Print Baby Print
Research for Online Investors

by John Dalt

6/15/10

Print Baby Print is the call from politicians and central banks to supply the one unnatural resource we don’t need any more of. We have not written about monetizing the debt in some time. It hasn’t been on the front burner of late. We have other issues that have pushed it aside. Don’t believe it is gone. Just like an athlete that trains under the lights long hard hours for his moment in competition, bureaucrats are working overtime in darkened offices undermining the value of money around the world.

The latest and most egregious violator of safe money is the European Central Bank (ECB).  Everyone knew the U.S. Federal Reserve would print money to try to plug the holes in the leaking dike during the crisis of ’08 and ’09.  The Fed printed $1.25 billion to monetize mortgage backed securities.  The Bank of England printed 200 billion pounds, completely financing Britain’s 2009 budget deficit.

The ECB was supposed to be different.  They were independent and served no master.  They knew the lessons of Weimar Germany and ruinous hyperinflation.  They did not answer to one government but were the central bank for sixteen counties that shared the euro as their currency.  When it was time to say “No”, they wavered and whimpered and started up the presses in their dark little rooms.

Today the ECB is buying the sovereign debt of countries that cannot sell to anyone.  Moody’s downgraded Greece’s debt to “junk” status on Monday.  Who is going to buy it?  The ECB.  What is it worth?  Nothing.  Can they ever repay the debt?  No.

The U.S. Federal Reserve, Bank of England and now the ECB all declare they will pull the money back after the crisis passes.  How do they do that?  The procedure is simple in abstract.  As the mortgages are paid off, as the sovereign debt is paid back to the central bank, they mark the money off their books as if it was never there.  It goes back into the dark corners of the central bank, ready to be called back to the ready if another crisis hits.  This is called sterilizing the debt.  It does not infect good money with inflationary pressure.

The extra money was only temporary and is withdrawn from the economy as the crisis passes.  In practice, it is much more difficult to remove the money from the economy.  Homeowners have to pay off their mortgages, Greece has to pay their bondholders.  Eventually you have to stop buying new debt issues, then gradually remove the old issues without causing a spike in interest rates.  And while the central banks are balancing these balls, they must worry about a new crisis developing that requires more monetization.

U.S. homeowners are defaulting on their loans, many observers believe Greece cannot pay off their debt.  Over the course of history, the monetization of debt may stem the leaks in the monetary dike, but before the extra money can be withdrawn in an orderly fashion, a new emergency requires more monetization, or quantitative easing.

We all know this is true because the U.S. dollar is worth about two cents of a 1910 dollar.  Gold sold for $20 dollars an ounce, today over $1200 per ounce. Crude oil sold for $0.61 cents per barrel in 1910 today the price is $76 per barrel.  This is why a penny candy now costs fifty or sixty cents in the U.S. or a nickel candy bar from your youth costs a dollar.  Our prediction today does not take a crystal ball as much as a rearview mirror.  The Federal Reserve, the BofE and the ECB will not sterilize the monetized debt but continue and expand it into the future.  The expansions in money are malinvested, and the world economy continues to lurch from one crisis to another.

If you agree with this scenario, and who cannot, simply look at our recent past. Monetary inflation should prop up underpriced equity prices in the short run, because there is more money chasing the same number of shares. If the money we use to value assets is inflated, then we want to own the underlying assets. Natural resource companies should provide the average investor with the greatest protection from currency inflation.  Natural resources become the "new" currency of choice.

To the mailbox:
I didn't realize other people (traders) actually see all the bids on their computers.  They have complete control.  I had no idea.

Johns reply:  If you have level two on your computer, you can see how many shares at each price point for the stock you are watching.  Traders on the floor can see it by order.  They dip the price and buy 500 shares of AAPL for $220 on somebody’s stop loss for one of their favored customers.  It happens all the time.  It always frustrates me if I have a limit buy order in and the market dips below my limit, but mine does not fill.  I know the floor traders took out somebody’s stop and filled a friend.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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