Printing Money to Save the World

The Dow rose 50 points on Friday. Gold rose too.

As we ended the week, the Dow was over 12,000…gold was over 1,400…and oil was over $100.

And all seemed to be headed up.

But there’s trouble afoot.

Housing in the US, the foundation of most household wealth in the country, has gone into a double dip…which could drag millions more homeowners underwater.

In other words, the speculative markets are moving one way. The economy is moving the other. The markets are going up. The economy is going down.

Oh…and you can imagine what this does to the poor householder. He’s caught in the middle. The real economy pushes the value of his main asset down…while the feds push up the cost of his most important supplies – food and energy.

“Don’t worry about it,” says Bernanke, Geithner et al. The economy is recovering. But is it?


It’s going to turn out very, very badly.

As predicted here, the feds’ easy money is making things much harder for most people. It’s pushing up costs…and prices. The feds can tell American households that the inflation rate is under 2%, but the poor consumer knows better. He knows that his real cost of living is going up at a rate probably more than 5%. Maybe, as John Williams tells us, more like 9%.

So, thanks to the feds’ pro-inflation policies, the consumer can’t buy as much stuff…so stores don’t sell as much stuff…and the economy weakens. And then, what do the feds do? They push even more inflation into the system.

This is not going to end well. Inflation is increasing…while inflation expectations are still low. Sometime in the future…inflation expectations will get ahead of inflation. And then, the Fed, if it is to get control of the situation, will have to put rates up above the real rate of inflation. In other words, the Fed will have to get ahead of inflation.

Is that going to happen? Not likely. Not in an economy that is slumping.

And along the same line…

We love Japan. Yes. Count on the Japanese to do things that are both great and horrible at the same time.

To put the following news item in perspective, the Japanese are in even worse straits than Americans, at least in some ways. Their government debt equals 220% of GDP. Savings rates are falling to zero. The annual government budget dwarfs tax receipts. And the Japanese face a huge bill for rebuilding after the earthquake, the most expensive natural catastrophe in history.

Where are they going to get the money?

Well, there are two possibilities. The first is bad for Japan. The second is bad for the US.

Like the US, Japan can print its way out of the problem. Some Japanese officials are all for it. Others aren’t. Bloomberg has the report:

Bank of Japan Governor Masaaki Shirakawa is under fire for refusing to consider 1930s-style purchases of government bonds to fund reconstruction from the nation’s record earthquake.

Shirakawa repeatedly attempted to quash direct buying of government debt, a step allowed in extraordinary circumstances with the permission of the Diet, in appearances before lawmakers this week. The policy would undermine confidence in the yen and provoke a surge in consumer prices, he said at parliamentary fiscal and finance committee hearings.

“If this isn’t a special situation, what is?” Kozo Yamamoto, a Diet member with the opposition Liberal Democratic Party, said in an interview this week. Yamamoto advocated a 20 trillion yen ($247 billion) reconstruction program funded by BOJ debt purchases. A group of ruling-party lawmakers submitted a similar proposal to Finance Minister Yoshihiko Noda on March 18, according to a web log posting by DPJ member Yoichi Kaneko.

The debate parallels discussions last year in the US and Europe, where the Federal Reserve and European Central Bank adopted bond-buying programs.

The report mentions how Japan paid for its military build-up in the ’30s. It printed money! Eventually this led to runaway inflation…and economic as well as military disaster.

But what’s the choice?

Well, there’s another option: Japan should dip into its “rainy day fund,” say economists Carmen and Vincent Reinhart. While the Japanese bought Japanese government debt, the Japanese government bought the debt of other governments – primarily, the USA.

Now, it has about a trillion dollars’ worth of it. Why not just sell some of it in order to rebuild the country?

Well, yes… But then, you see the problem, don’t you, Dear Reader? What happens to the price of US government debt? It goes down, right?

And then the US has a hard time funding its deficits.

But wait. It can print money too.

Oh joy…we’re saved!


Bill Bonner
for The Daily Reckoning

The Daily Reckoning