We've Entered a New Era of Very Bad Money

Jim Jubak MSN Money April 17, 2012

4/16/2012 7:49 PM ET

By Jim Jubak

As countries continue to create money out of thin air to dodge debt crises, where will this all end? And how can investors prepare?

Jim Jubak

So how does this end?

I don't mean the current Spanish debt crisis or even the euro debt crisis. I think we know what the "solution" will be to that.

And I don't even mean the U.S. debt crisis or the Chinese debt crisis. I think we know what the "solutions" for those will be as well.

But what about the meta crisis? The one that's been created by the current round of "solutions." How does that end?

Latest on Spanish debt crisis

I'd suggest that we all brush up on Gresham's Law, the 16th-century description of what happens to strong currencies when they meet up with bad money. In a nutshell, Gresham's Law says that the bad currencies win. Figuring out what to do about that is important as investors head into era of bad money as far as the eye can see.

I think it's clear by this point in the aftermath of the global financial crisis that all the various local crises have been "solved" to date by the creation of vast sums of money essentially out of thin air on the official balance sheets of central banks such as the Federal Reserve and the European Central Bank and on the unofficial balance sheets of, say, China's banking system. I think it's equally clear that, for all the talk about economic reforms creating growth, or austerity creating growth, or financial market confidence creating growth, the most likely "solution" going forward is the continued creation of vast sums of money essentially out of thin air.

It's still an open question if the "solution" will work. In the case of Spain, for example, the European Central Bank fixed the crisis for a while by giving banks access to 1 trillion euros in three-year loans in December and February. But by late March the crisis was back, and the yields on Spanish and Italian government bonds had started to rise again. Now we're looking at another program of bond buying by the central bank to lower yields or another program of three-year loans to banks to give them the money to buy more bonds in order to lower yields.

To condense what I wrote in my Friday, April 13, column, "Why Spain scares the market," on the current state of the art in the Spanish crisis, Spain and the eurozone are likely to fall back on a series of increasingly desperate work-arounds by the European Central Bank, other global central banks and, finally, the International Monetary Fund. Each of those fixes would require that somebody print money -- either the European Central Bank, the International Monetary Fund or some combination of the Federal Reserve, the Bank of Japan and the People's Bank of China. Print enough and the immediate Spanish crisis goes away again as bond yields sink and governments get more breathing space to propose economic reforms and budget cuts.

At some point, though, the bill for these solutions comes due. I hope that point comes after some semblance of economic order has returned to the eurozone and when growth has recovered in the United States and China. But even if Spain -- and Italy, Portugal and Ireland -- win back enough confidence to be able to sell bonds in the financial markets again, the world will still be looking at the bill for this crisis. And we'll still be looking at unsolved budget and balance-sheet problems in the United States and China.

How big is the bill?

The grand total depends on how many central banks we want to include in our reckoning.

At the least we should count the balance sheets of national central banks. For example, the Banco de España, Spain's central bank, showed an increase in its balance sheet for net lending to 228 billion euros in March from 152 billion in February. The March 2012 lending total was up from just 42 billion euros in March 2011.

Go up another level to the balance sheet of the European Central Bank. At the beginning of March, that bank's balance sheet hit a record 3.02 trillion euros (roughly $4 trillion). That was nearly one-third bigger than the German economy.

The only thing good about the rapid expansion of the European Central Bank's balance sheet is that it makes the Federal Reserve's balance sheet, at $2.9 trillion, look positively conservative.

Deleveraging those balance sheets will be extremely dangerous. Central banks will have to sell bonds and other assets back into the financial markets to reduce the size of their balance sheets. That will reduce the money supply and cut into growth. At the same time, governments that haven't yet dealt with their outsize budget deficits and their own debt will have to raise taxes, cut spending or both. The two-track effort, even if successful, will be a huge drag on national economies and on the total global economy.

I think we can assume, however, from the behavior of national governments and central banks during the crisis so far that they will do all they can to put off any significant deleveraging.

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Sprues2, your handouters comment is just not true. Very rarely do you see an obese European. They take better care of themselves than we do but do have superlative free healthcare paid for by higher income taxes than we pay. I was just in a 24-hour clinic the other day for a minor ailment. I have insurance. There were about 50 people there, all anglos, and quite a few of them were pregnant young women or young women with kids and very few had insurance. The nurse told me all the illegal aliens head to the ER and get free healthcare while tying up the ER with their minor ailments. Sad thing is I saw several of these people turned away because they either didn't have a credit card or because the cost of treatment was more than they could afford. They exited still sick while the illegal alien got treatment and a prescription courtesy of the American taxpayer. Obama wanted to end this. The Republicans want to keep giving away free healthcare to illegals for the votes. What kind of country gives money away to illegals and then makes their own citizens ashamed for asking for a handout? Only America.

2 0ReportSpamsprues24 hours ago5000 years we have watched the handouters trying to get a free lunch5000 years we have watched them take countries down the tube.We sit here in the USA, watching the handouters in Europe go through their gyrations trying to save their freebies.We are trying to get where they are, the leftys still think they are going to get a free lunch. 3 2ReportSpamKOO4 hours ago

Wow, judging from the comments below Jubak really brings out the right-wing gun nuts and the 99 percent crowd. The NRA crowd was happy feasting from 1980 to the present on a steady diet of God and Guns. Sadly, the politicians who fed it to them were complete idiots and religious fanatics who had no concept of how to run a business or a country. Our deficit grew to enormous levels as we fed on their dillusions of the holy bible, as they know it, conquering the world and enslaving our own unknowing masses to Big Oil. Those days, like Jubak's doom and gloom festival, are numbered. The Republicans wanted you to think they were the party of small government that hated unions and instead both unions and the government grew in number and screwed us with inferior leadership and inferior products that the now sophisticated global economy doesn't want. So, Allen Greenspan organized an internet bubble and a real estate bubble to fund more mayhem and debt. It's remarkable what Obama's team of MIT-trained czars has accomplished in such a short time since only yesterday we were in a god-induced depression. Spain is not some backwater country. The ECB will pull out of this soon and things will get better. Proof is the GOP shooting down the Buffet rule in the Senate which taxed the rich. Once the old guard is out of office and all the corruption inherent in government is reduced, America will shine again. You know, in Spain they capture illegals and send them home. Second time is prison and hard labor. U.S..A. treats illegals better than citizens. These entitlement programs lathered on illegals have to stop. Cut out all that fluff and we might be able to afford insurance for our own people.

3 2ReportSpamMArket_opinion4 hours agoIndian govt does not tax foreign revenue.Hence Indian companies can quote 30% less rate easily when they compete with US local guys.it is not level filed game.Indian Govt should charge tax on their foreign revenue.Otherwise all US information technology jobs be gone to India. 1 1ReportSpamJeremy123415 hours agoCrying Tree: Ever since they made it a global economy it has turned to massive fraud. Who can print the most money and who can bail out who. We were much better off as a nation before world trade. It has just gone down hill and now our property is worth half at what the insurance companies appraise to rebuild. Were headed for priced to high to buy as inflation rules the necessities of life.

Well, the global economy with the mix of government types has only made a comparably few very wealthy and depressed the vast majority in every country engaged in it.

It has done nothing to make prices stable, encourage economic growth meaning both demand and supply curves push outwards not just one or the other which just forms bubbles or inflation. It has enslaved millions below the poverty line. And is unstable-- a spiral down that just keeps getting further and further out of control.

The global economy was code word for let the vast majority suck eggs and build a new elite class that controls them all. One ring to rule them all LOL! And that ring, was greed.

Everyone thinks they're going to be rich LOL!

1 1ReportSpamfree_health_ care_Ya_right6 hours ago

You can have your GOLD and SILVER, i've been investing in Guns and Ammo for months. When your money is no longer worth anything, and pecious metals won't buy you jack crap, I'm willing to bet that anyone looking down the barrel of a gun is going to give the handler anything they ask! So for you OBAMA lovers, go ahead and keep that idiot in office so he and his pal Ben can make all the Fiat money you can stuff in a building, cause it's not going to be worth squat! "He with the most weapons wins"!

This also goes for you fruit loop NRA haters too. When you give up your rights to own a gun, then you might as well live in a country like Syria,N. Korea,Iran,Cuba,Iraq,Afganastan,China,etc.etc.etc....I believe those counties all have people with no rights. Get the picture???

4 4ReportSpamhavasu466 hours agoBuy something that will inflate as currencies are debased which includes commodities, equities, metals and anything but bonds pay negative real interest. Same thing investors always do. 1 1ReportSpamSomeone (Kasicben)8 hours agoGet ready for 3rd world corruption, in order to get anything done you will need to pay off cops, local politicians, doctors, basically anybody who feels they are underpaid. RUN FOR THE HILLS!!, 6 1ReportSpamstevie59strat8 hours ago

just a matter of time before all the monopoly money these central banks are printing, around 7+ Trillion in the last couple of years, falls apart. Elections here won't matter as whomever wins will have another mess to deal with. We can't print our way out of everything.

The only thing you can be sure of is there will be QE3. It will artificially prop up the stock market until the election so Bernanke can keep his job. Romney said he would replace him if elected and helicopter Ben only stays if Obama wins. Then get ready for more inflation which will probably kick into high gear next year. Sigh :-(

10 1ReportSpampartylike19298 hours ago

1990's = billions

2000's = trillions

Look out quadrillions, here we come...

11 1ReportSpamCrying Tree9 hours agoEver since they made it a global economy it has turned to massive fraud. Who can print the most money and who can bail out who. We were much better off as a nation before world trade. It has just gone down hill and now our property is worth half at what the insurance companies appraise to rebuild. Were headed for priced to high to buy as inflation rules the necessities of life. 30 2ReportSpamAdd a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.CategoriesSpamChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatThreats of suicideOtherAdditional comments(optional) 100 character limitAre you sure you want to delete this comment?/**/ DATA PROVIDERS

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The grand total depends on how many central banks we want to include in our reckoning.

The only thing good about the rapid expansion of the European Central Bank's balance sheet is that it makes the Federal Reserve's balance sheet, at $2.9 trillion, look positively conservative.

I think we can assume, however, from the behavior of national governments and central banks during the crisis so far that they will do all they can to put off any significant deleveraging.

We've Entered a New Era of Very Bad Money

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