The Bubble in Paper Money

Founder Bill Bonner

US stocks are still going up. Gold is still dillydallying.

Gold is waiting to see what happens. Japan and the US are pumping up the monetary base – fast. But collectively, their balance sheets actually contracted by $415 billion in the first quarter – led by a $370 billion decline in the ECB's balance sheet.

Result: slightly less paper money in the developed economies... and a slightly lower gold price. Seems logical. Seems sensible.

You see, since the start of the secular bull market in gold, there has been a nearly perfect correlation between the gold price and the rate of balance sheet expansion (aka money printing) at the Fed, the ECB, the Bank of England and the Bank of Japan.

You can see clearly it in this chart courtesy of our friends at the Sprott Group.

Central Bank Assets Vs. Gold Bullion
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According to Sprott, for every extra $1 trillion in collective balance sheet expansion by these central banks, gold has risen $210 per ounce.

Gold is the world's alternative money. It and bitcoins. New supply of paper money is expanding rapidly. New supplies of gold and bitcoins are much more stable.

But many mainstream pundits are sure the end of the secular bull market in gold is at hand.

Who knows? Maybe they're right.

But it seems more likely that when the Japanese get their presses running hot, the price of gold will resume its upward climb.

Like the Fed in the 1970s, central banks in the high-debt, low-growth developed economies have decided that inflation is the solution to low growth and high unemployment.

Unless something happens to stop them, they'll probably keep increasing the money supply. And the price of gold will continue to correlate to the rate of increase in the monetary base of the developed world's major central banks.

Doing the Damnedest Things

But we're still laughing at the Japanese... and at Ben Bernanke... and at economists and central bankers everywhere.

And at ourselves! We all do the damnedest things.

Remember the dot-com bubble? People thought they could rich by buying companies with no earnings... no assets... and no business plan that had ever been tested. They invested hundreds of billions of dollars in these companies.

And when we pointed out to them at the time in our Daily Reckoning e-letter that the whole thing was loony, they said we "didn't get it."

As it turned out, we were happy not to get it.

And remember the US housing bubble? People thought they could get rich by buying houses. They thought that some magic force was making houses more and more valuable... and that all they had to do was to buy the biggest, most expensive house they could afford and "flip" it for a outsized profit.

Again, we didn't get it. How could an inanimate object that needed constant maintenance and attention increase your wealth? Houses were consumer items, not capital investments.

And again, it turned out that not getting it was a big advantage.

So you're probably wondering... what is it that we don't get now?

We'll tell you. We don't get how printing money can make people wealthier. It never did in the past. Instead, it just led to higher inflation, bankruptcies, riots, revolutions... and disappointment.

Not that we have a closed mind about it. If someone could explain how printing up pieces of paper makes us more prosperous, we'd be all for it.

We'd want more of it. Heck, if one or two trillion new dollars or yen or euro makes you wealthier, why not print up 10 quazillion?

Wait a minute. Didn't Argentina try that in the 1980s? Didn't Brazil give it a whirl in the 1990s... and Zimbabwe in the 2000s?

We don't remember any of them getting richer. Instead, they got poorer.

So what's the magic that Ben Bernanke and the Japanese have discovered? What's the secret?

There may be one. Anything's possible. But what is it?

Until we get a good answer... we're going to keep laughing.

Regards,

Bill Bonner

Bill


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