Counterfeiting Money -- Crime or Good Economics?
Have you ever thought that counterfeiting money could be good for the economy and that the counterfeiter could be considered an economic genius or even a national hero? I received an e-mail from Nic Corsetti, a friend of mine, describing exactly how that might happen. From Nic:
“Let’s say that I invent a printing press that allows me to produce counterfeit money (let’s say U.S. dollars) by the trillions — these dollars look EXACTLY like real ones, so no one can tell the difference, not even the government or the bank. So I start off the first year by counterfeiting $3 trillion:
- I use $1 trillion to buy stocks (jump-starting the bull market)
- I use $1 trillion to buy U.S. Treasury bonds (thus driving bond prices higher and interest rates lower)
- I use $1 trillion to go around to every neighborhood in every major city of the U.S. and start buying houses for 10% higher than the listed price.
“Obviously, this is a lot of work, so I hire a whole network of employees and consultants to help me achieve those lofty goals in a reasonable time period. The apparent benefits would be huge.
- This will create jobs, since lots of employees and consultants will be needed to spend $3 trillion
- The stock market indexes will soar. Everyone’s 401(k) and day-trading portfolios will increase in value
- Home prices will increase by 10% overnight
- Interest rates will fall, which will make it even cheaper for everyone to borrow money to buy new cars, upgrade into bigger homes, and buy new plasma TVs every year, hoping against hope of getting to watch the Cubs someday play in the World Series
- The lifeblood of America, vastly underpaid real estate agents, will get a much-needed and well-deserved infusion of cash
- The economy will be humming so fine that no one will care about the loss of jobs to India and China
- Cheap goods will continue to pour into the U.S., and the CPI will show only a modest 2% rise in the price of goods.
“Additional Printing Presses
“This is such a good plan, I decide to let some of my best friends in on the action. So I pick 12 of my closest cronies and give them identical printing presses and instruct each of them to buy stocks, bonds, and real estate with their counterfeit money. I tell them to loan the money to anyone who asks. Now we are really getting somewhere.
- The stock market will rise 30-50% every couple years
- By buying massive amounts of Treasuries, interest rates will stay at historic lows
- Everyone’s net worth will double every few years if they just buy more real estate
- There will be no reason to save money, because assets will just keep skyrocketing in value
- Wave after wave of immigration proves adequate enough to supply the homebuilding industry with enough manpower to get the job done
- So much money is made in the stock market that $50 billion in bonuses can be distributed
- Home prices start rising so fast that people start buying 2 or even 3 of them. It’s a ‘can’t-lose’ venture
- There is so much money floating around that credit standards drop and everyone who wants a home gets one
- So many homes are being bought that massive numbers of jobs are created for mortgage lenders, homebuilders, architects, real estate agents, title insurers, property insurers, interior designers, lumbermen, copper manufacturers, cement manufacturers, truck manufacturers, granite miners, brick layers, roofers, repairmen, industry analysts, home flippers, Internet bloggers, Internet site maintainers, newspaper ad salespeople, Wall Street specialists (to create RMBS, CDO, CDS, index swaps), hedge fund employees (someone has to trade all these securities), and accountants and lawyers to keep track of all of the above
- There are additional profits to be made on Wall Street by investing in IPOs, private equity LBOs, M&A, trading, mutual funds, and hedge funds
- There is job growth in investment advisers, investment analysts, day traders, media cheerleaders, SEC regulators, state regulators, New York district attorney’s office, and accountants and lawyers to keep track of everything
- Government jobs explode. State and local governments get all sorts of funding for projects of all types — big and small. This creates still more jobs
- People need a place to spend their money. Shopping malls, strip malls, big-box stores, specialty stores, boutiques, and nail salons spring up everywhere
- People are so busy shopping they do not have time to cook. This creates a need for more restaurants or coffee shops on every corner.
“Even with all of that there is STILL NO INFLATION! Cheap imports keep prices from rising and the best part is that those foreigners keep taking this counterfeit money as if it were real money. No one can tell the difference, anyway.
“This goes on and on — we have really created a tremendous virtuous cycle where everything just gets better and better.
“After a few years of counterfeiting, I am quite certain that a ‘new era of goodwill and fortune’ would be announced and that I, Nic Corsetti, would rightfully be hailed as the first economic grand wizard to have permanently vanquished recessions.
“But what’s the catch? Where’s the hole in this story? Is there a hole in this story? If counterfeiting is such a great idea, why isn’t it legal? Actually, it is legal.
- My name is not really Nic Corsetti. It is Ben Bernanke
- My 12 friends are the 12 member banks of the Federal Reserve
- My employees and consultants are the financial services industry (Wall Street broker dealers, hedge funds, mutual funds, retail banks, and commercial banks)
- Those printing presses are currently manned by me and my 12 friends.
“I, Ben Bernanke, hope these printing presses don’t break down and that people keep accepting these counterfeit dollars, or this economy might implode. This is my only fear right now.”
Mish’s Note: Nic Corsetti is a real person. The above idea came from Nic via e-mail and was rewritten and reformatted by me. Still, Nic deserves full credit for the idea. Thanks, Nic.
As proof of the ingeniousness of legal counterfeiting, Alan Greenspan has been hailed as an economic hero and knighted by the queen of England for his “contribution to global economic stability.” Printing presses do work (for a time), and Greenspan’s timing was perfect, as discussed in an “Interview With Paul Kasriel”:
“Kasriel: Greenspan is a fascinating study. Someday, I hope to write a book about him. Right now, I’m willing to say he is the luckiest Fed chairman in history.
Mish: Greenspan is the luckiest Fed chair in history? How so?
Kasriel: He was fortunate in two very big ways. First off, he was fortunate to preside over the economy at a time when productivity was soaring and the global supply of goods was expanding rapidly because China had entered the world trading arena. In that environment, the Fed could create large amounts of money and credit without causing inflation other than in asset prices.”
By the way, so many others have acquired the magic printing presses that the Fed is now basically irrelevant when it comes to credit expansion and contraction. Synthetic money is now being created in massive amounts in numerous places. For example, GSEs are now running their own printing presses. Want a $500,000 mortgage? Boom, you got it. No one cares if you can pay it back, either. It is foolproof as long as home prices only go up. Multiply that by the hundreds of thousands and it all adds up, and much of it done with 0% down, and most of it based on the belief that housing prices only go one way: up. The day of reckoning comes when home prices sink. A collapse is now underway, and it has hit the subprime market especially hard. Those credit problems are guaranteed to spread.
Some may object to the term “synthetic money,” perhaps preferring something like creating money by “fiduciary media.” The important thing is not what we label it, but rather the general idea of what is happening. And without a doubt enormous amounts of money (credit/debt) are being borrowed into existence with increasing leverage and risk.
Broker dealers (via junk bond offerings) have figured out how to create their own synthetic money backed by essentially nothing. As yields collapsed, increasing leverage had to be used to generate the same returns. Such offerings have exploded along with mammoth growth in hedge funds all wanting a piece of the pie.
Some 20,000 hedge funds are now doing things with leverage because yields are too low. Various carry traders have created synthetic dollars of sorts by borrowing yen and investing in U.S. dollar-denominated assets such as U.S. Treasuries. This has been building and building and building on itself so that no one even knows how many printing presses are actually running. The day of reckoning on carry trades will come when the Bank of Japan is forced by the market to raise rates rapidly and there is a mad scramble to get out of dollars and back into yen. Rest assured, these events will be anything but orderly when they happen.
Initial sponsorship of “legal counterfeiting” came from the Fed and central bankers in general, but once Wall Street got hold of the magic printing presses, things have gotten more than a little out of hand. This is what happens when you have money backed by nothing and borrowed into existence. This is also what gold lovers see when they recommend gold.
Ponzi schemes can only go so far before they collapse on their own accord, and it’s important to recognize what is happening now with stock buybacks, leveraged buyouts, and various carry trades for what it is: one giant Ponzi scheme. This scheme will end the way they all d when the willingness or ability to take on more debt stops and/or when the willingness to further speculate stops. When either of those happens, there will be a mad rush for the exits and no more buyers for “overpriced tulips” will be found. Be prepared.
Mike Shedlock ~ “Mish”
February 8, 2007