The biggest debates I have are with gold bugs. They believe endless money printing will inevitably lead to hyperinflation and that will push the gold price over $5,000 an ounce while sinking the dollar to near zero.

They are (and have been), quite simply, wrong!

Japan has already proven that money printing doesn’t lead to much higher inflation, and certainly not hyperinflation… especially when in a deflationary period of debt and bubble deleveraging like the 1930s. Such an environment destroys money and creates deflation, with fewer dollars chasing goods and services.

The truth is, Japan TRIPLED down on its money printing efforts in 2013 after 14 years of more typical levels of QE… and it had a minor impact on inflation or the economy.

Look at this chart…

 

It shows the insanity of Japan’s (and all others’) QE efforts. We’re the only sober country since early 2014…

China leads the central bank balance sheet race when it comes to total assets. Europe’s next in line, then Japan, and then the U.S.

But look to the right of the chart. As a percentage of GDP, Japan’s central bank created total assets at a whopping 97%, yet its GDP is only 25% of the U.S.’s.

Japan’s QE has been about four times that of the U.S. For the U.S. to do what Japan has done, the Fed would have to QUADRUPLE down and print $12 trillion in addition to the $4 trillion it has already printed.

Try proposing that after the last round of QE finally fails.

But even if the Fed tried to print a fraction of that, it still wouldn’t result in hyperinflation.

An aging, flat or shrinking workforce is deflationary.

Debt deleveraging and bursting bubbles are deflationary.

We’re in the deflationary Winter Economic Season, and it’s almost impossible to create high inflation in such a period.

Consumers, businesses, and governments have over-expanded and can’t, or don’t, need to borrow more. They don’t need to leverage the money central banks print.

All the newly “printed” money does is create financial asset bubbles in stocks and real estate. And such bubbles always burst in the end, creating a larger financial disaster.

Europe has printed almost twice as much as what we have, when compared to GDP, and it has very low inflation and lower growth than the U.S. That’s because our workforce and demographics are flattening, but not declining, as is the trend in Europe and Japan.

China has created the most central bank assets, but in its case, from the massive debt bubble that resulted from the government’s implicit guarantees rather than QE. It’s spurred a massive export boom that has accumulated foreign exchange reserves of over $5 trillion, $1.2 trillion of which is invested in U.S. Treasurys.

Such buying of sovereign bonds suppresses interest rates and is similarly stimulating globally as QE policies.

The big question is: Will central banks have any credibility to take QE up to higher levels if the economy crashes when such unprecedented stimulus finally fails and we end up in a worse crisis than 2008 to 2009?

I doubt it.

And if Japan’s tripling down, producing four times the stimulus compared to the U.S., didn’t create inflation or any significant growth, would even 10 times make that big of a difference? (Ten times globally would mean $150 trillion or two times global GDP).

Unlikely.

My view is that the next bubble crash will nearly end, or totally destroy, central banks.

People will realize that markets are better at managing interest rates and our economy than a bunch of pin-headed academics are.

Central banks should just provide short-term liquidity in crises, not endless stimulus or macromanagement of markets and economies.

Besides, now that tapering is the trend, central banks will be a bit slow to react and be behind when an inevitable crash does occur.

If you bet on a hyper-acceleration of QE, on hyperinflation, and on gold… you could get your ass handed to you… even if you’re right about a financial crisis ahead.

On Monday, I sent our 5-Day Forecast email to our Boom & Bust subscribers showing why the dollar is starting to head back up again and how it may curb gold’s bear market to the lower end of the $1,375 to $1,428 range I predicted. If you missed that, learn more here.

Deflation has happened many times at the global level, as has high inflation. Hyperinflation has rarely happened and only in isolated countries, like Germany after losing WW1 and being burdened with massive reparations… Zimbabwe, Argentina and, now, Venezuela and Argentina again.

It’s the opposite impact for stocks, high-yield bonds, real estate, and commodities.

Deflation’s the same, but worse than high inflation. So, understanding the difference between deflation and inflation is MORE IMPORTANT than understanding how much the economy will grow or crash.

The logic of gold bugs is that printing money causes inflation. Rather they should be asking: Why are central banks printing so much money, so desperately?

They’re doing it to fight the already pernicious deflationary trend that began in early 2008, and that I predicted in my first book back in 1989…

And since you don’t get something for nothing and you can’t fight fundamental trends forever, deflation will win in the end.

Bet on that!

Harry

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