Money Printing: Everything Old is New Again

The only thing new in the world is the history you do not know.‘ – Harry S. Truman

While the world has evolved over the centuries, human emotions have remained the same – happiness, sadness, jealousy, greed, fear.

The ruling class and working class are equally afflicted by these emotions.

Seeking the easy option is another human frailty that has stood the test of time.

It is for these reasons we are destined to repeat the same mistakes of our ancestors.

The mentality of ‘something for nothing’ has become so entrenched in our culture we have lost sight of objectivity and reality. History is littered with examples of how badly the story of expected privilege ends.

Politicians promise ‘something’ funded by money created in the ether. Citizens are conditioned to expect entitlements paid for by someone else’s taxes. Consumers are urged to buy ‘something’ with money they don’t have (credit).

Central (pun intended) to this game of illusion are our central bankers. Their printing presses are keeping the ‘something for nothing’ global economic charade on life support.

Proof of how precarious this ‘something for nothing’ house of cards has become was the recent release of the US Fed’s minutes. Some board members had the temerity to question the merits of Quantitative Easing (money printing). The mere ‘thought bubble’ was enough to send Wall St into a temporary spin.

Imagine if the central banks of Europe, Japan, China, UK and US actually said, ‘enough is enough and henceforth all this money printing nonsense will cease’? Markets would go apoplectic. History emphatically tells us this is our destiny.

From Rome to Spain to Washington

The Fed is the latest in a long line of money tamperers. This deceptive practice dates back to Ancient Rome. In an attempt to fund the demands of an expanding Empire, successive Roman Emperors ‘printed more money’ by gradually diluting the silver content of coins with cheaper metals. Note – this sleight of hand did not end well for the Romans.

Many centuries later the Spaniards found another adventurous way to inflate the currency in their economy.

The Spanish economy in the 16th century, courtesy of its powerful navy, was the envy of the world.

The Spanish fleet journeyed to the New World and returned with a bounty of gold and silver. Between 1556 and 1783 the Spanish extracted over 41,000 metric tons of pure silver from just one mine in one Latin American country, Bolivia.

The rivers of gold and silver delivered great wealth to Spain – this was both a blessing and a curse.

The easy money created a false prosperity. Subsequent generations were conditioned to believe the wealth was an entitlement rather than a windfall. (Sound familiar?) Gradually, consumption replaced manufacturing.

The phony wealth continued for as long as the galleons returned fully loaded from the New World.

The unintended consequence from injecting tons of gold and silver into the Spanish and, by extension, the European economy, was an inflationary breakout. Prices increased more than 600% in a period of 150 years. Inflation slowly eroded the Spaniard’s buying power. Eventually the rivers of New World gold and silver ran dry and the Spanish were ruined.

Easy money provided soft options for the Spaniards, complacency replaced commerce. It took centuries for Spain to recover from its economic malaise.

A century or two later the industrialisation of the printing press enabled a raft of governments to reproduce Rome’s alchemy and Spain’s larceny. Printing proved far easier than minting dodgy coins and sailing ships half way around the world. This in turn gave rise to a proliferation of fiat (paper) money disasters.

In the history of fiat money, not once has printing more money ever provided a lasting cure for the underlying ills of an economy.

Obviously Bernanke thinks ‘this time is different’ and he can avoid the tragic endings associated with the money printing of the 1700’s Mississippi Bubble; the 1790’s French Revolution; Germany 1921-1923; Yugoslavia 1989-1994; Zimbabwe 1998-2009, etc, etc.

History clearly demonstrates that money printing (in all its forms) is not a sustainable solution.

Yet, here we are centuries later, with Spain, the Romans (Italy) and the rest of the western world all edging closer to the economic abyss. Everything old is new again. The characters and storyline may be different, but the plot remains the same.

What the Austrians Taught Us Fifty Years Ago

The modern day financial world became the New World equivalent. Debt instruments have been the ‘rivers of gold’ providing easy money for a consumption-based lifestyle.

The west exported its industries to the emerging markets in exchange for debt-funded cheap imports. Complacency replaced commerce.

The Great Credit Contraction is drying up the rivers of gold and the western world is struggling to come to terms with this new economic reality. Baby boomers, Gen Y and X have only ever experienced an economic ‘growth’ model supported by excessive debt.

This new world of private sector credit contraction is completely foreign to us. The austerity demonstrations in Europe indicate a large section of society is not coping well with the squeeze.

Baby-boomer central bankers are also doing their best to maintain the old-world illusion by propping up share markets with more phony money. Bernanke and his Wall Street mates have built a house of paper. The economic storm brewing on all fronts in the western world is destined to rip Bernanke’s paper edifice to shreds.

Learn from history. Booms always bust. Reality eventually trumps phony money – although this moment of dawning can and does take longer than expected.

The famous Austrian School economist Ludwig von Mises made the following observation over fifty years ago (emphasis is mine):

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.

The ‘sooner’ scenario would have been to allow the GFC to purge three decades of excessive debt from the system and permit imprudently managed banks to fail. The central bankers decided to ignore history and prop up the system with more credit (printed money).

These delaying actions mean the ‘later’ scenario of ‘total catastrophe’ awaits us.

The majority is blissfully unaware of this pending outcome.

Sadly when history inevitably repeats itself, those who were duped into believing ‘something for nothing’ was a sustainable concept, will be taught the same painful lesson of every other civilisation that embraced this ill-fated experiment.

My advice is that the recent share market rally should be rented, not owned. Be prudent and reduce your share exposure to a level where you will not incur lifestyle-threatening losses.

Fail to heed the lessons of the past and your retirement capital will also be history.

Vern Gowdie+
for The Daily Reckoning Australia

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

To read more insights by Vern check out the articles below.

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money