More easy money on the way

Oct 14, 2010

Buenos Aires, Argentina

Today, we're headed up to the ranch... Which means we're going to take a few days off from these daily reckonings.

------------------------------ Derivatives Simplified ------------------------------
Derivatives can be very profitable. But also very complex. Simplify them with our FREE & Exclusive Guide on Derivatives... and most importantly know how to profit from them.
All we request is you try our Free-For-Life newsletter - The 5 Minute WrapUp - for a week to Get this Guide Right Away!

Instead of reckoning with gold, fed policy, stocks and interest rates...we're going to reckon with things that are easier to understand but harder to actually do anything about. Cattle. Water. Grapes. Capers.

Capers? Yes, apparently, the high, dry valleys are good for growing capers.

"Why bother," asked a friend in Paris. "Aren't you supposed to be enjoying that place? You don't want to work when you go there."

Au contraire. We like working. Especially on things we know nothing about.

Truth is, we barely knew what capers were. Those little salty things that they put in with fish, olives, pickles. We don't really know what they do with them. But we're going to plant some anyway to see how they do...

It helps keep the people up there busy. Otherwise, they have no jobs. We feel the heavy weight of a landowner's responsibility... to make the farm more than just a place to relax. We have to try to make it pay!

Meanwhile, stocks, commodities, practically everything is slobbering...breathing and bothered. Probably capers too. Why? Because everything points to more easy money from the Fed. And everyone knows what easy money does. It causes prices to bubble up. Asset prices, that is. It doesn't do much for the economy - not when the economy is de-leveraging. But it can really cause havoc in the financial markets.

The Dow went up another 75 points yesterday. Oil is up to $83. Gold is headed to $1,400 - and after that, the moon.

Whee! What fun it is to think about all that new, Fed-created money bubbling into the markets...pushing up everything in its path...

Ben Bernanke gave the Japanese some advice about 10 years ago. He said that if their economy was stuck in the doldrums it was their own damned fault. He didn't put it that way. He said their problems were largely "self-induced." Which is a polite way of saying it was their owned damned fault.

He made it clear that he wouldn't let that happen to him. He'd use the tools at his disposal to light a fire under the economy. Anyway, that's what he told them.

And now, here he is. In Tokyo. Well, not literally in Tokyo. You know what we mean. He's faced with almost the same set of problems that faced the Japanese - a sluggish, de-leveraging, funky kind of economy.

"Across the US, long recovery looks like recession," says the New York Times.

So far, Bernanke has done about the same things they Japanese did. And so far, he's gotten about the same results.

But investors are betting that he won't stop there. They're betting that they can take him at his word...that he'll pull the trigger on enough Quantitative Easing to light up the whole world. Or blow it up.

Yes, the markets seem to be jumping for joy at the prospect. Ben Bernanke is supposed to announce a program of easy money...not just a little easy money...but a lot of it. Analysts are talking about the Fed buying between $100 billion and $1.5 trillion in bonds.

Of course, investors have probably already priced that kind of QE into the price structure. So, what are they gonna do if Bernanke does the expected thing?

Ben Bernanke's momma didn't raise no moron. He knows the whole world is watching. If his gesture falls short of what investors expect, they'll sell. And if he doesn't do something dramatic, they'll accuse him of being a coward...and they'll sell too. Only if he surpasses their expectations will asset prices really take off. And, of course, the dollar will fall. Which is what he's hoping for.

It will be a disaster for the economy. Printing press money always is. But it should be fun to watch.

*** The story of the rescued miners brought tears to our eyes. With so much claptrap and folderol in the news, it was a delight to see a real triumph...a genuine victory...for the human race.

We tip our hat and raise our glass to the whole rescue team. Especially to those drill operators from Pennsylvania. Good on you!

*** Now...back to our miserable beat...back to lies and vanity and foolishness. Back to the financial world!

If you could really make a society prosperous just by inflating the currency, Zimbabwe would be richer than Switzerland...and the Argentines would all be driving Mercedes. They've got 25% inflation right now. But they're not getting rich. They're not driving Mercedes. They're just looking for ways to not to get robbed, by buying apartments and opening offshore bank accounts.

And yet, everyone seems ready to believe that monetary inflation will make things better. Even the most illustrious thinkers in the financial world.

Here is George Soros, in the Financial Times:

"What America needs is stimulus..."

"Without a bailout," he says, re-treading some familiar ground, "the financial system would have remained paralyzed."

Really? What makes him think so? It looks to us as if the bailouts themselves are the source of the paralysis. Rather than let the chips fall where they may, the bailouts left the chips more or less where they were. Failed bankers still run failed banks. Failed auto executives still run failed automakers. Failed regulators and policymakers regulate even more...and as for making policy...well, we now have QE!

Printing money up extra money - with no backing - used to the sort of thing only counterfeiters did. Now it is done by the central bankers and Treasury Secretaries themselves. They don't apologize for it. They don't hang their heads and contemplate blowing their brains out. Instead, they're proud of it...announcing that they "saved civilization," or some such claptrap.

It is all so leaves us gasping for air.... Everyone seems to think he knows better what people should do with their money than the people who own it. Businesses are building up liquidity, says Soros; they should invest. Consumers are paying down debt; they should spend, says Krugman.

What? They don't want to spend or invest? Then, we'll steal the money from them, via inflation, and make them want to get rid of it.

This makes no sense in theory. Why should people do anything with their money other than what they want to? What is an economy for, if not to serve the interests of the people in it?

But the economic busy-bodies think they know better. They think an economy is supposed serve them - by doing as they demand. They want it to produce full employment, consumer price increases and positive GDP numbers - all the time. And they think they can get these things by increasing the supply of notional 'money.'

It is swamp gas in theory...but maybe it works in practice? But where is the evidence? When has it ever worked?

It hasn't. It never will.

But it sure can touch off a fire-show in the market....before it blows up the economy completely.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "More easy money on the way". Click here!