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The Path to Money Printing

What comes after QE2?...

INVESTORS ARE beginning to look beyond QE2, the second round of quantitative easing by the US Federal Reserve, writes Bill Bonner in his Daily Reckoning.

If the economy really is recovering, investors say to themselves, the Fed will be able to back off from money printing. 

Stocks, gold, commodities - everything should go down.

Did we mention a "hyperinflationary depression"?

What's that, you're probably wondering.

Well, it's when you have a deflationary correction...and soaring prices too. And that's what happens when the feds try to stop a major correction by pumping in huge amounts of money and credit.

But let's stop and look at how an economy works.

As an expansion gets underway, first consumers spend money that they earn. Then, they spend money that they will earn in the future. And then, they spend money that they will never earn.

The private economies of many of the world's developed nations reached the "never earn" stage in 2007. All of a sudden, lenders realized that they were never going to see their money again. Many borrowers would never earn enough money to pay off their loans.

The economy began a contraction...correcting its mistakes by writing down the value of those loans.

Markets are always discovering what things are worth. In 2007, they began to discover that a lot of the world's credits weren't worth as much as people had thought.

But then the feds were on the case.

While an individual person might run up debts greater than he can pay, the feds go one step further.

First, an expanding government lives on what taxpayers give it. Then, it lives on what taxpayers give it, plus what it can borrow from them. Then, it spends everything that it can squeeze out of taxpayers, plus what it plans to squeeze out of generations of taxpayers who haven't been born yet. 

Finally, when it has crushed all the blood out of the turnips, current and future, it spends money that no taxpayer will ever earn or pay in taxes. It just prints money.

This creates a far bigger problem. Because, no one knows what to make of this new money. Where did it come from? Who earned it? What does it mean?

Since the economy is contracting, the new money doesn't have much traction...at first. It is lent to hedge funds, banks, and other speculators. Soon, it finds its way into asset markets and basic commodity prices.

That's why we've seen so many record setting prices in recent weeks.

But this is a special kind of inflation. Instead of stimulating people to buy, spend, borrow, and invest...it makes them feel poor. They pay more for gasoline and have less left over for other things. If they have a job, their earnings barely creep up...while prices race ahead.

Want to see the process in action? It's happening already in the US. And it is even more advanced in England. Here's the report from The Telegraph:

The Centre for Economics and Business Research (CEBR) said soaring inflation coupled with low pay rises means household peacetime disposable income is at its lowest since 1921.

Rising food, clothing and energy prices mean the average British family will have £910 less to spend this year than they did in 2009.

The CEBR calculates that household disposable income will fall by 2% this year, more than double last year's fall of 0.8pc and the biggest drop since the savage 1919 to 1921 post-First World War recession.

It forecasts inflation will average 3.9% in 2011, its highest since 1992, as January's increase in VAT from 17.5% to 20% and the rising cost of oil and other commodities continue to drive up prices.

At the same time, salaries will rise just 1.9% as unemployment remains high and the public sector makes cutbacks.

Is this the description of a hyperinflation depression? Nope. Just an inflationary recession...so far. But wait until the feds pump some more...

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Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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