The World's #1 Money Printer

The Dow was up a paltry 53 points on Friday. Gold was flat.

Why? Shouldn’t stocks be flying? Shouldn’t gold be closing over $1,800… and on its way to the moon? This was on the day after the Fed announced the biggest programme of money-printing ever undertaken by any government in history.

No, we’re not saying the Fed is adding more zeros than any other central bank in history. Not even close. Gideon Gono of the Central Bank of Zimbabwe still holds the record for adding zeros to a currency. Trillions of them. He’d take a billion-dollar bill and add another three zeros. Then, it would say one trillion dollars. Instead of being worth one cent, it would be worth two cents… until 24 hours later, when it was worth half a cent.

The bank of Ben Bernanke has a long way to go to catch up. But in terms of the current value of the money to be printed, Ben Bernanke is number one.

Forty billion dollars per month. Maybe forever. Or at least until the presidential election. If it continues, that’s $480bn per year. The Federal Reserve website shows current assets of $2.8trn. Add nearly $500bn per year… and it will take scarcely five years to double the Fed’s assets, which are the foundation of America’s money supply.

So far, gold has tracked the increase in Fed assets. Broadly, both doubled over the last five years. Does this mean the price of gold will hit $3,500 five years from now?


That’s the trouble with the financial world. Too many ‘maybes’. But here’s something we think we know: raise the money supply and you will raise prices. Gold, which is most sensitive to the money supply, should register the change quickly.

Other consumer prices, which are subject to supply and demand forces of their own, will adjust in their own way in their own time. But here’s a report from the Wall Street Journal. It tells us that prices are going up now:

WASHINGTON-U.S. wholesale prices in August posted the largest one-month gain in more than three years, fresh evidence that advancing energy costs could create inflation pressures.

Meanwhile, the number of U.S. workers filing applications for jobless benefits rose last because of the fallout from Tropical Storm Isaac, which hit several Gulf Coast states late last month.

The producer-price index, which measures how much manufacturers and wholesalers pay for finished goods, increased a seasonally adjusted 1.7% in August from a month earlier, the Labor Department said Thursday. The biggest gain since June 2009 was largely a result of energy prices rising 6.4%…

We also know that government, over time, makes a habit of stealing wealth by printing phoney money. Friedrich Hayek explains:

“With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.”

We have no doubt that fraud is afoot. But when and how will it be revealed?

We’re still in a Great Correction. And in a correction prices tend to go down, not up. People cut back on borrowing and spending. The money in the banking system may increase – as it has over the last five years – but it is not lent out to the public.

And the money already ‘in circulation’ tends to circulate less quickly. It stays in bank accounts, pockets and mattresses longer than before.

Since people borrow less, interest rates tend to go down naturally – with or without the central bank pushing them. And then, as prices and interest rates sink, lenders figure they’d rather keep their money in cash. Why bother to lend it out when interest rates are so low? Households figure they’ll hold their money a little longer too. Heck, prices might be low… but they might be even lower next month.

This is known as a ‘liquidity trap’. It’s what happens when the best thing you can do with your money is to keep it in your mattress. And when that happens, the Fed can buy all the bonds it wants.

It won’t make much difference to the real economy. People won’t borrow. They won’t spend. And the economy won’t grow. And the Fed just makes it worse by buying bonds, because it stifles interest rates, further encouraging people to hold onto cash, rather than lend it or spend it.

That’s what has happened in Japan for the last 20 years. It’s what is happening, more or less, in Europe and the UK today. And it is what seems to be coming in the US. Does that mean inflation will have to wait?

But here comes another maybe. If you’ve looked at the bond market you’ve noticed that they are going down, not up.

Because investors are also pretty good at looking ahead and trying to figure out what comes next. And many of them now figure that all this money-printing has to come to grief sooner or later. They all know you can’t get real wealth with phoney money.

So, they’re trying to figure out what happens when you try… and edging away from bonds.

We’re trying to figure it out too. Stay tuned!


Bill Bonner
for Markets and Money

From the Archives…

Be Very, Very Scared
14-09-2012 – Greg Canavan

How QE Favours the Rich
13-09-2012 – Bill Bonner

To the Barricades!
12-09-2012 – Dan Denning

The Power of Pork
11-09-2012 – Dan Denning

Waiting on Beijing
10-09-2012 – Dan Denning

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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The moral of the story – Sink your money into forests – Paper is in demand, and the US is running low on trees


An inflation arbitrage commodity ….

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