Printing money isn't the cure

By Bill Fleckenstein

For every action there is an equal and opposite reaction. It's what Sir Isaac Newton postulated in his Third Law of Motion. Here is a tweaked version for the times in which we live:

When money printing goes to excess, as it almost always does, speculation follows. (This is not to say that speculation requires money printing. It doesn't.) However, one can never know in advance exactly where the speculative juices will flow and what assets or markets will be kited wildly higher.

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Look at what happened when then-Federal Reserve chief Alan Greenspan printed too much money (and that was kid stuff compared with what we see today). In the mid- to late 1990s, stocks went on a tear, culminating in the sheer lunacy of the yearlong-plus dot-com craze. Lust (greed) sent the market caps of Web sites into the multibillion-dollar stratosphere, based on nothing more than targeting "eyeballs."

Subsequently, the money printing that was used to mitigate the ill effects of that bubble caused real-estate prices to go insane -- or, more precisely, it made real-estate-financing terms insane. During that period, stocks also went wild, with some of the zaniest action occurring in the leveraged buyout arena.

"Modern day" wisdom (of the past 20 years or so) has it that this money printing will fix things and not lead to excesses or inflation. But that is a silly notion. It's not as though quantitative easing, which sends money right to banks, is a precision instrument that targets only bank balance sheets. The money flows where it will, and it can go anywhere.

What excessive money printing always leads to, in addition to speculation, is inflation, a weaker currency and higher interest rates. The latter two -- components of the nascent funding crisis I've written about before -- are what we have seen recently. (On that score, more saber-rattling occurred Wednesday when Alexei Ulyukayev, the first deputy chairman of Russia's central bank, said his bank might convert some Treasury reserves into International Monetary Fund debt.)

No inflation? Not really

Nonetheless, folks are of the opinion that there can be no inflation of any consequence -- because wages aren't galloping higher (as they were in the 1970s, led by strong union activity).

That argument simply isn't true. Inflation has supposedly been tame over the past 10 to 15 years -- due, in part, to the fact that it's been substituted and "hedonicized" away. (For an explanation of those terms and how this works, read "How the government manufactures low inflation" and "Why all roads lead to inflation.")

Throughout those two bubbles, even though there was no generalized wage pressure because the majority of the money flowed elsewhere, wages were driven higher as the unemployment rate bottomed out at the top of the bubble. In other words, even without a rampant upward spiral in wages, we still experienced real inflation.

Continued: For the unemployed, a hollow recovery

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