Will The Fed’s “Beautiful Money Printing” Lead to Economic Recovery?

September 23, 2013

The End GameBridgewater's Ray Dalio, one of the world's most successful hedge fund investors, has put out a neat video explaining how the economic system works and how the suffocating burden of unmanageable debts can be reduced without propelling the world into uncontrollable inflation or a deflationary depression.

According to Dalio, every deleveraging  in history has involved a combination of cutting spending, reducing debt through defaults and restructuring, redistributing wealth and the printing of money by central banks.

Each method of deleveraging must be done in just the right amount to avoid tipping the economy into either deflation or inflation.  For example, spending cuts, also know as austerity, leads to falling incomes as less money is spent and debt burdens becomes even more untenable as deflation sets in.  Fewer jobs and higher unemployment from spending cuts require even further spending cuts and this vicious cycle of lower incomes and higher debts ultimately leads to a severe economic contraction known as a depression.  Increased taxes on the wealthy to redistribute spending power to the poor and debt write offs must also be conducted in measured amounts to avoid social unrest between the "haves and have nots."

Money printing by the central bank is also essential in Dalio's view since interest rates are already at zero and printed money is necessary to make up for disappearing credit.   If money printing along with spending cuts, wealth distribution and debt restructuring are done in just the right proportions, a "beautiful deleveraging" occurs resulting in declining debts and strongly positive economic growth.  If the four factors of develeraging are done properly, money printing will not cause inflation since the printed money merely offsets the credit destruction triggered by reduced lending and borrowing and debt restructurings.

Dalio does not explain how the central bank and central government can accurately determine how to precisely apply his four develeraging factors to get the economy back on track.  In addition, Dalio admits that the whole system winds up falling apart if incomes do not grow faster than debt.  If debts continue to grow at 4% and incomes increase by only 2%, the debt burdens continue to grow, the economic problems compound and banks continue to cut back on lending until incomes increase.

Income growth can outpace debt growth, according to Dalio, if the Fed prints "just the right amount of money."  Good luck with that - the members of the Fed can't even agree on whether or not money printing is causing more harm than good and the Fed's money printing efforts have been totally counterproductive in attempting to increase incomes as Household Incomes Remain Flat.

Over a longer perspective, the figures reveal that the income of the median American household today, adjusted for inflation, is no higher than it was for the equivalent household in the late 1980s.

For all but the most highly educated and affluent Americans, incomes have stagnated, or worse, for more than a decade. The census report found that median household income, adjusted for inflation, was $51,017 in 2012, down about 9 percent from an inflation-adjusted peak of $56,080 in 1999, mostly as a result of the longest and most damaging recession since the Depression. Most people have had no gains since the economy hit bottom in 2009.

Government programs remain a lifeline for millions. Unemployment insurance, whose eligibility the federal government expanded in response to the downturn, kept 1.7 million people out of poverty last year. Food stamps, if counted as income, would have kept out four million.

Since the recession ended in 2009, income gains have accrued almost entirely to the top earners, the Census Bureau found. The top 5 percent of earners — households making more than about $191,000 a year — have recovered their losses and earned about as much in 2012 as they did before the recession. But those in the bottom 80 percent of the income distribution are generally making considerably less than they had been, hit by high rates of unemployment and nonexistent wage growth.

The Fed's money printing rampage has done nothing but inflate the cost of living for the average American even as wages continue to spiral downward.  What will the Fed do next?  There is every reason to believe that the money printing will continue to expand as it did in the Weimar Republic as explained in The Economic Collapse.

There is a reason why every fiat currency in the history of the world has eventually failed.  At some point, those issuing fiat currencies always find themselves giving in to the temptation to wildly print more money.  Sometimes, the motivation for doing this is good.  When an economy is really struggling, those that have been entrusted with the management of that economy can easily fall for the lie that things would be better if people just had "more money".  Today, the Federal Reserve finds itself faced with a scenario that is very similar to what the Weimar Republic was facing nearly 100 years ago.  Like the Weimar Republic, the U.S. economy is also struggling and like the Weimar Republic, the U.S. government is absolutely drowning in debt.  Unfortunately, the Federal Reserve has decided to adopt the same solution that the Weimar Republic chose.  The Federal Reserve is recklessly printing money out of thin air, and in the short-term some positive things have come out of it.  But quantitative easing worked for the Weimar Republic for a little while too.  At first, more money caused economic activity to increase and unemployment was low.  But all of that money printing destroyed faith in German currency and in the German financial system and ultimately Germany experienced an economic meltdown that the world is still talking about today.  This is the path that the Federal Reserve is taking America down, but most Americans have absolutely no idea what is happening. It is really easy to start printing money, but it is incredibly hard to stop.  Like any addict, the Fed is promising that they can quit at any time, but this month they refused to even start tapering their money printing a little bit.

Long term investors in gold and silver should continue to accumulate positions at current bargain prices as part of a long term wealth preservation strategy.

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