Little Discussed Side Effects of Money Printing

In the January “You May Not Know Report” (my monthly client communication) to be mailed mid-month, I discuss the predictable outcomes of money printing in detail and offer strategies for you to consider in your own, personal financial situation.

While price inflation is the first inflation end-result that most of us think about when we consider the effect that money creation will have on our economy and society, history teaches us that the wealth gap and resultant social unrest followed by a reset are also inevitable outcomes of money creation.

History also teaches us that as money creation becomes the mainstream, “go-to” policy, it accelerates exponentially.

Past radio program guest, Dr, Chris Martenson describes the path to hyperinflation using an analogy of water drops in Yankee Stadium.  I have borrowed his analogy to describe this phenomenon in past issues of “Portfolio Watch”.

If you began by placing a drop of water in Yankee Stadium and then every minute that passed doubled the drops deposited in the stadium one minute earlier, you’d fill the entire stadium in less than one hour.

To make the point, you’d put one drop in the stadium immediately.  After one minute passed, you put in 2 drops, after another minute passes 4 drops, and so on.

Interestingly, five minutes after the bases were covered the stadium would be full.  In other words, most of the action takes place in the last few minutes.

Hyperinflations work similarly.  Most of the action takes place at the end.

When you analyze the numbers, you have to seriously wonder if we are near the end.  Follows is an excerpt written by Pascal Hugli that was published on Mises (emphasis added):

Although monetary policy had been ultra expansionary even well before the virus hit the world, central bankers are currently upping the ante once again. While it took the Federal Reserve almost six years to create 3.5 trillion in new US dollar liquidity, this time around it took only ten months to unleash a monetary tsunami of $3 trillion with the projection of at least another $1.8 trillion next year.

While these astronomical numbers don’t really speak to the general public anymore, another astonishing fact resonated with them: after March 2020 alone, the US banking system is reported to have increased the M1 money supply by 37 percent. What this means in plain words is that 37 percent of all outstanding dollars and dollar bank deposits that have ever existed have been created this year. If one bears in mind that monetary aggregates like M0, M1, and M2 today no longer give an accurate account of all the money in the system because they do not account for the shadow banking’s collateral multiplier, one can only guess that the actual extent of monetary expansion must be a lot greater.

Financial markets have gone crazy. Not only do Swiss and German bonds have a negative interest rate, but the Spanish ten-year bond also recently dipped into negative territory for the first time, albeit for a brief period. Buying these new zero-to-negative-yield bonds is the European central bank (ECB), as an analysis by Germany’s DZ Bank shows.

The European bond is on the verge of vanishing. Just as Europe will gradually follow in Japan’s footsteps and increasingly experience the social consequences of zero interest rates, its bond market is being “japanified.” The Bank of Japan (BOJ) has long been overtaken by the fate of being virtually the sole bidder on Japan’s government bonds (JGB). The ECB is currently facing the same risk, and there really seems to be no way out of it. Just as has been the case in Japan, Europe’s central bankers are siloing ever more government bonds, depriving the private sector of this “high-powered” collateral and making monetary policy ever more difficult. In this regard too, Mises’s famous spiral of intervention will keep on spinning as technocrats and apparatchiks have to come up with new out-of-the-box “solutions.”

          I alluded to the social consequences of money creation above.  As devastating as price inflation is to savers and investors, the little-discussed social consequences of money creation are every bit as costly, perhaps even more costly from some perspectives.

          Mr. Hugli commented on these social consequences of money creation in an article he published in July.  Here is a bit from that piece (emphasis added):

Anyone who has ever been to Japan knows: Japan is special. The country has many strange habits. The Japanese culture is simply different and many peculiarities are hardly understood in the West.

But it’s not only the old established traditions that are foreign to us Westerners. Just as disturbing are social developments such as the increasing tendency of Japanese people to overwork, parasite singles who isolate themselves, or the existence of platonic relationships in which people are paid to hold hands. All of these phenomena are indeed odd and are generally attributed to the peculiar Japanese culture. However, few people are aware that there is probably a deeper reason for these curiosities, namely an economic one: zero and negative interest.

          Mr. Hugli notes that from the 1960’s through the 1980’s, Japan was an economic powerhouse.  However, beginning in the 1990’s as interest rates moved lower to create more money (money is loaned into existence in a fractional reserve banking system so lower interest rates mean more money creation.  Money creation typically only begins when lower interest rates no longer creates the desired quantity of new money), Japan began to change economically and socially.  Here are some of Mr. Hugli’s comments (emphasis added):

At the beginning of the 1990s, interest rate policy in Japan increasingly moved toward the zero lower bound. Three decades later, the country is still stuck in a zero interest rate trap and the magic and innovative power of Japanese companies has diminished considerably. In the international context, they can hardly keep up with American or Chinese counterparts, or at least they are no longer as feared as they used to be.

Innovation ultimately has a lot to do with time preference in economic terms. Real innovations often only pay off years later, which is why innovative companies have to be prepared for a long haul. Zero-interest rates counteract the power of innovation, because they almost always go hand in hand with higher time preference. The fact that Japanese companies are hardly feared by global competition today is probably largely due, albeit not monocausally, to Japan’s long-standing zero interest rates.

Today, people generally speak of the lost decades that Japanese companies have fallen victim to. The opportunity costs of this zero-interest-rate policy are also reflected in the dwindling innovative strength and productivity. It is hard to imagine where Japan would be today if the Japanese economy had been spared the burden of zero and negative interest rates.

          Mr. Hugli notes that Japan’s innovations have come in rather bizarre fields; platonic relationship offers, dolls to serve as companions and relationship substitutes and a new emerging market is renting a substitute father or friend.  If you don’t want to go out alone, you can rent a companion or you can rent a whole family to be able to fake enough celebrants at your personal graduation party.  Hugli also notes the widening wealth gap in Japan (emphasis added):

Younger people in particular have been hit the hardest. As recently as 1992, 80 percent of young Japanese workers had a regular job. In 2006, half of all young workers were in part-time jobs with lower wage levels. Only 2 percent of nonregular workers in Japan move to regular work each year. Most of today’s young workers are unlikely to find a regular job.

Quite a few young people have therefore completely cut themselves off from the world of work, an inglorious trend known in Japan under a popular term called hikikomori. At the same time, people are withdrawing more and more from civil society and the public sphere into their own four walls. Unofficial speculations suggest that this phenomenon, described as cocooning, now affects up to 10 million Japanese.

Zero and negative interest rates are a reality in Europe and will soon be in the US as well. It should not be expected that we will necessarily be immune to similar developments to those in Japan. In the West, the first “signs of resignation” are beginning to appear, particularly among millennials and younger generations. A growing proportion of them seems to be subconsciously realizing that they have to adjust to an increasingly stagnant life.

The anger and frustration are then directed either at the condemned turbocapitalism, against which more and more people take to the streets in demonstrations.

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Is Your Currency Going to Change?

Every day that passes we are seeing changes as far as currencies are concerned globally.  Given the rest of the news and the tendency of the mainstream media to report with bias, many of these changes have gone largely unreported and consequently unnoticed.

          For a long time, recognizing that the current financial system is highly stressed, and the current level of money printing and debt accumulation is unsustainable, I have been forecasting a future ‘reset’ of some kind.

          In the October “You May Not Know Report” newsletter distributed to my clients, I noted that there are two ways for this reset to occur – either reactively or proactively.  I offered the example of Zimbabwe as a reactive reset and the example of the Bretton Woods agreement as a proactive reset.

          If you’re not a reader of the “You May Not Know Report”, I’ll briefly summarize here.  In the case of Zimbabwe, due to overspending and massive money printing by Robert Mugabe, a reactive reset took place.  Once the citizens of Zimbabwe woke up to the fact that holding currency versus tangible assets didn’t make sense, the rush to own tangible assets created massive price inflation.  In this reset, the government simply opted to allow the citizens to use stronger currencies like the US Dollar.

          The Bretton Woods agreement created a new monetary system in the 1940’s.  This system was anchored by the US Dollar which was redeemable for gold at a rate of $35 per ounce.  This was a proactive reset of the monetary system.  This system remained in place until 1971 when the link between the US Dollar and gold was broken.

          Shortly after the link between the US Dollar and gold was eliminated, a deal was struck with Saudi Arabia to sell oil only in US Dollars and the Petro-Dollar was born.  Now, due to profligate spending and reckless money printing by the Fed, the writing is on the wall.  This trend will have to end.

          You don’t need to be an economist to recognize this.  More than $3 trillion was created out of thin air this year alone.  This week’s RLA radio guest, Rob Kirby contends that there is more money being created than is admitted by the Fed.  He provides compelling evidence to back up his claim.

          During the interview, Rob borrows an analogy he borrows from past RLA Radio guest, Chris Martenson.  The analogy:  imagine that you begin by putting one drop of water in Yankee Stadium and then every minute you double it.  One minute after placing the one drop of water in the stadium, you place two drops.  After another minute passes, you place four drops.  And so on.

          At the end of 45 minutes, the water level in the stadium is just covering the bases, but after 50 minutes, the stadium is completely full of water.  The point is simply that all the action happens in the last five minutes.       

          Past RLA Radio guest, Alasdair Macleod, made this point as well.  Mr. Macleod has suggested that hyperinflations occur quickly, over a period of months rather than years.

          So, the bottom line is that money creation is occurring at a level that is not sustainable, and the trillion-dollar question is what will the reset look like?  Will it be reactive, or will it be proactive and how will you be affected?

          There is growing evidence that there is activity occurring presently that may lead to a proactive reset although, at the present time, there is nothing concrete.  Trying to figure out what this reset might look like based on the information that is available is a lot like putting a puzzle together.

          As I have reported previously, the idea of a “Digital Dollar” has been floated twice already this year.  Although the idea is still an idea at this point in the United States, other countries around the world are testing digital currencies.  The Bahamas, Ukraine, Uruguay, and parts of China are testing digital currencies presently.

          At the end of September, the European Central Bank applied to trademark the term “Digital Euro” which can be abbreviated to DE.  Perhaps a move to get the Germans more comfortable with the idea?

          Now, just about 2 weeks after the European Central Bank applied for the “Digital Euro” trademark, the Bank of Japan is getting in on the act.  This from Zero Hedge (Source: (emphasis added)(official excerpt from the BOJ’s statement in larger font):

On Friday, the Bank of Japan joined the Fed and ECB when it said it would begin experimenting on how to operate its own digital currency, rather than confining itself to conceptual research as it has to date.

Digitalization has advanced in various areas at home and abroad on the back of rapid development of information communication technology. There is a possibility of a surge in public demand for central bank digital currency (CBDC) going forward, considering the rapid development of technological innovation. While the Bank of Japan currently has no plan to issue CBDC, from the viewpoint of ensuring the stability and efficiency of the overall payment and settlement systems, the Bank considers it important to prepare thoroughly to respond to changes in circumstances in an appropriate manner.

The bank explained that it might provide general-purpose CBDC if cash in circulation drops “significantly” and private digital money is not sufficient to substitute the functions of cash while promising to supply physical cash as long as there is public demand for it.

            Interesting that the Bank of Japan states, “while the Bank of Japan currently has no plan to issue CBDC”.  From my experience, whenever a politician or a central banker floats an idea with such a disclaimer, that is exactly what they are planning.

          “Reuters” also reported on the development (Source: (emphasis added):

The Bank of Japan said on Friday it would begin experimenting next year on how to operate its own digital currency, joining efforts by other central banks to catch up to rapid private-sector innovation.

The move came in tandem with an announcement by a group of seven major central banks, including the BOJ, on what they see as core features of a central bank digital currency (CBDC) such as resilience and a clear legal framework.

            When digital dollars were proposed previously, it was suggested that the Federal Reserve would maintain a digital wallet for each American.  The reason given for the development of a digital dollar wallet was that it would be easier and more efficient for citizens to receive their stimulus payments, a.k.a. “helicopter money”.

          And, while the Bank of Japan stated there would be physical cash available if there was public demand for it, my cynical side questions this statement.

          While physical cash would likely be available for a period, one can’t help but wonder for how long.  Once a population gets comfortable with digital currency and largely quits using cash, it’s easy for a central bank to justify pulling the cash and using only the digital currency.

          Once the cash get pulled, it then becomes far easier to impose negative interest rates across the board.

          I remain hopeful that we will ultimately see a proactive reset with a digital currency that is linked to gold or silver.  History suggests that when fiat currencies fail, the population typically demands a return to some form of gold or silver-based currency.

          No matter when or how a reset might occur, holding gold and silver in a portfolio makes sense for many investors.

          Many traditional money managers are now jumping on the gold and silver bandwagon.  While this doesn’t guarantee anything as far as the price of gold and silver are concerned, it’s interesting at the very least.

          Kelvin Tay of UBS Global Wealth Management had this to say, “We like gold because we think that gold is likely to actually hit about $2,000 per ounce by the end of the year.  In the event of uncertainty over the US election and the COVID-19 pandemic, gold is a very, very good hedge.”

          Wells Fargo’s head of real asset strategy John LaForge had this to say about gold, “The fundamental backdrop looks good.  Interest rates remain low, money supplies excessive and we are doubtful that the US Dollar’s September rally has long legs.  We view gold at these prices as a good buying opportunity and, as evidenced by our 2021 year-end targets, expect higher gold prices.

          I will revisit this topic as information warrants.