Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

The Biggest Race to Print Paper Money in History?

Tuesday, August 27th, 2013
By for Profit Confidential

270813_PC_lombardiMany central banks within the global economy are involved in printing more of their paper money (often referred to as “fiat” currencies). There’s a race to devalue currencies in hopes to revive economies and maintain a competitive stance. Countries believe that by printing more of their fiat currency, they can improve their exports to the global economy, because the goods will be cheaper for those countries that have a stronger currency.

Recently, we heard from the central bank of Brazil that it will commence a program “with the aim of providing FX ‘hedge’ (protection) to the economic agents and liquidity to the FX market…” (Source: Banco Central Do Brasil, August 22, 2013.) In simple words: Brazil’s central bank is going to make sure the country’s currency stays low compared to the currencies of its trading partners.

Through this program, the central bank plans to sell US$500 million on Mondays, Tuesdays, Wednesdays, and Thursdays of every week. This intervention is expected to last until the end of this year, but the central bank also made it very clear that it will continue with its plan as long as necessary.

Similarly, Columbia’s central bank is taking steps to lower the value of its currency. It has bought significant amounts of U.S. dollars and printed pesos. The finance minister of the country, who also represents the government on the central bank’s board, stated that the government wants to keep the country’s currency value between 1,900 and 1,950 pesos per U.S. dollar. (Source: Reuters, August 20, 2013.)

Our own central bank, the Federal Reserve, has been putting pressures on the U.S. dollar. Though we are told the intention of the bank’s quantitative easing is not to create these pressures, it is clearly happening.

The European Central Bank (ECB) is “ready to do whatever it takes,” too. Last year, the Swiss National Bank (SNB) printed a significant amount of its currency, and the Bank of England continues to embark on its own version of quantitative easing.

Currency intervention looks to be the new norm, but its long-term effects are not great. The dark side of these currency wars is the hyper-inflation they will eventually bring to the global economy.

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If the devaluation of a currency was the solution, then we would have seen Japan, which has become known for its notorious money printing, prosper to new heights—of course, that hasn’t happened.

Economic growth occurs through fundamental means, not money printing. The core problem in the global economy today is that demand is weak.

I see central banks in the global economy realizing fiat currencies are losing their purpose—they don’t store value. To protect their wealth, central banks are turning to the alternative currency of gold as a store of value. Dear reader, central banks are the most conservative of investors. When they are buying gold, it tells me they are positioning themselves for what they believe lies ahead.

Going forward, I see central banks buying gold bullion and printing more of their fiat currency at the same time. Have you looked at the chart for the U.S. dollar lately? The currency is on a roller coaster ride.

USD-Us-Dollar-Index-Cash-Settle-ICE  Chart courtesy of www.StockCharts.com

And it’s not just the U.S. dollar that is falling in value in the global economy. The Japanese yen has tumbled, the Indian rupee is falling, and the euro is now prone to wild swings due to that region’s economic crisis. Overall, plummeting currency values are just one more reason for me to stay bullish on gold.

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  • robert corbett

    Two conventional methods exist to manage government budgets #1 is to reduce the size of government cut government workers, excessive pensions and transfer payments like food stamps, disability etc., very unpopular with voters. #2 is to raise taxes from the private sector to fund big government also very unpopular. Options #1 and #2 require a political vote and consensus, very unlikely. Option #3 is for Governments to print the money it needs to fund its excessive spending and tax shortfall. By creating excess money the existing money in circulation money is worth less and less, therefore the government prints itself a secret discount on its obligations and creates a hidden tax on savers and workers buy making their existing money worth less with the flood of newly created money. This creates the spending cut by paying out less valuable dollars to fund government liabilities and also by subtracting purchasing power (defacto taxation) from workers, savers and investors. All that is required is a continuing resolution to raise the debt ceiling about every 2 years done during non election years. This is a great Ponzi scheme that works until the rest of the world stops accepting or demands much more of the devalued currency as payment for goods, services, food and natural resources.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles