When central bankers go mad

What happens when monetary authorities go mad? The money they control loses value. There is no way around this one. So much so, that even Alan Greenspan recognises the problem – at least, in the rare moments when, as Tim Price puts it, he speaks like an “honest human being” rather than a “machine for uttering gibberish”.

Back in 2005 when replying to a question on social security financing, he said it clearly. We can guarantee “cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power”. In other words, says Tim, “the central bank can always create money but there is no guarantee it will ever be worth anything”.

Greenspan also famously noted in his pre-power days that in the absence of a gold standard – something that stops money printing – “there is no safe store of value,” no way for the average person to protect their wealth from the insidious creep of inflation.

And so it is all proving at the moment. The Fed is printing money with the result that that money is worth less and less. Those in any doubt as to the effect of quantitative easing (QE) – more notes makes each note worth less – need only look at the collapsing trade-weighted value of the dollar (now at its lowest since the early 1970s). It has fallen further over the last decade than all but a few complete basket case currencies (not that it is not a basket case itself…).

Then look to the chart below courtesy of Sean Corrigan of Diapason. You don’t need to understand what all the acronyms mean precisely. Basically there’s what Sean calls ‘QE0’ – all the bailout packages that came amid the 2008 banking crisis. Then there’s QE1 – the first batch of QE. Then QE2, the latest batch.

As you can see, the lines representing various asset classes have all gone up, the more QE the Fed has done. In fact, says Corrigan, the more lines you add to the chart, “the less deniable the causation becomes”.

The effect of quantitative easing

We are of course all gold bugs here so I won’t bore you with more reasons to buy it right now. But those looking for further justification can amuse themselves with a new view out from Bullionvault.com that suggests that the current inflation adjusted fair value price for an ounce of gold is $3,800.