How long will this money printing go on? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 13 December 2012
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Baltimore, Maryland

When I was just a little girl
I asked my mother, what will I be?
Will I be pretty?
Will I be rich?
Here's what she said to me

- Doris Day

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What a great day! The Fed has just done (yesterday) what everyone thought it would do. Nevertheless, we were surprised.

We hardly believe it. It is as if America's central bankers announced that they were going to get drunk...rob a bank...and watch a lap dance... all in one evening. You might do such a thing; but you wouldn't normally call a press conference and tell the world in advance.

Counterfeiting is a crime. There is an act of Congress that allows the Fed to get away with it. Still, a banker from an earlier era would have only done it in the dark of night. In the time of Edward II, a banker who clipped his coins would have his balls cut off. In the 19th century, one who printed up too many notes was soon disgraced and bankrupt. The best of them blew their brains out. But today, Ben Bernanke is treated like an honest man. Go figure.

The gist of the Fed's new plan is to print up $85 billion per month and use it to buy mortgage-backed securities and US government debt. This is supposed to increase 'demand,' and thereby get the economy moving faster. The important thing is that Fed has no money with which to buy these things. It has to create it, out of thin air. A lot of it.

At that rate, the Fed will be adding to the nation's monetary base - the Fed's assets - three times faster than the US economy creates new goods and services. In other words, for every $1 of new output, the Fed will add $3 to its balance sheet. In an idealized 10 for 1 fractional reserve system, that would mean as much as $30 in additional credit for every single dollar of extra GDP. By early next year, the Fed's balance sheet should reach $4 billion, which is a big increase over the $800 billion it was before the crisis began.

As long as the economy is in a major slump, this extra money is more theoretical than real. It increases stock market prices (probably) and bankers' bonuses (certainly), but it may not have much of an effect on consumer prices or the real economy.

Consumer price inflation has actually been falling, despite the Fed's efforts. The economy, too, has generally failed to react to the Fed's fiddling. But what can you expect? We're in a Great Correction. And as long as we stay in a Great Correction, the unforeseen consequences of the Fed's actions probably won't show up. The money will go into the banking system, and mostly stay there. The Fed's money-printing will be a dud, but not yet a disaster.

How long will this go on? Darned if we know.

What can you do about it? Nothing.

What should you do to protect yourself? Ah, that's easy.

Que sera sera
Whatever will be, will be
The future's not ours to see
Que sera, sera

Since you don't know what is coming...and can't change it...you have to prepare for what you can't see, not what you can. This is the point of Nassim Taleb's new book, Antifragile. The future's not ours to see. All you can do is to prepare to be surprised.

What kind of surprise? Who knows? But this isn't the first time a central bank tried to improve things by printing money. John Law tried it in France in the 18th century. All went well, until the new money collapsed and Law had to flee the country.

Same thing in Argentina in the 1980s. It seemed to go well, for a while. Then, all Hell broke loose. Prices rose at a 20,000% rate in March of 1990; the geniuses running the country tried to divert attention from their economic mismanagement by mismanaging other things. They invaded the Falkland Islands!

Same thing in Zimbabwe. The central bank thought it had a solution to the problem of too little money. It would print more of the stuff. It increased the money supply approximately a quadrillion times. Did that huge increase in demand boost output?

Ha ha...output disappeared. The shelves were soon barren. Nobody could produce because nobody - except for black marketers - could get paid. Shoppers had only the central bank's ersatz money...with lots of zeros but no value.

Will that story be repeated in the US? Again, we don't know. All we know is that when you do something outrageous, outrageous things happen.

In Taleb's words, the financial system becomes fragile. A little shock - heck, even an improvement in the economy - could cause a crisis and a disaster. A depression? Hyperinflation? Defaults? Shortages? Nervous breakdowns? Night sweats? Cold sores? Earthquakes? Traffic jams? Assassinations? Superbowl upsets?

We can't predict the future. But we don't have to. When the central bank plays fast and loose with the nation's money, someone's gonna get hurt. Just make sure it's not you.

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

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2 Responses to "How long will this money printing go on?"

SIVARAMAKRISHNAN

Dec 13, 2012

May be that is the reason the Central banks are buying Gold more even at this high price envisaging huge possibility of the new money getting collapsed by Hyperinflation due to monsoon failures or frequent droughts or Natural disasters.

BTW Mr Bill I want to know if the Fed's balance sheet should reach $4 trillion or is it $4 billion from $800 billion before the crisis began. Please correct me if I am wrong.

Like (2)

N K Nirula

Dec 13, 2012

You must be having a really bad day meditating in such a circular fashion--it's not like you to be so helplessly depressed! "...someone's gonna get hurt. Just make sure it's not you," you say--well, tell us more about how to make that happen.

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