my opinion the Federal Reserve should be shut down.
Trade policy, manufacturing policy, immigration policy, tax policy, politics and campaign policy are all policies that are the core cause and effect of making a country truly strong again.
Not being strong on paper but being strong in real life tangible goods, manufactured from raw materials with real physcial and intellectual workmanship and labor. Making things and selling them at a profit will be the only way a country will ever truly get out of trouble.
5000 years we have watched them take countries down the tube.
We sit here in the USA, watching the handouters in Europe go through their gyrations trying to save their freebies.
We are trying to get where they are, the leftys still think they are going to get a free lunch.
"In the long term I don't know how this plays out-although I suspect the outcome is rather ugly," Isn't that always what happens when central banks interfere with free market forces? Hey Juback you actually know what is going to happen!
Keep voting for idiots like we have running the show for the last century and this is what your going to get. A world wide currency crisis which all the central banks won't be able to stop.At some point central banks bag of tricks will run out. When will this happen? In my opinion when all the worlds biggest billionares and corporations start dumping their cash and head into gold and silver all out its coming and coming quick.It will be the Hiroshima of world wide wealth destruction.
Crying Tree: Ever since they made it a global economy it has turned to massive fraud. Who can print the most money and who can bail out who. We were much better off as a nation before world trade. It has just gone down hill and now our property is worth half at what the insurance companies appraise to rebuild. Were headed for priced to high to buy as inflation rules the necessities of life.
Well, the global economy with the mix of government types has only made a comparably few very wealthy and depressed the vast majority in every country engaged in it.
It has done nothing to make prices stable, encourage economic growth meaning both demand and supply curves push outwards not just one or the other which just forms bubbles or inflation. It has enslaved millions below the poverty line. And is unstable-- a spiral down that just keeps getting further and further out of control.
The global economy was code word for let the vast majority suck eggs and build a new elite class that controls them all. One ring to rule them all LOL! And that ring, was greed.
Everyone thinks they're going to be rich LOL!
You can have your GOLD and SILVER, i've been investing in Guns and Ammo for months. When your money is no longer worth anything, and pecious metals won't buy you jack crap, I'm willing to bet that anyone looking down the barrel of a gun is going to give the handler anything they ask! So for you OBAMA lovers, go ahead and keep that idiot in office so he and his pal Ben can make all the Fiat money you can stuff in a building, cause it's not going to be worth squat! "He with the most weapons wins"!
This also goes for you fruit loop NRA haters too. When you give up your rights to own a gun, then you might as well live in a country like Syria,N. Korea,Iran,Cuba,Iraq,Afganastan,China,etc.etc.etc....I believe those counties all have people with no rights. Get the picture???
You need sound fiscal policy here. In the US we have a balance sheet recession. Monetary policy is useless in a balance sheet recession. Lowering rates (ZIRP) to zero only traps reserves within the money system. This is allowing the banks to re liquify but savors and retirees are hammered. QE again is not anything else than a swap of interest bearing assets from the economy. It is a non factor that has only raised asset prices. This is a tax on the economy that has done nothing except again trap trillions in the monetary banking system. We have not figured out that this is a balance sheet recession. Europe is also in a balance sheet recession but it is much more tragic as they are also trapped in a single currency union where you don't have a balancing mechanism within the lower periphery. In both instances we need sound fiscal policy. Congress in our country doesn’t want to deal with it and in Europe it’s the same. The Europeans have done the minimum with minimum political/fiscal damage. They as well as us have abdicated policy and governing to the Central Banks. In this way they are 100% not culpable for the potential damage. Just blame Draghi, Trichet, and Bernanke. That seems to work! Remember, CB's can only do so much after all they are printing money to take care of the problems created by congressional policy makers and technocrats.
In the end, the need for some sort of counter cyclical fiscal policy where in times of contraction, we lower tax rates and increase spending and in times of major expansion (bubbles) we raise taxes and slow spending is needed. We have forgotten the later and we will continue to suffer at the hands of Congressional Policy Makers.
"Deleveraging those balance sheets will be extremely dangerous. Central banks will have to sell bonds and other assets back into the financial markets to reduce the size of their balance sheets."
That will never happen. Central banks' balance sheets will get deleveraged the way everything else will get deleveraged- by devaulation of currencies.
Not paying your debts in the same money you borrowed is tantamount to theft.
What I propose is simple. We adjust PRINCIPLE to the increase in money supply. The more you print, the more you must pay back. Plain and simple. No defrauding of the lender to the benefit of the borrower.
The borrowers who borrow money and then invest it poorly should never be bailed out. It is the Left and the 'Inflate your way out ofdebt" that has made a shambles of the economy, along with their wealth redistribution schemes to defraud those that work to give to those that don't....
Marxists and democrats all seem to think alike... Ask yourself, how did Dodd/Frank stop Mr. Corzine from stealing 2 billion and why is this guy not in jail? How did Mr. Madoff, another life long democrat, evade the SEC for so long? In a nut shell large campaign contributions to Democrats...
Keep em broke, in debt and happy. Doesn't all of this/these answers sound familiar? I find it hard to really criticize political/economists of this generations answers to the world we live in. Anyway it's for their benefit that they keep it all going, the dog chasing it's tail answer to everything. I think I'll mutter into an open mic that I intend to make government agencies smaller, fewer employees, lower taxes and more jobs. All of these things were done at the end of WWI, and WWII. It has been done time and again after the Creation of the Federal Reserve, which was designed around the German banking system. History just keeps repeating itself. It is the same old same old. Are you still alive?
Is our government really Looking out for Americas best interests ? I think not !
Increasing the debt at home doesn't work either.. Besides, i dont have a way to print that stuff like they ( The Central banks ) do! Paying our Debts should be #1 . Might i suggest the Lincolns Green backs ? The Central banks ( $$$$ laundering at best ) seem to be out of control and only the rich prosper. Good evidence / proof is the BAIL OUT . I cannot be convinced in any way shape or form that this present leadership in Congress , House of representatives or the President, is a positive influence on how government should govern for the people. I like your annalogy J.M. ... As others have said " SPOT ON " !
The economics of austerity, high debt and printed money!!!!! No growth and inflation,stagflation!!!
This is not for just America but the whole world. We will come up with a new economic plan, the question is how hard do we have to get hit with an economic 2X4 before we change the program.
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