What Would You Do?

What Would You Do?

Courtesy of Paul Price

Suppose you had the technical ability and raw materials to print up counterfeit dollars, euros or yen that were identical to the real things. Assume you could spend them as fast as you could create them with no fear of any repercussions.

Would you prudently print up only as much fresh currency as you needed for your current lifestyle? Would you create just a bit more than that to help relatives or those in need?

It is most likely you’d have your printing press running 24 hours a day, seven days a week. Becoming the richest person in the world would confer great power upon you.

You could rationalize this action because you plan to use the money for good purposes. Imagine the warm feeling you’d get by giving every person in America one million dollars, no strings attached.

Then think about what would occur almost immediately afterwards.

The “easy come-easy go” principle would take effect. Car dealer inventories would be cleaned out instantly. Wal-Mart, Target, Kohl’s, Nordstrom, even high-end Saks Fifth Avenue and Neiman Marcus would have nothing left to sell.

SOLD OUT - image

Smart manufacturers and merchants would withhold inventory because they knew the abundance of money, with no new extra supply of goods, would drive prices through the roof.

The people controlling today’s currency issuance are well aware of this. That is why newly minted funds from QE (quantitative easing, A.K.A legalized counterfeiting) programs never reach the general population.

Immediate distribution of wads of money to everybody would quickly destroy the financial system.

Doing it gradually, under the average person’s radar while keeping the benefits contained to a small group (politicians and bankers) allows favored individuals to add great wealth without immediately noticeable damage.

Before 2008’s crisis Central Banks did not believe they could get away with simply conjuring money out of thin air. The ‘bond vigilantes’ would have demanded higher and higher interest rates on government debt, busting budgets around the world.

First America’s Zero Interest Rate Policy (ZIRP) and later Europe’s Negative Interest Rate Policy (NIRP) took care of that major hurdle. Those policies destroyed the rate setting ability of the debt auction markets by injecting shill buyers (the Central Banks) to bid up bond prices on an unlimited basis.

The Bank of Japan (BOJ) started slower but has now surpassed both the US and Europe in terms of fiat-based money creation versus the size of GDP.

Do counterfeiters keep hordes of phony $100 bills in their home safes? No. They want to spend that fake cash ASAP, turning it into real assets whose value cannot be diluted away as the supply of money expands dramatically.

That is why global real estate, stock prices, corporate bonds, fine art and antiques have exploded to the upside. Even gold has been showing signs of life recently.

Gold  60-days as of Jan. 26, 2015

When fiat currencies finally collapse these hard assets can be converted back into whatever is serving as ‘cash’ in the new environment.

The BOJ recently bought over $5.6 billion of foreign denominated stocks in just one week. Every yen devaluation makes those stocks more expensive when reconverted back into local currency.

Japanese Buying of Foreign Stocks for Guru Focus

The one asset class that central banks don’t want to touch is sovereign debt. Central banks know many of these foreign bonds will end up "toxic" -- values slashed or in default. The central banks need to pawn off as much of the risk as possible to private entities and citizens rather than leaving themselves exposed when these bonds officially go bad. They will leave privately owned banks, insurance companies, individual investors, fixed income mutual funds and pension plans on the hook when the shit hits the fan, sometime in the future.

Unlimited money printing by the world's central banks will, by definition, devalue the currencies due to too much money chasing the same number of goods and services. Excessive money printing will ultimately make fiat-based currencies worth much less. This is already occurring right now in Venezuela and Argentina.

So stop worrying about whether stocks are going to crash. The real danger is holding major assets in ‘risk-free’ fiat-based money.