Its A Good Thing To Print More Money * Longer-Term

[JEast]

As the German mathematician Jacobi says, Always Invert.  Then let us suppose that we are all wrong that printing too much money is an inflationary course of action and invert the premise.  Suppose that printing more money is non-inflationary and actually beneficiary for your currency.

 

Though Shilling, Van Hoisington, Hamblin/Watsa, et al, have all been correct for the last 10 years that interest rates would continue to fall – what if they were right but for the wrong reasons?

 

Maybe we all have this printing business upside down and the strange phenomena is that the more you print the better you are, much like the first to market advantage.  The amount of Yen outstanding now is so large that I can not even get my head around how big the numbers are, but nevertheless, the Yen is worth more today than it was worth 40 years ago!  Think about that for a moment.  This seems to be the case, in general and compared to everything else, for the US dollar too.

 

Unlike the collapse and hyperinflation of Weimar Republic in ’23, there were other choices when they printed too much and the currency collapsed, including many other reasons of course.  Same for Zimbabwe, other choices.  Not so for Japan and the US as the more they print, it just puts other currencies in the minority all the more so and who really wants a splinter currency these days.  Sure, maybe Singapore or the Yuan may stay strong, but is that just because there is such a deficiency of supply? 

 

I am referring to the long-term super-macro theme here and as more US dollars are printed it may actually drive yields down even further because it is the only game in town.

 

If I am Venezuelan I want dollars, if I am South African I want dollars, if I am Russian I want dollars, and the list goes on.  If in 10 years the Euro kicks half the countries out of the union, does your thought process think that will strengthen or weaken the Yen/Dollar hegemony?  The more you print the more it seems like folks want it as it is a known product and is convertible into nearly anything. 

 

Just an inverted thought  --  I will now go back into my cave.

 

 

Cheers

JEast

[ERICOPOLY]

It seems to me that the high debt issuances of the US Treasury would crowd out the private sector investment if there wasn't a new buyer stepping forward willing to snap up every new issue.  That new buyer would be the Fed.

 

So in a sense it keeps the available supply of risk-free debt issuance in balance with the risk assets already out there.  That keeps prices from collapsing for risk assets.  So QE is sort of the prevention of collapse due to excessive US Treasury issuance, rather than propping up assets that otherwise would collapse on their own (outside of US Treasury issuance).

 

I can't think at the moment of how they unwind it though.  I guess over time interest payments (and bond maturities) flowing from the Treasury to the Fed can be used to gradually reverse the Fed's money printing.

 

 

[no_free_lunch]

If you read Mish Shedlock, his basic theory seems to be that you have to include debt outstanding in the money supply.  The US has somewhere on the  neighbourhood of $50T total debt (federal, state, municipal, corporate, personal), so printing $.5T a year suddenly doesn't sound that bad if that debt level is stalled out.  I am not sure it is quite as simple as that, I would assume that different types of debt have different velocities and impact.  Anyways, it might explain what is happening in the US and Japan.

 

So I guess in direct answer to your comments, the printing can continue until the money supply gets closer to these debt levels (I have no idea how close) or until leveraging takes off again.

[beerbaron]

"Money printing" is the same thing as credit creations. The only difference is that the FED has no liabilities associated with the money it creates.

 

What is the difference between a bank issuying credit VS the FED printing money? Both are dilution of the money base.

 

BeerBaron

[Palantir]

I think the Fed should continue to print money until we see consistent credit creation and sustainable growth. Be bold Ben!

[original mungerville]

I think if you combined what Ericopoly said (ie the crowding out effect) with what no free lunch said (ie you have to print a lot more to be really inflationary if you take into account the debt levels into the money supply). It means you can crowd out for a while driving down all yields (ie the central bank can buy government bonds and government can spend) without it being hugely inflationary - rather its just reflationary.

 

I have heard one or the other being mentioned by economist before but not both together (albeit I have not researced this stuff) - the combination is interesting.

[Packer16]

Following on what does deflation cause in the absence of QE?  The reduction and liquidation of debts.  The real question is does QE allow this process to happen so the growth and the credit cycle can begin again?  It does if the velocity of money doesn't drop like a rock causing relative devaluation to real assets.  Up to today, we do have declining velocity as the consumer has delevered.  Gary Schilling has stated we are about half-way through the delelvering cycle.  Another five years of delevering may cause enough debt to be removed from the system to create normalized growth.  Once we see velocity increasing then we can see what shape we are in in terms of debt and will be able to see the positive or negative aspects of QE.  One aspect of this is the corporate sector appears to be the best off in terms of debt.  Who would be the winners and losers at the end of delevering?  Winners corporations and losers debt holders (as the asset they hold would be in depreciated currency).  We have already seen some devaluation versus real assets as their prices have increased.  The question is do real asset prices go up causing relative devaluation and reduced debt levels in real asset terms or do they go down increasing debt levels? 

 

Packer