The Coming Monetary Bubble to End all Monetary Bubbles

Global monetary policy in the developed world is the loosest it has been since the German hyperinflation after World War I. That is, central banks in America, Europe and Japan have been printing money like mad.

Expect more Central Bank Printing of Money
I predict, moreover, that we haven’t seen anything yet; the world’s central banks are likely to vastly increase their money creation, resulting in the biggest monetary bubble ever, with perhaps $100 trillion more new money on its way into the global economy. This prediction is not specifically tied to Brexit, the U.K’s vote to leave the European Union. However, we’ll discuss Brexit below in the context of printing money.

Monetary policy today: The loosest in almost a century.

There’s no debate that central banks around the world have been printing money in historic fashion. (Central bankers prefer to call this quantitative easing: QE, or better yet, large scale asset purchases -- LSAPs). I prefer to call it printing money, though technically, central banks create money electronically -- out of thin air.

The European Central Bank is manufacturing more than a trillion dollars worth of euros a year. The U.S. Federal Reserve has created over $3 trillion dollars of new money in the last decade (after taking nearly a century to create the first trillion). No one knows exactly what is going on inside China’s central bank, but we can be certain that it involves massive liquidity creation. In a world filled with monetary looseness, the Bank of Japan is printing the most money of any major economy relative to the size of its economy.

What have we gotten in return for monetary easing? The stated goal of monetary looseness is to create jobs and economic growth. By this yardstick, monetary policy appears to be a failure (see IMF downgrades growth forecasts -- again).

However, if the goal of printing money is to pay for government expenditures, monetary policy has been an enormous success. Central banks have taken more than $10 trillion dollars from their citizens. Not only have central bankers taken wealth in historic amounts, they have been cheered for their expropriation.

Governments have two ways to pay for their expenditures. They can take the money from their citizens through fees and taxes. Or they can have the central bank create new money. (Borrowing the money can be thought of as a third way, or it can be viewed as simply deferring the choice between taxing and printing).

To understand the seductive allure of printing money, consider the U.S. program of drone strikes in Afghanistan. Some of the missiles that the U.S. fire cost $1 million each. So 1,000 drone strikes costs $1 billion.

The government can fund the $1 billion by taxing people. If the government uses taxes to pay for the drone strikes, the people who pay for the missiles know who they are, and they generally are not happy. The political cost to additional taxes is very high.

Instead of raising taxes, the Federal Reserve can print an extra billion. In terms of real resources, $1 billion is taken from other uses, made into missiles and exploded. The billion dollars is gone, and it doesn’t matter whether it was paid for with taxes or printing money.

Economically, it matters not whether the drone strikes are paid for by printing money or raising taxes. Politically, however, the two alternatives are currently perceived to be very different. In fact, when the Fed prints $1 billion to pay for 1,000 drone strikes, who pays?

Printing more money does not alter the size the economy; it simply reduces the value of each dollar. The seductive aspect of having the Fed pay for government expenditures is that, unlike taxes, the cost of printing money is invisible. Almost no one is even aware that they have paid for part of a drone strike.

Given the choice between printing money and taxing people, governments reliably take the easy way out and print.

Japanese Prime Minister Abe makes the easy decision

Relative to its economy, Japan is running the largest government deficit in the industrialized world. It has also been promising to increase taxes to reduce the deficit. If you were Prime Minister Shinzo Abe, which would you choose?

  1. Dramatically increase taxes on every voter in the upcoming election, causing pain and outrage, or

  1. Nudge the Bank of Japan to cover the deficit by cranking up the monetary presses?

Unsurprisingly, Japan recently cancelled (officially, “delayed”) pending tax increases. Meanwhile, the Bank of Japan prints money around the clock. Thus, the Japanese government deficit is being covered with brand new yen printed by the Bank of Japan.

Central banks around the world have made a similar decision to print, not tax. In Europe, the total government debt of Greece is just a few months-worth of ECB printing. Why would Europe take the pain of Greek default and exit when they can simply paper over the problem?

In fact, every time Greek default looms, European leaders agree to continue to defer the problem with more subsidies. The subsidies are paid for with freshly printed euros. And Europe will continue to paper over their Greek problem -- and similar problems in Portugal, Italy and Spain as well -- as long as printing money is politically permissible.

Brexit and the Government Response.

On June 23, 2016, England voted to leave the European Union. What was the response of the European Governments to this historic decision? Here is some of the response. 1) The Italian Government is looking to give $44 billion to Italian banks. Where is Italy going to get the money to give to their banks? The answer is to print money and create more debt. 2) The Bank of England is rumored to be considering even looser money in the form of cutting rates and restarting printing money. 3) Financial markets now wager that the U.S. Federal Reserve is more likely to cut rates in 2016 than to raise them as previously planned. In short, the government response to Brexit is print money and create more debt.

Here is a list of the government responses to Brexit that are designed to make it easier to create jobs in Europe: click for list.

Europe is in crisis because governments’ response to every problem is to take the easy path of papering over the crises. Predictably, the government response to Brexit is more debt and more printing money.

The Current Situation: hatred of taxes, love of printing money.

In March of this year, ECB President Mario Draghi announced that the ECB would begin directly supporting companies by buying their bonds -- the IOUs they issue when they borrow money. Previously, all the euro printing had been directed toward buying government debt. With the European economy continuing to sputter, however, Mr. Draghi took more dramatic action to give money directly to companies in the hopes that they would use it to expand their operations and increase hiring.   

The problem is that when the ECB lends newly minted money to companies by buying their bonds, it transfers wealth from European savers to companies. How so? Because the more money the ECB lends by buying corporate bonds, the lower the interest rate companies have to pay. Consider that Toyota sold a Euro-bond last week that pays no interest. Zero. Who would buy a bond that pays no interest? The European Central Bank is happy to, but in doing so, it forces savers who would invest in corporate bonds to accept a zero rate of interest as well.

Further adding insult to injury, the ECB will only buy the bonds of blue-chip companies. These large, rich companies are precisely the ones that would have no trouble borrowing from private investors. Small companies, who might actually need money to expand and hire people, are excluded from the ECB’s bond-buying program.

So the ECB program transfers money from European savers to the largest, richest companies in the world. What was the response to the ECB’s bond buying plan? Was there outrage at this transfer of wealth? Did Senators Elizabeth Warren and Bernie Sanders lead “Occupy ECB” marches? No, exactly the opposite happened: Stock markets around the world rallied after the announcement of more European printing.

Why do stock markets go up when central banks print more money? The answer could simply be that some of that new money is used to buy stocks. Another possibility is that the gains to monetary policy, if any, come immediately, while the pain is spread out over years. Perhaps the correct analogy is drug addiction. Another injection makes the recipient feel better immediately, while increasing the total amount of damage over time. In any event, in the current environment, central bank looseness is rewarded.

In fact, every announcement of monetary easing has been greeted with global cheers. And until the cheering stops, the printing will continue. In fact, if printing money is good for the world and essentially free, why not, you might ask yourself, replace all taxes with newly printed money?

Coming soon: the monetary bubble to end all bubbles

Given how easy it is to print, with so few negative political consequences, more money is coming. How much more? Total global printing money in the last decade has totalled the equivalent of about $12 trillion dollars. On the low end, the next wave could be $20 to $30 trillion. However, records are made to be broken, so perhaps central banks will print a $100 trillion of new money. Why wouldn’t they?

How will the coming massive round of printing money end? There are two ways that the world can end printing money.

  1. Governments can reform themselves. Central banks can decide that printing money takes resources from people in exactly the same way taxes do. Even though the world does not currently express outrage at the extraction of wealth via printing money, governments can reform themselves, stop printing, cut spending, raise taxes and act responsibly.


  1. Financial markets can reform governments. Under this scenario, the political cost of printing money increases to the point where fiscal restraint is less costly to decision makers than printing money. Governments will reform because they are forced by financial crises. The exact form of how the market would end the current easy money bonanza is not clear. However, it must be the case that the reaction to future monetary easing will become negative. The political cost of printing money must exceed the political cost of the alternatives -- cutting spending or raising taxes.

Given these alternatives, the most likely outcome is financial crisis. As the crisis unfolds, we should expect people to claim, “NEVER AGAIN.” You can get ahead of the crowd. Say it now. “Monetary policy cannot make us rich; we will never again try to print ourselves to prosperity.” Open the window and scream it:


And then hope you die before the next round of monetary printing. Many elderly Germans who lived through the 1930s cannot believe the current situation. They are mad as hell, but there are too few of them alive to alter the outcome. The seed of future monetary shenanigans grows with each funeral of people who lived through the prior crises.


  1. Dr. Burnham I agree these negative interest rates and massive printing of money by the central bank is unprecedented and therefore I think we are looking at a major event to happened in the markets.

    However with my limited economist background. This thought continuously bugs me.

    Printing money, should cause inflation, However now the opposite is happening.

    So with no inflation and the need to goose the economy
    Why not monetize the whole American debt?

  2. Hi Doug,

    thank you for your comment.

    1. Printing money -> consumer price inflation?

    Printing money may or may not cause consumer price inflation.

    Here is one example. Loose money --> easier to raise money on stock market for all firms --> more investment --> lower prices.

    For example, the existence of Tesla makes the price of all competing cars a bit lower. In a stock market less inflated by printing money, Tesla might not exist.

    Similarly, China has created money, built many steel plants, thus reducing the price or steel.

    2. Why not print more money?

    I wrote an article on PBS: Is Fed Printing free money? http://www.pbs.org/newshour/making-sense/federal-reserve-printing-free-lunch/

    My answer is that it appears to be better than free now. However, at some point, I believe the market will turn and cut the governments off from printing. I suspect this will take the form of

    a) higher real interest rates, and

    b) negative market reactions to announcements of more printing -- the reverse of the market reaction these days.

  3. Dr Burnham

    I continue to enjoy your posts and would agree that the principle of too much money chasing too few goods (the root of inflation) appears to be lacking at the moment.

    I understand your reasoning to be perhaps there are "not too few goods" as the money for investment for production is being created out of thin air and thus capacity is keeping up with and/or exceeding demand (thus leading to disinflation and/or deflation).

    Assuming that I properly understand your thoughts, although my economics knowledge is sorely lacking, the question(s) I have is why (and how) would the market turn and cut the governments off from printing (or is the answer - akin to your contest name - because the emperor has no clothes) ?

    And then the issue becomes how does one with the foresight to have seen the train barreling down the track protect their assets (and what asset classes are protected and/or can be maximized) in the event of such a train wreck ?

    Thank you for your time

    1. Thank you for your comment. In answer to your question, I do not know how the market will cut the government off. I think it has to include high real interest rates.

      I am also unsure on how to best protect one's wealth. I have made my own investment decisions public. Currently I am mainly in Treasuries which has to become dangerous at some point if I am correct.

      You can see my current investments: http://www.terryburnham.com/2016/06/in-june-2016-chicken-little-portfolio.html

  4. In the 1930s, Keynes described the liquidity trap as the situation in which the central bank increases the money supply with no corresponding decrease in interest rates, thereby making monetary policy ineffective. At (effectively) zero interest rates, no one doubts that we have been in a liquidity trap for quite a while. And yet, Terry, you describe unprecedented quantitative easing as responsive in the immediate run to the challenging current economic conditions (albeit with the dire longer run consequences that Chicken Little has warned us about repeatedly). How can we reconcile living in a liquidity trap with any hint of policy success, fleeting though it may well prove to be?

    1. Thank you last exposfan.

      Your knowledge of Keynes exceeds mine. China's response to the liquidity trap is to force investment. Japan is considering borrowing more and sending checks to people. The Japanese move, if undertaken, might not happen. Instead of giving people money, they could give people consumption vouchers expire by a certain date. This would force consumption.

      In the end, it amounts to less than nothing.

  5. HI Terry
    I was reading your posts, and was wondering about what bank would be a good bank to put my money in. I dont have a lot, and I mean that compared to you, but what I do have Id like to keep.
    I have a CD in Chase bank, and most of my savings in Wellsfargo, and a savings account with Captial One (an online bank), and keep some cash in a safety deposit box at chase.
    Can you give me some advice about what to do with what I have.

  6. Dear Wave Watcher,

    Good question. Martin Weiss has compiled a list of the safest banks for each state in his ultimate money book. You can see part of the book here for free: https://goo.gl/M4JtE1

    I think you can see the full list here (from a few years back): https://goo.gl/845c3M

    with regards,