Guest Post: The Trouble With Printing Money

Tyler Durden's picture

Submitted by Chris Martenson from PeakProsperity

The Trouble with Printing Money

For a while now, I have been expecting a coordinated, global central bank action that would seek to print more money out of thin air, or "QE" (quantitative easing), as it is now called.  Now we have two of the most important central banks, that of the U.S. (the Federal Reserve) and in Europe (the ECB) having committed to open-ended, limitless QE.

In Part I of this report, we analyze the actions themselves, and then in Part II we discuss the implications to individuals and those with responsibilities to manage money.

The most recent announcement came from the Fed, and it had these features:

  1. The creation of $40 billion a month out of thin air to purchase agency mortgage-backed securities (MBS)
  2. The continuation of Operation Twist, which uses short-term Treasury bills and notes on its books to purchase long-term Treasury paper (that's 10- and 30- year bonds)
  3. When MBS payments come in – the Fed holds over $840 billion dollars of those – they will buy still more MBS paper ('rolling' the payments into new MBS, as it were).
  4. Taken together, the Fed will expand its balance sheet holdings of long-term assets (i.e., "debt") by ~$85 billion per month through the end of the year...but wait!  There's more...
  5. This time, unlike the prior two QE efforts, the actions will be taken without any pre-defined limit.   
  6. QE will continue until the labor market improves "substantially," whatever that means.  But wait...there's even more!
  7. If deemed necessary, the Fed will "purchase additional assets" and "employ other policy tools."
  8. As if all that weren't enough, for good measure, the Fed committed to a six-month extension of the 0.0% to 0.25% target range for the Fed Funds rate until at least mid 2015.

That laundry list can be summarized as 'we will do whatever it takes.'  If anyone was still wondering if the Fed would 'allow' deflation to happen on its watch under Bernanke, perhaps the above points in combination with QE 1 and QE 2 will settle their minds.

But will it work? 

Well, that all depends on what your definition of 'work' is. 

Without context, I really don't know how to explain the importance of these recent actions.  In order to address the implications of this historic move – remember, now is the time to keep a journal, as your future relatives will want to know all about what happened 'back then' – I'm going to rewind this story back a few years.

Review of How We Got Here

Since the very beginning of my public writings, I have leaned heavily towards the path of inflation, by which I mean money printing or its electronic equivalent, because even a cursory review of history will show that leaders have always chosen a little money printing today and the possibility of inflation tomorrow over the immediate pain of having to live within their means or with the consequences of their poor decisions.

That was just a fancy way of saying 'humans will be humans,' and while our technology has advanced tremendously over the past few decades, our DNA blueprints are virtually identical to those found in people living 50,000 years ago.  History can tell us much.

Our current predicament has its roots way back in the early 1980s, when something changed in our collective psyches that allowed us to abandon thrift and savings in favor of spending and borrowing.  This first chart, which references the U.S. (but in reality could apply equally well to most developed countries) show how borrowing has outpaced income (debt vs. GDP).

In order to believe that the Fed or any other central bank can get us back to 'normal,' you have to believe that it is normal for borrowing to exceed income and (here's the kicker) that it can do so forever.  Many people cling to the thin hope that somehow the Fed and its related entities across the globe can get us safely back on the yellow line in the above chart, angling forever upwards at 45 degrees.

Well, if it's not possible for you, personally, to forever borrow more than you earn without someday getting into financial difficulty, it is not possible for two or ten or 310 million of you to do so.  The math does not change simply because a nation is involved instead of an individual.

To really drive home the point that what our leaders have accepted as 'normal' and are endeavoring to resurrect is anything but normal, I find it useful to present this chart, which shows how the total credit market debt (that's everything) in the U.S. has doubled and then doubled again and again and again over the past four decades:

What 'getting back to normal' requires is that we find a way to continue expanding debt exponentially with a doubling time of around 8 years.  That's what the last forty years have seen, and that's the period during which every single leader at the Fed and in DC grew up and developed their views around 'how the world works.'

Unfortunately that's not how the world actually works.  In the real world your income and expenditures have to eventually balance, and the only question is whether this is accomplished through diligence or catastrophe.  The prior forty years were an admirably sustained departure from reality, but like all teenage road trips fueled with a pilfered credit card, the practices of those times were unsustainable and destined to end.

Hopefully by widening up our lens a little bit, we can more easily appreciate that instead of being 'normal', the vast expansion of debt was actually quite abnormal, and therefore attempts to resuscitate its prior trajectory are (1) certain to fail and (2) going to make the final crunch a lot more painful and damaging than it otherwise needs to be.

And oh, by the way – world oil is trading at $114 per barrel.  Recoveries are tricky business at half that price.

QE Will Lift Stocks and Commodities

While left out of the official FOMC (Federal Open Market Committee) policy statements, but not Wall Street Journal editorial pages, is that a primary goal of the Fed is to boost stock prices.  The stated reason is that the so-called wealth effect will lead households to view their rising portfolio statements and go out and spend more money.  An underlying reason has to also be the fact that pensions, endowments, and other long-running actuarial pools of money are being destroyed by too-low rates of interest on bond holdings and desperately need stock-market gains to cover some of the shortfall.

QE and its distant cousin Operation Twist both serve to lift stock prices.  QE does this in two ways – first by dumping money into the financial system, which then has to go somewhere and do something, so some of it ends up in the stock market, and second by driving down interest rates, which has the tendency to push money into stocks.

Operation Twist, which is balance-sheet-neutral for the Fed (short-dated securities are traded for long-dated securities – it's a swap) only serves to drive down interest rates on the long end of the curve.  No new money is created.

As we can see, stocks respond well to both types of stimulus:

As we might also note, when the stimulus ends, stocks respond unfavorably.  It would seem that the Fed is now trapped and that if it ever pulls away from the market there will be a rout of historic proportions.

Commodities really only respond to new money, which makes sense.  Lower interest rates on the long end of the curve do not change the preference for commodities much, and so Twist might be expected to do little, if anything, for commodities.  That's exactly what we see in the data:

While the Fed may not be too pleased with rising commodity prices (with all that's going on in the world with unrest, drought, and $114 Brent crude), it seems quite likely that rising commodity prices stand a good chance of being a feature of QEternity, or whatever this new program will finally be branded.

The Trouble with Printing Money

It is against the larger backdrop of borrowing and spending well beyond our means that we need to interpret this most recent effort by the Fed to print our way back to prosperity.

One way to look at the $40 billion per month in new printing is to compare it to individuals and households.  Remember, money only comes into your life through effort, and that's why it has value and can function as a store of value.  Once upon a time you could make the choice as to whether to work to find money (by mining gold or silver) or work to earn money by farming or practicing a trade, craft, or service.  Note that work was always involved.   

What does it mean that the Fed can just up and print $40 billion per month indefinitely without performing any work whatsoever? 

Well, let's put that in context.  If an individual earns $50,000 per year, then each month the Fed is effectively printing up the yearly output of 800,000 such individuals.  Said another way, if you earn $50k, then you'd have to work for 800,000 years to earn the same amount of money the Fed prints each month.

Given that the median household income is ~$50k, this means that after one year of MBS purchases, the Fed will have printed up as much money as 9,600,000 households will have earned.  Presto!  Just like that, the Fed is effectively creating the exact same purchasing power as nearly 10 million US households, or 25 million people (I'm rounding a bit here).

And nobody had to do anything except push a key on a computer a couple of times.

While the Fed can wrap this magic act in all sorts of covering language about dual mandates, maximum employment, and price stability, the simple fact remains that money printed out of thin air cannot, has not, and will not ever lead to prosperity.  How could it?  It arises without any effort at all, no work performed, no goods transformed or lives improved, no land planted and tended well, no services rendered, and no capital formed.  It is just conjured into existence.

It is just new money tossed after bad debts, with both remaining to work their different insidious effects on the economy and our daily lives.  If printed money could lead to prosperity, trust me – some culture would have worked it out long ago, because people every bit as clever and determined as those alive today (and with the same DNA software installed) have tried it again and again.

If it could work, then we should just print every household up a nice $1,000,000 check each year and let everybody stay home, take vacations, and drive nice cars.  It's just an absurd notion, and this is why you should keep a journal – you live in absurd times.


How does all this end?  Like it has every other time in history, with a final destruction of the currencies involved.  That's my best guess.

This is why I view all of the QE efforts to date, and those that will certainly follow, not only with suspicion but as a series of unforgivably narrowly-conceived efforts that will combine into one of the most colossal failures ever experienced by modern man.

In Part II: Understanding the Implications of QE3 we analyze how the recently-announced liquidity measures by the world's largest central banks will impact major asset classes (stocks, bonds, precious metals, commodities, real estate). And at a higher level, we look at why – at the dawn of this next phase of our economic and fiscal descent – prioritizing wealth preservation is essential. I remain convinced that the fate of most will be to lose most of their wealth during this process by trusting that the majority cannot be wrong when that is exactly the most likely case.

Click here to read Part II of this report (free executive summary; paid enrollment required for full access).

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Victorio's picture

Fiat destruction, bitchez.

GetZeeGold's picture



Johnny.....get back in there and print print print!!!

MillionDollarBonus_'s picture

The manifesto of the progressive revolution:

Part 1 - Rich People

I feel angry when libertarians start talking about the free market and 'personal responsibility'. I'm not interested at all in discussing how to create value in the real world and trade that value for goods and services that I want. I don't "want" goods and services - I need them, and deserve them. CEOs and big shots make hundreds of millions of dollars a year, which has a direct tangible negative effect on my life. I simply cannot live my life without taking just a little bit of that money for myself, and donating just a little bit of that money to causes that I deem to be worthwhile and desirable. My principle objective in life is to make sure that NOONE gets to make such obscene amounts of wealth. Rich people are no better than rapists and murders. It is absolutely immoral to make millions of dollars a year, and high income earners should be punished just like any other criminal. The government, on the other hand is 100% legitimate, and warrants no criticism whatsoever, other than when they help the rich. It is immoral for the rich to control the power of the state, but perfectly moral for voters, unions and environmental groups to control the power of the state.

Dalago's picture

"It is immoral for the rich to control the power of the state, but perfectly moral for voters, unions and environmental groups to control the power of the state."


What the fuck are you talking about?  A rich person is a voter... Develop something high in demand and make shit-tons of money then go say success is immoral.  Whats immoral is the lack of charity; Caritas.  When Rome was a Republic it was the morals of the people to donate money to the less franchised.  There was MORE a community feel when the middle-man (government) is taken out.

Fukushima Sam's picture

We're now in year 99 of the 100-year plan.

redpill's picture

Next year we'll say Happy 100th Birthday Fed!  Only took them 100 years to destroy our currency, obliterate our economy, mongrelize our populace into brainless automoton borrow-consumers, and make the rest of the world hate us for nearly endless warmaking.  Isn't centrally-planned fiat currency GREAT?

onebir's picture

A Crips & Bloods community feel. But that's going by the TV series ;)

lasvegaspersona's picture

MDB you used sarcasm here which threw me off (I think it was sarcasm) anyway this was NOT your best stuff. Yesterday you were on FIRE, I guess every troll has a bad day....maybe tomorrow you'll be better....don't let that tiny brain ever quit!!

whatsinaname's picture

The something that changed in 80s was the stock market and the advent of the 401k programs ?

BooMushroom's picture

Yup. From wiki:

The section of the Internal Revenue Code that made 401(k) plans possible was enacted into law in 1978. It was intended to allow taxpayers a break on taxes on deferred income. In 1980, a benefits consultant named Ted Benna took note of the previously obscure provision and figured out that it could be used to create a simple, tax-advantaged way to save for retirement. Ironically, the client he was working for at the time chose not to create a 401(k) plan.[3]

So that's about the same time that J6P started 'saving' by playing a percent Of his income (matched by a percent of his employer's income) in the casino, and not paying taxes on it.

blunderdog's picture

Yup and yup.

Yet people and pundits STILL attribute the "market miracle" to the politicians for their "bold leadership."

Satan's picture

As the saying goes..." the only thing we learn from history is that we learn nothing from history".

GetZeeGold's picture



Screw history......just teach your high school kids they're special.


LULZBank's picture

Lack of enough ink and paper.. Bitchezz!!!

LawsofPhysics's picture

Thanks Chris, build real wealth in those around you.  Your family, your employees, your community.  Unless you have a private island and private army (like a couple venture capital guys I know) you will need each other.  Long physical assets of real value and the labor to defend them.

moskov's picture

Don't worry. Those bankers are like suicide bombers.

They care less about any lives in this world.

They only believe money is their god and money can make the world theirs.

Shocker's picture

What a t-wreck this entire economy is. Between Wars, Currency problems, Job Issues, we got some serious issues.

Who know where it will all end

francis_sawyer's picture

I actualy have one of those ONE HUNDRED TRILLION DOLLAR Zimbabwe notes... I have it in a frame right next to a FRN... (at least the frame is prolly worth something ~ & it's mde out of 'fools gold')...

Vincent Vega's picture

I have a 100T Zimbabwe note also. Along with about another 15-18 worthless currencies. I use them for demonstration purposes. Pull out a 100T Zimbabwe and lay it next to a Morgan or Peace dollar and ask people which they would rather have. Deer in headlights looks will abound. Devaluation is happening here right now. Don't be fooled.

Clueless Economist's picture

I carry a 100 Trillion Zimbabwe note in my Peace Dollar Pontiac money clip.  I get the same deer in headlights look as people say wow how much is that worth?  I love the look when I say it is worthless just as the FRB notes will be, but not this Peace $ etc etc


Vincent Vega's picture

"how much is that worth?" I wish I had a Peace $ for every time I've heard that during my demonstration.

Robot Traders Mom's picture

The Fed wants their tax (inflation). That is no secret. Obviously, the Fed could theoretically mail each citizen a check for $10k tomorrow and they would get the inflation they are looking for. 


Make no mistake, they will do everything, including throwing the kitchen sink out to get inflation. I'm not fighting the Fed on this one, nor should any of you. BUY METALS and HOLD THEM. If you start charting and trying to trade them, you can easily get burned. You know what the end game is, BE PATIENT!



sdmjake's picture

Agreed. But the real question is:

How did someone so stupid come from your loins?

iDealMeat's picture

First came RT..  Then came RTM..

Blasé Faire's picture

To stimulate growth, why not send a charge card with $168.25 to every adult each month?  That would be the same $40bn per month and it would ensure that every dollar gets spent paying bills or going into the economy.  I guess the problem would be people spending wrecklessly - probably on the wrong kinds of shiny stuff.

*Using 2011 population stats

krispkritter's picture

Bubble Ben huffed and he puffed until he blew the House of Cards down...

Landotfree's picture

"$40 billion a month out of thin air"

Money does not get created out of thin air except possibly from the big bang.   Hairless monkeys decided way back in the day to start lending and borrowing at a rate of interest, eventually the system can't sustain the system... all the hairless monkeys take their rocks home... whatever civilization they had starts to collapse along with the credit system.  Hairless monkeys no longer have enough of the stuff they have been using as money so they start using credit as money.  Eventually the system can't generate the amount of new credit to sustain the system, eventually collapse.   

Nothing has changed in 1000s of years.  The system will rise ,the system will peak and the system will collapse.   Blaming the Fed is like blaming buglar alarm for getting caught breaking into someone's house.  A little late to be complaining.

The Fed will squeeze all you unfunded liabilities until max potential has been reached, after that there is little they can do but to watch along side you.   As far as I can see the Fed has completed it's mission by assisting in the creation of the biggest system the world has seen to date before it collapses.  

dugorama's picture

It might have worked (QE1 and 2), had we had the cojones to get it to the consumers rather than the bankstas.  Giving them more is obviously nonsense - no demand is or has been created, there is no debt relief for the consumer and there is no tax relief.  

Landotfree's picture

Unless you believe the Fed and humans have unlimited power, no it will not work and never could work.  It will end in collapse, it was just a matter of when, not if.

Pseudo Anonym's picture

talk to mish shedlock

If anyone was still wondering if the Fed would 'allow' deflation to happen on its watch

he's pretty silent on the topic of deflation he's been peddling around for awhile

Landotfree's picture

Eventually the system will collapse, credit creation will go below zero again in the tunes of trillions.  A new currency will be attempted but credit creation will not happen for decades, eventually my guess 1-3 billion unfunded liabilities will have to go... only 100+ million went last time but the system was only a fraction of what it is this time.  I predict the unfunded liabilities will be deflating by 1-3 billion.

Pseudo Anonym's picture

you wrote that:

credit creation will go below zero again

how can credit go below zero?  hypothetically, if credit is less than zero, than debit would be greater than zero, which, at the end gives you zero.  hyperinflation = deflation?

shedlock ( ) , at some point was arguing something similar but i dont have the link.

Landotfree's picture

Credit creation went negative in 2008, did it not?  Go see the Fed's Z1 report, matter of fact it didn't start going positive until late 2011/early 2012.

"than debit would be greater than zero, which, at the end gives you zero"

Total debt is above zero, debt shrank, system was starting to collapse in a big way.   Without the Fed and the government doing what they do, your ATM cards would have stopped working years ago.  Eventually the amount to sustain the system will not be matched, your ATM cards will just stop working.  Not much anyone can do about it but delay as long as possible.

What you have been witnessing over the last few years is the dead cat bounce.   The equation always wins the war but loses countless battles along the way.   

The system must be feed at an exponential rate, failure to feed the equation cause the equation to feed on the unfunded liabilities eventually.   

Pseudo Anonym's picture

credit creation declined (did not create as much) when compared to previous period, but did not go negative in absolute terms - as if all credit was wiped out to zero and then went somehow below zero into debit territory

Landotfree's picture


The system was not generating any new credit when taking in account past credit payments due.   It was actually 2009 when it went negative in Q2.

Total Credit Market Debt went from $52.899T (Q1) to $52.73T (Q2).  So, the system was generating new credit into the system at a negative ($676B) annuallized by end of Q2 2009.   This is versus an expansion at a rate nearly at a positive $4.7T in 2007.... within a 6 quarter time frame the credit market did a $5.3+T turn around.   In essence, credit was being wiped out faster than it could be created, or was being created.

The system is only generating about $1T of new credit annualized right now, it's a dead cat bounce.  If the system had not started the collapse, the system would be if normal north of $67T by now.

It's called a tapped out system, THAT'S ALL FOLKS.


francis_sawyer's picture


The problem with Mish (and other ~ let's call them 'sober' economists) is that despite being sober, they still hitch their reputations on the pseudo SCIENCE of economics (which, in of itself, develops its own patterns based on a pre-fabricated design of the game)...

With that in mind, it is hardly possible for them to predict (even with a 50-50 chance of winning), in which direction the eventual DISMANTLING of the system will topple... Mish (& friends) place their faith in THE MARKET, and the mathematical certainty that it's going to fail... Instead ~ they FAIL to account for any notion that the same market, in the process of being dismantled, can be manipulated in strategic spots (which provide a favorable outcome for the MANIPULATORS)...

All 'economists' like Mish, thoroughly discount the idea of manipulation (because to admit that a market could be 'rigged' would tend to go against their own theories that their hard work & research that has allowed them to 'DECODE' market behavior & therefore discredit their very existence)... They counter with the notion that MARKETS ARE TOO LARGE TO BE RIGGED... The error in that thinking is in NOT accounting for the fact that it's the RULES that count... That bad behavior will be punished... When the rules of the game get constantly changed & when criminals never get prosecuted, then it becomes very easy to manipulate a market...

Failure to accept the notion of RIGGED markets puts someone like Mish in 'coin flipping' territory... Worse ~ it probably bellys them up to the 3 card monte table... 

Landotfree's picture

If nobody spends the system collapses tomorrow, or what are you going to pay the previous interest payments with?

The function of the Fed at the direction of the Government which acts on behave of the people is to expand the system until max potential, once max has been hit nothing else to do but watch the fireworks.  

Oh regional Indian's picture

On many levels, the core issue with PRINTING money is that it can be counterfeited rather easily.

THAT is why the PTB love it so much. Counterfeited money is probably equal to or more than M(X) of any country.

Non-counterfeit-ablity is the key to the next currency.


imapopulistnow's picture

Without QE we have deflation.  Why? Deleveraging and demographic trends (aging = less consumption) that result in a contracting economy.  Adding QE into this mix, results in moderate inflation.  Moderate inflation allows economic rebalancing to occur.   It is a relative thing.  It is an appropriate thing.

imapopulistnow's picture

Never said it was a popular thing. yuk yuk

madcows's picture

It is an exceedingly painful and pernicious thing, and by no means appropriate.  The intent of QE is to inflate the problem away.  The result is that the people that lived within their means are punished, whereas those that did not are rewarded.  Risk taking is reward, responsibility is punished.

Further, those that are punished most harshly are the poor and middle class.  These are the people that can least afford inflation.  My personal cost of living (food, clothing, heating oil, gas) is up $12,000 in the past 5 years.  That represents a major portion of my income.  To the rich, not so much. 


Deflation does not hurt the poor and middle class so much.  We don't have as many assets to deflate.  it actually makes our lives easier to afford.  But, Bernanke doesn't run with the downtrodden.  He hangs with the rich and powerful, otherwise known as those that would be most impacted by deflation.  And there you have it.  Bernanke will do whatever it takes to take care of his own kind, of which, I am not.

crusty curmudgeon's picture

"Moderate inflation allows economic rebalancing to occur."

I presume you mean this to be a good thing.  In any event, please do tell us--in words even I can understand--what the hell does that mean?

Ten to one you can't explain it without a comment like, "uh, there's a lot of high math wouldn't understand."

"Simplicity is the ultimate sophistication."  --Leonardo DaVinci

Hedgetard55's picture

Ben is a thief, plain and simple, no different from a mugger, an identity thief or a scam artist.

Landotfree's picture

Any person and/or entity that is connected with or uses the system is a "thief" and "mugger".  There really is no difference.

As far as I can tell there are something like 7 billion thieves on this floating rock. 

Landotfree's picture

Interesting.  Neo's exact words.

Neo - Bull****. 

*The responses of the other Ones appear on the monitors: "Bull****!"* 

The Architect - Denial is the most predictable of all human responses. But, rest assured, this will be the sixth time we have destroyed it, and we have become exceedingly efficient at it. 

Anasteus's picture

An interesting interview with Neil Barofsky (served as the Special Inspector General for the TARP program)