What Would You Do?

First America’s Zero Interest Rate Policy (ZIRP) and later Europe’s Negative Interest RatePolicy (NIRP) took care of that major hurdle. Those policies destroyed the rate setting ability of the debt auction markets by injecting shill buyers (the Central Banks) to bid up bond prices on an unlimited basis.

The Bank of Japan (BOJ) started slower but has now surpassed both the US and Europe in terms of fiat-based money creation versus the size of GDP.

Do counterfeiters keep hordes of phony $100 bills in their home safes? No. They want to spend that fake cash ASAP, turning it into real assets whose value cannot be diluted away as the supply of money expands dramatically.

That is why global real estate, stock prices, corporate bonds, fine art and antiques have exploded to the upside. Even gold has been showing signs of life recently.

Gold  60-days as of Jan. 26, 2015

When fiat currencies finally collapse these hard assets can be converted back into whatever is serving as ‘cash’ in the new environment.

The BOJ recently bought over $5.6 billion of foreign denominated stocks in just one week. Every yen devaluation makes those stocks more expensive when reconverted back into local currency.

Japanese Buying of Foreign Stocks for Guru Focus

The one asset class that central banks don’t want to touch is sovereign debt. Central banks know many of these foreign bonds will end up “toxic” — values slashed or in default. The central banks need to pawn off as much of the risk as possible to private entities and citizens rather than leaving themselves exposed when these bonds officially go bad. They will leave privately owned banks, insurance companies, individual investors, fixed income mutual funds and pension plans on the hook when the shit hits the fan, somewhere in the future.

Unlimited money printing by the world’s central banks will, by definition, devalue the currencies due to too much money chasing the same number of goods and services. Excessive money printing will ultimately make fiat-based currencies worth much less. This is already occurring right now in Venezuela and Argentina.

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Disclosure: Short UPS Jan. 2017, $90 puts, Long BBBY shares, short BBBY Jan. 2017, $70 & $75 puts.

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Joe Economy 5 years ago Member's comment

The US govt tried QE a number of times in the past. In November 2008, the Fed announced a $600 billion quantitative easing program, and another $1.8 trillion four months later. Eventually the economy recovered but at what cost. Some of the many disadvantages of QE are:

1. It causes the dollar value to decrease

2. Leads to inflation raising prices of consumer goods hurting the people QE was supposed to help.

3. Diminished value of the dollar decreases the ability of the US govt to borrow money from other govts because the dollar buying power is hurt.

4. Can ultimately lead to a consumer war (perhaps this is where we are closest to heading right now after the Swiss abandoned its cap on the Swiss Franc that sent its value surging). Which country is next to head down the same road as Switzerland?