Answer: It increases the price, of most everything.
Today the Dow Jones rose 2% to 11,434 and Gold hit $1390 an ounce, up 6% in just over 24 hours.
What happened?
What happened was that the Fed announced it will throw (err, I mean print, or, uh, I mean buy) $850 to $900 billion of treasuries and other assets between now and June 2011. The idea behind the Fed’s announcement is to try to stimulate the economy by keeping interest rates low. The Fed is led by Ben Bernanke. As Chairman of the Federal Reserve he also has other names: Dr. Bernanke, Professor Bernanke, and — my favorite — “Helicopter Ben.”
In 2002, Helicopter Ben said that deflation wouldn’t happen here. “The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost,” he said. He also referred to a statement made by Milton Friedman about using a “helicopter drop” of money into the economy to fight deflation.
I just like to refer to him as ‘Helicopter Ben’.
Helicopter Ben is an expert on the Great Depression. When he was speaking in 2002, he said that if he were in charge he’d drop buckets of money out of helicopters before letting deflation take hold in this country again. Yesterday, Helicopter Ben continued to make good on his word.
I value consistency in other people. Well, Bernanke is being consistent. In a Boston speech on October 15th Bernanke said that additional monetary stimulus is warranted because inflation is too low and unemployment is too high. The jobless rate has been above 9.5% nationwide for the last 14 months. The idea behind this newest Trillion dollars in stimulus is to support the fledgling economic recovery by keeping interest rates low.
I ask you, what happens when you throw a Trillion dollars at a problem? What happens is that the value of each dollar declines.
Today, the US Dollar continued its decline against other currencies, against Gold, against oil, and against stocks (it takes more dollars now to buy the same stocks). This should come as no surprise. When I was a kid, we had a national debt of 1 Trillion dollars. Today it’s nearly 14 Trillion.
It will likely be $20 Trillion in four years.
So let’s see, debt has increased 14x. What have other prices done? In 1977 Gold was $147 an ounce. Today, it’s nearly $1400 an ounce. So while the debt level has gone up 14x, the price of gold has gone up 9x. Let’s remember a few other prices. A postage stamp cost 13 cents in 1977. I used to buy candy bars for about 20 cents. They are between 75 cents and $1.50 today.
It’s safe to deduce that if we “print money”, and throw it out of helicopters (or buy treasuries (it’s the same thing in our ‘sophisticated economy’), then the prices of many things (oil, stocks, gold, food, and most everything else), will go up.
What’s it mean?
Don’t listen to me, just heed what markets the direction of the money. Today the markets spoke loudly. Stocks are rising and so are other durable assets including commodities, rare collectibles and hard currencies (of which there are only three: Gold, Silver and perhaps the Swiss Franc).
Here’s my final thought for the day:
Why is it, that when we predict something, and it comes true, it’s still surprising? I’ve been predicting the long-term rise in gold for 8 years. Last December, in my annual forecast I predicted a $1450 gold price by the end of this year. Now that this is turning true, why do I feel so surprised?
I suppose it’s because it’s so breathtaking. Like a true-believer fan, who had faith that the Giants could win, continued to say that they would win, but can’t believe it — now that they have actually won!
These new price changes are just the beginning. Some day we will “remember” when gas “only” cost $3/gallon, and Gold was “only $1400”…
