The Trouble with Printing Money

There is plenty of money available for good ideas.  When people save, they are storing capital that can be deployed to good ideas (like your anti gravity motor).  If you have a good idea even in a hard money system lots of people will want to invest and there would be plenty of money.  However, if just happen to be a hack who has a poor idea then, no it shouldn't be funded.  Just because we have tons of sloshing liquidity funding everything from the dot.com bubble to the housing bubble doesn't make it good.   What it does is move the risk from those investing to the general populace via inflation.

There is nothing that says that money has to expand in an economic expansion phase.  In a non-fiat based currency, things become cheaper as you expand and then become cheaper to create with tecnological advances. Which is exactly what should happen.  If you can make something easier, then it should become cheaper - less work, less effort or resources involved.  A hard money system does nothing to limit expansion of technology, but it certainly can mean less care is taken in where to spend valuable resources by removing the risk from those taking it.  A fiat money system makes bad decisions much more likely.

Did you transport in from some other universe? The Fed doing a good job?  They have destroyed 98% of the value of our money since they took over, 70% in the last few decades.  They have hollowed out our manufacturing and job base, blew multiple asset bubbles, and allowed out of control government spending. 

The Fed and a fiat money system does nothing to support an economy, all it does is allow an elite group the ability to distort the value of capital (labor and resources)  to grant advantages to select institutions and goverment.

rhare, I agree - except I do not entirely blame the Fed for hollowing out our manufacturing base in the USA. We did that with legislation like NAFTA.

You said,


The Fed and a fiat money system does nothing to support an economy, all it does is allow an elite group the ability to distort the value of capital (labor and resources)  to grant advantages to select institutions and goverment.

Agreed... I am not sure capital really even exists anymore...  the rate of new, QE money creation so outrunning the rate of actual savings anymore.  We need to get back to a system where capital has value.. where it earns a yield such that savers are encouraged and rewarded.  For these reasons and more, I have lost confidence in the dollar already.  There will be no Volcker to save us this time. 

[quote=safewrite]rhare, I agree - except I do not entirely blame the Fed for hollowing out our manufacturing base in the USA. We did that with legislation like NAFTA.
[/quote]
So many distortions exist that all have added to the loss of manufacturing base.  However, I still put the Fed firmly as the root cause because many of the other distortions are a direct result of the Fed as well.  For example:
The petrol-dollar has kept shipping costs artificially low for those US companies allowing them to move manufacturing elsewhere and ship back to the US. 
The Fed has allowed a distorted military budget which protects US corporate interests outside the country - essentially free insurance.
The reserve currency the USD has been artificially high against other currencies.  This has allowed US companies to build factories over seas cheaper than normal. 
The Fed has allowed us to feel artificially wealthier allowing for feel good things such as minimum wage laws, state enforced unions, legislated benefits, etc.  These all distort the real value of labor creating artificially high labor rates in the US which also move jobs out of the country.
In a non-distorted system I think free trade is great because it forces countries to remain competitive on a world stage.  However agreements like NAFTA in the current system simply amplify the distortions.  Also, the alternative to free trade is simply more distortions via tariffs - which are political methods to favor favorite industries.
 

Devices that do the ironing?  I already have that…they are called Haggar double knits and they don't need ironing.  Ball 'em up in a backpack, knock out 75 miles on the AT from Loft Mountain up to Front Royal, hang 'em up in a shower and run the hot water for a few minutes and presto!  Ironing's done.
Change sheets?  Check.  Make the bed?  Nope - gotta let it air out so the dust mites can escape.

I have been to Mars and there isn't any gold.  Lots of rutabagas, but no gold.
Wait…that was Lancaster County, PA…

The list of what the fed is going to do for QE-3, reads like a bad infomerical. You know that the product is not as good as the hype!

 

Martenson gets a lot of points correct, but misses the obvious correlation between the Feds (Greenspan's) efforts to suppress the cost of money, even during times of relative prosperity, and how it created the Tech Stock Bubble, followed by the Housing Bubble.  In his charts, it's easy to see exactly where those bubbles developed, because the net effect is a doubling of the debt.  There's good reason for the little blue triangles in that chart - They correlate exactly with the Fed's past mistakes.  
 
He also suggests that the Fed prints money simply by pressing a button on a computer.  It isn't quite that easy.  The US Treasury has to issue, and auction off Treasury Bonds in amounts that correspond with the amounts of money the Fed prints.  Those bonds are currently being purchased by Money Managers, Foreign Central Banks, and the Fed itself (as a means of creating artificial demand in the bond market, and therefore driving up the prices of the bonds being sold to monetize the Feds printing efforts).  Did you get that last part?  Yeah, it's a little thing they do to manipulate prices.
 
So if the Fed is playing all these games, why do investors and Central Banks still keep buying billions upon billions of dollars worth of Treasury Bonds?  Because its the safest bet on the table. In a world where stocks and commodities and real estate remain volatile, the one place in the world where a Money Manager knows he has the best shot of getting his investment capital back is in US Treasuries. 
 
Unfortunately, that kind of safety doesn't pay a very high dividend.  The 10-Year US Treasury currently pays a dogshit rate of 1.65%.  That rate is determined by the market as a function of supply and demand (it isn't up to the Fed).  Bond prices and yields move in opposite directions.  More demand in the marketplace means higher bond prices, and investors also have to accept a lower yield.  That's why the Fed creates artificial demand of its own.  The Treasury will get a higher price for the bond, and the interest they have to pay on that debt to investors will be lower.  As long as buyers rush to the safety trade of US Treasuries, the Fed can print their asses off.
 
"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."
 
The function of how this ends is fairly simple, although predicting the exact timing will be tricky.
 
It will end when some market, somewhere, looks more attractive to investors than Treasuries.  The most obvious guess is that, at some point, the US Stock Markets will start to gain some footing and show signs of recovery.  It doesn't even have to be predictive of a real, sustainable recovery.  It just has to look good enough to lure Money Managers, Investors, and Foreign Central Banks away from the shitty 1.65% they're currently making on bonds.  Our current rate of inflation is 2%, which means those bonds actually have a negative real rate of return for US Investors (1.65% Return minus 2% Inflation equals -.35% Real Return).
 
On any given day, you can watch the inverse relationship between the 10-Year Treasury and the S&P 500.  When money flows into stocks, demand wanes for Bonds, and Yields go up slightly.  When investors get spooked (by economic chaos in Europe, civil unrest in the Middle East, etc), money flows out of stocks, and demand for Bonds goes up, driving down the annual Yield.  You may hear about it in the news as Risk On/Risk Off or The Safety Trade or whatever.  When investors are bullish, money flows from Bonds into Stocks.  When investors get nervous, their money goes from stocks into the relative safety of bonds.
 
When I was a kid in the early 80's, the yield on the 10-year note went almost to 15%.  If that happens today, it means the cost of MAINTAINING the interest on the National Debt will go up almost 1000%.  Yeah, 10 times what it currently is.  We won't even have to get anywhere near those levels before Federal, State and Local governments become insolvent, the US Credit ratings are downgraded to junk and investors lose faith in the US Dollar.  Medicare, Medicaid, Social Security, Food Stamps and the single biggest employer in America (The Government) will all be bankrupt.  A valid argument could be made that they're already bankrupt, but people won't take real notice and start rioting in the streets until their paychecks start bouncing or simply disappear altogether.  
 
That's how it's going to end - The US will default.  Probably wont have any global implications though.  The US Dollar is only the worlds Reserve Currency.  The price of every other currency worldwide is pegged to the dollar in some fashion, so a US Default shouldn't be too traumatic.  All the whole world will have to do is reprice their currencies against every other currency in real time as markets try to continue to function in an environment of global economic collapse.  No need for concern, nothing to see here, move along.
 
There's just one problem - One man's debts are another mans assets.  So what do you think all those investors and Central Banks from around the world are going to do when they don't get their payments from the US?  And their economies and markets are in total fucking turmoil because of our actions?  I wonder if anybody is going to get mad.  What do you think US retirees, government workers at all levels, military, law enforcement and fire fighters are going to do when the payroll for many/most of them stops at the same time?  History suggests there is going to be some serious civil unrest.  Consider this: The last time a deleveraging event like this happened, it took years of world war and a couple of Hydrogen Bombs to snuff out the civil unrest.  The damage at Hiroshima occurred in minutes using technology from the 1940's.
 
How efficiently will the destructive forces of economic rebalancing function this time?
 
Im not predicting a single cataclysmic event, like an earthquake or hurricane that causes an immediate collapse of world markets and Global Armageddon overnight. Markets are highly levered and incredibly complex, so, speaking in purely financial terms, I think it's more accurate to consider pockets of destruction rather than a total leveling of the countryside.
 
"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."
 
Martenson's right about that last part - And his point about whether economic rebalancing occurs through diligence or catastrophe is spot-on.  Unfortunately, the Fed (starting with Greenspan) has already laid the groundwork to assure the latter.
 
Bottom Line: As long as hordes of investors have little choice beyond the safety of treasuries, Bernanke and the Fed can get away with debasing our currency and manipulating the bond market to some degree.  And they will continue to print.  
 
But the Fed isn't bigger than Mr. Market.  Right now the Fed is doing everything it can to keep from getting crushed by Mr. Market, not the other way around.
 
When the market herd gets distracted by other opportunity, and starts to run away from treasuries, that will take away the Fed's printing press.  It will also have some far reaching implications for the US Dollar and world markets alike.