Two Assets to Hold

as Money Printing Goes Into

Overdrive
The problem with know-it-alls is that most of what they think they know isnt true.

At the end of last year, the Fed announced it would buy $45 billion
month of U.S. Treasury debt. Not only that, but it will also continue
buying $40 billion a month of agency mortgage-backed securities (junk,
in other words). These purchases will be made with dollars created out of
the thinnest of air. They are expected to balloon the Feds balance sheet
to $4 trillion five times what it was in 2008 by the spring of 2014.
The important thing about the Feds money is that it is not real at all. It is
phony. So is the entire program. It uses ersatz money to fund an imposter
scheme based on fraudulent formulae. If we are lucky, the program will
be merely ineffective. More likely, it will bring the sort of catastrophe
that you can only get from determined central planning.
With this new stimulus program in place, the Fed will increase
Americas monetary base at three times the rate of GDP increases. For
every dollars worth of extra output, the Fed will add $3 to its balance
sheet.
Has any central bank west of Harare ever been so daring? Has any central

Bill Bonner

banker (other than, say, Gideon Gono of the Central Bank of Zimbabwe or Rudolf Havenstein of Reichsbank
during the Weimar Republic) been so bold? And who but the American people would put up with such a
reckless program, right out in the open, as if a counterfeiter had invited the newspapers to have a look at his new
printing press?

Four Conditions for Disaster

A huge centrally planned disaster typically includes four important aspects.

1. Inputs must have passed the point of declining marginal utility so that further
inputs produce negative returns. (GDP return per dollar of Fed money printing is
now about 30 cents see below.)
2. The program must be based on a grand usually preposterous theory, not on
practical experience or common sense. (Countercyclical monetary stimulus
without any real money again, more below.)
3. There is usually mass agreement and mass support for the program. (Look at the
yield on a 10-year Treasury note.)
4. The program is not self-limiting but self-perpetuating. (Think of all the
Americans who want more Medicare, Medicaid and Social Security.)
The Feds EZ policies ring all the bells. They multiply the number of things that could go wrong and reduce to a
few (maybe none) those that could bring a favorable outcome.
Private buyers could shun U.S. debt. Consumer price inflation could spike. Stocks could collapse. A big bank
could go broke. Oil and commodity prices could soar. Congress could do something stupid. Europe could fall to
pieces. In its fragile state (depending heavily on borrowing and printing press money to keep the lights on) any
shock could be catastrophic.
As Bill Gross quickly pointed out, even a positive outcome could set off a disaster. If the economy ever really
does warm up again, surely people will begin to borrow and spend this new money; thats the whole point!
Lent out through the banking system, the money supply will expand like the universe after the Big Bang, in all
directions, with nothing to stop it.
If the volume theory of money has any validity at all, consumer prices will rise sharply. The supply of
money can increase many times faster than the supply of good and services. And once prices begin to go up
substantially, inflation will soon get the prefix hyper soldered onto the front of it.

How to Become Antifragile

Black Swan author Nassim Taleb has new book out which gives us a clue as to how to protect our wealth. Its
called Antifragile.
As Taleb explains, when you subject them to a shock, things that are fragile break. Things that are antifragile

get stronger. We want investments, families and businesses that are antifragile.
On a personal level, we want families that can absorb shocks that can bounce back after reversals that can
rise to the challenges the future brings.
In our investments, too, we need to watch out for fragility. We dont want to own stock in companies that have
too much debt; they wont survive a downturn. We dont want too many eggs in a single basket. And, perhaps
most important, we dont want to bet the farm on our own ideas, no matter how confident we are.
Probably the best antifragile holdings right now are gold and cash. If you believe that central planning works,
you probably wont be interested in either. But if you believe in the law of unintended consequences, you will
hold at least a portion of your wealth in these defensive assets.
Antifragile does not mean merely robust, in Taleb terms. It means long volatility or long adversity. It
means your investment will go up in price in a crisis. If the crisis is of an inflationary or hyperinflationary sort,
gold will go up. If it has a deflationary bias, cash will go up (because everything else will go down maybe
even gold).

Fools Confidence

A simple way to look at Talebs investment posture is this:

You cant know what the future will bring. But you can understand fragility. As
fragility increases, bet more heavily against the fragile sector. Ceteris paribus, as
a company takes on more debt, for example, increase your short positions in its
stock.
We can also look at macroeconomics using the same analysis. An economy becomes more fragile as more red
ink flows and the difference between assets and liabilities becomes more negative.
But most macroeconomic speculation, Taleb warns us, is like TV or the newspapers. It is pure noise. It is worse
than unhelpful. It finds causes and effects where there are none and leads people to believe they know things
that they cant really know. Emboldened with a fools confidence, they make decisions that ultimately prove
disastrous.
Ive argued that almost all the prescriptive remedies of modern economics are claptrap. Taleb goes further:
He believes that most of the observations and guesswork are a waste of time too. He notes that the study of
economics is a sort of epiphenomenology, where things that appear to be related are linked by a causality that
doesnt really exist.
Then, based on causal connections that are largely imaginary, economists clumsily intervene with market
mechanisms:
A main source of the economic crisis that started in 2007 lies in the iatrogenics
[when meddlers make things worse] of the attempt by Uberfragilista Alan
Greenspan certainly the top economic iatrogenist of all time to iron out
the boom-bust cycle which caused risks to go hide under the carpet and
accumulate there until they blew up the economy.

Greenspan didnt know what he was doing. But that didnt stop him from doing it. And now a new crew is in
control at Americas central bank. They are making the same basic mistakes, believing that they understand
cause and effect better than they do and therefore thinking that they can manipulate the system so that it
produces the result they are looking for.
There must be some deep yearning in the human character for order and control. People want to believe that
someone has the situation in hand. But theres no evidence for the proposition that central planning can bring
about a better outcome than neglect.

The Death of Moderation

The 1990s and early 2000s was known as The Great Moderation. It looked as though the authorities had
gotten control of the business cycle. Gordon Brown proclaimed it so. Alan Greenspan took credit for it.
But the moderation was an illusion.
It was only the kind of stability you get by not allowing mistakes to reveal themselves. If you lend enough
money, for example, you can lower the rate of default. But the errors are still there. They merely compound
and grow until they finally blow up.
In Talebs words, the system is fragilized by attempts to stabilize and protect it.
And now, we have the Fed embarking on the most breathtaking and remarkable voyage in monetary history.
Said New York Fed President William C. Dudley earlier in the year:
Monetary policy, while highly accommodative by historical standards, may still
not have been sufficiently accommodative given economic circumstances. The
primary reason for the poor performance has been inadequate aggregate demand.
Demand? You cant print demand. You cant print real wealth, which is what you need to have real buying
power. You can only print paper currency; you can only increase the money supply, not the supply of goods and
services that both demand and supply depend on.
But by printing money, ultimately, all youre doing is fragilizing the system, by facilitating the taking on of
more debt. As debt increases, the system becomes more vulnerable to a shock most likely the shock of sharply
rising consumer prices.

Maybe even hyperinflation...

Taleb is right. We cant know what will happen. But we see the system being weakened by what he calls nave
intervention. We dont know what will happen. But we know what to do. Hoard cash. Buy gold. Bet against the
Fed.