Monday, February 27, 2012

No, It's Not Alright to Print Money

On Sunday, I read an article in the main newspaper here in New Zealand called, "The Power of Printing Money".

The writer makes the point that in the 1930s, after New Zealand followed Britain off the gold standard, the then newly formed Reserve Bank of New Zealand, printed money to get housing programs started and the economy moving. It seemed to work.

Therefore, if this worked then, it will work now.

I don't think so.

The era was different, after all we had just left the gold standard and the values of assets were where they should be. Today we have been off the Bretton Woods quasi gold standard since 1971 and in a totally fiat money world. Many more years of lost value has ensued since then. Asset prices have increased considerably. Meaning, we have already had massive inflation, tearing the heart out of savings and value. Do we want to accelerate that by debasing our currency more?

I point you to another graph below. This is what happens when currencies are debased and assets maintain value. Prices rocket higher. In 2004, you could buy 1/600th of an ounce of gold for NZ$1.00. Today, you can buy 1/2150th of an ounce for NZ$1.00. Hmm, shame we can't print gold and other assets.
click to enlarge

I am surpirsed at this commentator, perhaps tongue in cheek, putting out such ideas. Currency debasement is the last resort of governments trying to protect their power, not governments trying to protect the savers and the middle-class they are supposed to be responsible for.

Just look at oil prices and where they are headed. Because the USD reserve currency is being debased by QE and bond buybacks etc, oil prices have to go up. Remember the inflation equation: Price = Asset + Money Supply. The more money printed (inflation), the more prices rise.

But there is a catch, especially in the US at present.

There are trillions stored at the Federal Reserve in the USA, but this has yet to be 'let loose' on the economy. It has no velocity. Business is not confident to spend, so doesn't require it. You need to spend it or lend it to get the inflation moving, and hence prices increasing. If confidence does come back, watch out for velocity to increase considerably and inflation to take off.

Of course this also assumes that the curent inflation rates reported in most major economies is correct. If we measured inflation now the same way we did in the 1970s, and we can, the rate is likely to be a lot higher, perhaps around 8%. Tell me that doesn't ring a bell when you go to the supermarket and seem to get less for your pay packet.

However, to remain competitive, short term, we will probably be forced to debase our curency somehow. I don't agree with the idea, but we are all inflaters now.  That's just the way it has always worked throughout history when fiat currencies take over.

A race to the bottom and a shift in the ownership of wealth.

in New Zealand dollars: $2122.29 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $42.37 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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