My favorite fable by Hans Christian Anderson is the one about the Emperor who was able to strut around nude, based on a myth, sold to his subjects by his minions, that he was dressed in the finest raiments, until one small boy pointed out the obvious that the Emperor had no clothes.
At the risk of parroting this little boy I believe the Central Bankers of the U.S., Europe, and Japan with their policy of ‘Quantitative Easing’ another word for printing trillions of dollars, euros, and yen, are pulling the same stunt. They believe, or they say they do, that if they flood the world with Dollars, Euros and Yen that asset values will rise and consumers will feel more wealthy and spend more. (In other words they are trying to create inflation)
The current dogma is that a little inflation is good because it keeps deflation (falling prices) at bay and no one anywhere knows how to manage an economy with no growth and falling prices. To wit the example of Japan during the last decade. In other words printing money and debasing the currency is the lesser of two evils.
To my simple mind there is something fundamentally wrong with this logic, not because it had never been tried, but because it flies in the face of very tenants of money, as we have known it for four thousand years.
Money, as we have known it, must be a medium of exchange and also a store of value. If it fails as a store of value, it will not be accepted as a medium of exchange for very long. In the simplest of terms people will be loath to sell hard assets, gold, real estate, and other commodities, in exchange for paper currency that is being produced in limitless quantities. Value is created by scarcity rather than by quantity. Sir Isaac Newton spent a great part of his life trying to convert lead into gold, a pointless exercise, since had he succeeded, gold would have reduced to the value of lead, rather than the other way around.
Sometimes I think it is hubris on the part of the bankers, who take the position that you can fool the great unwashed into believing that the Emperor still has his clothes. Indeed, former central banker Greenspan, recently opined that it was globalization that allowed for printing of limitless amounts of money without inflation. This is a dangerous fallacy. The bulk of demand for gold, other than from central banks, comes from two billion lower income people in India and China who already do not believe in the value of paper currency.
The bankers, in their defense, point out that when growth rates improve, they will reverse the policy and shrink the money supply. The last time this was tried was during the reign of Paul Volcker as Chairman of the U.S. Federal Reserve, when, in 1981-83 interest rates increased to eighteen percent and stagflation was rampant. A time of great misery for millions of people. This well maybe the reason for the incredible volatility the stock markets, when even the whiff of an increase in interest rates, sends the stock market into a tail spin.
What is far more likely is that there will be a new world order created for money, as a perpetuation of the myth that a bigger mess can solve all problems. The ‘new money’ will replace the dollar as the excepted medium of exchange for international trade. The value of this new specie will be based upon the value of commodities (gold silver, copper, oil ) in addition to a basket of paper currencies including the Chinese Yuan. Thus created, and who is going to say no, will relieve the U.S. Federal Reserve, of the unpleasant necessity of telling the populace that they must lower their standard of living in payment for past excesses.