When Central Banks Print Money

When real estate and stock markets crashed in 2008 about $7 Trillion in asset value simply disappeared. In response the US Federal Reserve moved to stabilize credit markets and stimulate the US economy. In the EU governments and central bankers took an opposite course of fiscal austerity. The USA has slowly but surely climbed out of the recession and is the healthiest of large economies on the planet. The EU is still flirting with recession and deflation and finally coming around to the stimulus approach. When central banks print money we tend to think of Germany in the 1920s and runaway inflation where in the end it took a million paper Deutschmarks to buy a loaf of bread. Is there more to the story of when central banks print money?

Dangerous Monetary Policy

Bloomberg published an article about how central banks inverted the world.

Whether the latest round of stimulus, which has generated a slew of negative rates globally, will end badly is yet to be seen, but it’s already turned the most basic investment concepts on their head.

Negative interest rates mean that you pay the bank to keep your money and they pay you when you borrow from them. Cash becomes more valuable over time but the best way to save is to put it under a really big mattress. Dividend stocks are popular because they are paying better than bonds. Whether this situation is sustainable remains to be seen.

The Good Side

To the extent that the Great Recession of 2008 sucked capital out of markets it may well have been a good idea to re-inject capital in the form of printed money from the world’s currency of last resort, the US dollar. Ben Bernanke and the US Federal Reserve can probably be given most of the credit for saving the US economy in the wake of the recession. However, now that inflation threatens the Fed may need to raise rates. That would drive the dollar higher which should interest Forex traders.

Dollar Appreciation

We wrote recently about when the US dollar appreciates.

When the U.S. dollar appreciates offshore assets become cheaper and American exports become more expensive for the rest of the world. Vacations in Great Britain will be cheap this summer as the Brexit has driven the British pound to its lowest in three decades. But an overly strong dollar will hurt US exports and US exporters.

Expert expect to asset repricing now that the Fed has quit printing money. Crude oil is the only commodity to fall substantially but other may well follow. When central banks print money and when they quit both drive currency rates and the global economy.

Gold

Traditionally gold bugs buy when inflation hits. This is usually when central banks print money and debase the currency. However, a surging US dollar is expected to reduce the appeal of precious metals according to Market Realist.

The strength of the US dollar is harmful to assets denominated in the dollar. Investors from other countries need to first buy the dollar to own a dollar-based asset. Therefore, a higher dollar means lower demand for precious metals.

Gold bugs would like the US to start printing more money again.