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If you think all the game-changing decisions to be made on November 2 will be by voters at the ballot boxes, think again!
corral together the other voting members of the Federal Open Market Committee …
send any dissenters off to the shearing shed, and …
before the following day, close the deal on QE2 — the next major round of mass money printing.
How ironic the twists and turns of history can be!
While millions of voters will likely vote to transform Capitol Hill into a new stable of fiscal conservatives …
Just 12 men — meeting two and a half miles away — will be voting to transform America into a field of money trees.
Strangely …
The vote at the polls will put the padlock on America’s fiscal stimulus. But …
The vote at the Fed will unleash a whole new round of monetary stimulus, potentially driving more liquidity into gold, commodities, foreign currencies, and emerging markets.
End result: One of the greatest disconnects of all time between …
A sinking economy on the one side, and …
The real possibility of roaring bull markets in certain asset classes on the other side.
In fact, with investors rushing to adjust their portfolios in anticipation of these game-changing decisions, we already see this disconnect right now:
- We see unemployment at deep-recession levels, housing in a depression, and home mortgages in chaos. But, at the same time …
- We see gold near $1,400 per ounce, agricultural commodities through the roof, emerging markets booming, and key foreign currencies exploding higher.
What will happen once we see these game-changing decisions in black and white — the election results on November 2 and the Fed announcement on November 3?
Could markets reverse sharply, as they often do when widely anticipated news is finally announced? Or will we see even bigger investor stampedes into the same assets that have been soaring so consistently in recent weeks?
The Big-Picture Answers
Just 24 hours ago, I had the great privilege of reviewing the galley proofs for a new book on precisely this topic — the Global Debt Trap, by Claus Vogt and Roland Leuschel.
The book goes to press in a few days. So although you can already pre-order online, it’s not yet available in bookstores.
No matter what — with Fed Chairman Bernanke declaring last week that a new round of mass money printing is now in the making — right now is the ideal time for a sneak preview of the authors’ most relevant conclusions.
So let me give you a few key passages from one chapter (updated slightly to reflect recent events) …
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Quantitative Easing or
“Look Mom, No Hands!
We’re Printing Money!”
by Global Debt Trap authors
Claus Vogt and Roland Leuschel
Three of the most powerful central banks in the world — the U.S. Federal Reserve, the Bank of Japan, and the Bank of England — have publicly espoused a policy of quantitative easing.
The European Central Bank (ECB) is following a similar path, but differs in that it has still not publicly professed this creed. Nevertheless, it is probably only a matter of time before ECB bureaucrats cross the same monetary frontier.
Most people, unfortunately, don’t have the faintest idea of what quantitative easing really means. They do not understand the phrase. They are certainly unaware of its true implications. They probably presume a complex concept that justifies the comparatively high salaries of the central bankers who pursue it.
The term was obviously chosen as an unmitigated euphemism with the exclusive purpose of concealing a simple reality — a truth that would be far easier for people to understand, but far more difficult to accept. This is why the term is rarely ever translated into an English that the average American would understand.
Regardless of the language, what central bankers really mean by quantitative easing is nothing more and nothing less than running the printing presses to create paper money.
And beyond the use of fancy language, what the monetary policymakers in Japan, the United Kingdom, and the United States are really doing is openly and blatantly singing the praises of the printing press. This is not new. A gifted soloist — U.S. Fed Chairman Ben Bernanke — was the first to raise his voice above the throng, with the now-infamous phrase …
“The U.S. government has a technology, called a printing press … that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
Bernanke left us no doubt that inflation is always feasible in countries with fiat currencies. And he made it abundantly clear to everyone that he’s the man to turn that feasibility into actuality.
In principle, a central bank can purchase any security or any commodity. There are, admittedly, a few legal limitations, but they are hardly worth the paper they’re printed on.
This unbridled money printing parallels out-of-control federal budget deficits in two ways: First, the urgent goal of financing the federal deficits is a key reason politicians are so quick to run the printing presses. And second, like federal deficits, all forms of principles and promises fall by the wayside just as soon as the need arises.
Consider, for example, the European Stability Pact, which forbade and forswore annual budget deficits higher than 3 percent of GDP. And consider how quickly — and universally — those limits have been shattered, how easily those rules became paper tigers, and how conveniently they were overridden precisely when they were needed the most.
The average national deficit of all 27 EU members was 6 percent in 2009, rising to 7.3 percent in 2010 — more than double the caps. And that was after averaging in the supposedly more disciplined countries and before new weakness in the European economy!
What did the Commission do about this blatant breach of its own hard and fast rules? Did it insist that the agreement be adhered to? No chance! Rather, it moved to reassure its colleagues in member states with this pronouncement: “The countries concerned need not fear any imminent enforcement proceedings.”
Shocking!
Even more shocking, however, has been the rush by the U.S. central bank to buy $1.7 trillion in mortgage-backed securities and U.S. government bonds, with other central banks following its lead.
What Happens When a Central Bank
Buys up Bonds or Other Securities?
It pays for them, of course. It transfers the money straight into the seller’s account.
Where does the central bank get the money? Does it have the money in its coffers or borrow it? Neither! It merely creates the money out of thin air.
Science fiction? If it weren’t happening before your very eyes, you might certainly think so. But it’s fact.
Wouldn’t you love to pay for things without having the money and without ever having to borrow it or pay it back? Wouldn’t you like to play with money that did not previously exist? In other words, wouldn’t you love to operate your own personal, legally sanctioned counterfeit money machine? Sounds both fantastic and impossible, doesn’t it? Yet that’s precisely what our central banks do.
The Mafia is undoubtedly green with envy.
Why are average citizens like us never allowed to run our own money printing presses? The reason is both obvious and rational: Anyone in any economy who takes or seizes ownership of goods without providing something in return is doing nothing less, nothing more than stealing.
But alas, that privilege is reserved for the government … and the handy mechanism by which this is done is provided by the central banks — quantitative easing.
As George Bernard Shaw said, “If the governments devalue the currency in order to betray all creditors, you politely call this procedure ‘inflation.'”
What Can a Government Do If
It Wants to Spend More Than It Has?
Answer: It must get the money by following any of several possible well-trodden paths known around the world and throughout the ages.
- Tax increases. Government leaders recognize that this path is less popular and brings with it the danger of invoking the resistance, wrath, and rebellion of the population … or, in democracies, elections that kick them out of power.
- Wars of conquest. Unfortunately, this path has been taken far too often in history; fortunately, this barbaric form of money creation is no longer readily available to Western democracies.
- Borrowing the money. In earlier times, kings who lived beyond their means went into hock with their banks. Their modern-day successors raise the money in the financial markets. The obvious disadvantage: The loans must be repaid, with interest. The not-so- obvious limitation: Ultimately, if debts get out of hand, credit ratings will fall, interest costs will surge, bond vigilantes will attack, and further borrowing could become impossible.
- Running the money printing presses. In earlier times, they sometimes tried to skimp on the gold content of coins. Then, with the advent of paper currency, printing up excess quantities emerged as the new, far more powerful mechanism. And today, the state-sponsored creation of money has been elevated to an even higher high-tech plane — electronic transfers from the bank accounts of central banks to the bank accounts of private-sector institutions.
This fourth pathway is the one the Federal Reserve pursued with a vengeance though March … and will announce AGAIN on November 3.
The U.S. Treasury issues bonds — IOUs which it hands off to the Federal Reserve Bank.
The Federal Reserve, in turn, transfers money to the government’s bank account — money that previously did not exist, money that the central bank simply creates in the form of an electronic book entry.
Then, the Federal Reserve does the same — in even larger quantities — for government-sponsored (now government-owned) agencies such as Fannie Mae and Freddie Mac, buying their mortgage-backed securities and other agency bonds.
This newly created money does not represent real wealth. No new goods are created. No new services are rendered. This lack of substance behind the money, however, does not stop the government from using it to pay its bills, meet payroll, or subsidize moribund banks.
So mark November 3 on your calendar. It represents another decisive break with previous monetary policy. It’s a day that will probably go down in financial history.
Importantly, the U.S. Federal Reserve is no trailblazer in taking this step. Japan’s central bank took a similar path in the early 1990s. And in the present economic cycle, it was the father of all central banks, the much venerated Bank of England, that made these methods seem respectable. But because the U.S. Fed has been entrusted with the responsibility for the U.S. dollar — the world’s premier reserve currency since World War II — it’s the Fed’s transgressions that are, of course, the most decisive.
And if you’re expecting the European Central Bank (ECB) to stem the flow of paper money, don’t hold your breath. ECB bureaucrats have, up to now, always found ways of staying more or less in step with American inflationary targets. No wonder. They are almost all unabashed fans of Alan Greenspan and his successor, Ben Bernanke.
Indeed, the best inflation-fearing Europeans can hope for is that the ECB will be deadlocked, unable to achieve a consensus among its member governments, all of which want to have their say. However, as we’ve seen, the ECB is no more a bastion of stability than the Fed. And as we’ve further seen, virtually no central bankers are monetary guardians, but the precise opposite. They are the foxes guarding the chicken coop.
Even the once-honorable Swiss National Bank has joined their ranks with increasing zeal. How? First, it sold the majority of Switzerland’s gold reserves. Then it began to sell its own currency, with the declared aim of weakening it.
Two conclusions:
1. We repeat a fact that you must not forget in the coming years: Inflation doesn’t just happen. It doesn’t fall from the skies. Inflation is man-made. It is the result of conscious political decisions.
2. Buy gold!
