I’m on my way to a talk and must be brief. But that means I’m forced to explain the global bailout and stock surge in just a few easy words.
When all the G7 finance ministers met – the reason they all had to meet – is not because they need to coordinate a bailout. It’s because none of them wants to be the only one bailing out his banks. Why? One way or the other, “injecting” cash into banks means printing more money. Whether the central bank buys a bank, invests in a bank, or purchases a bank’s assets, it needs money to do it. The bank may call the injection a “loan,” but that’s the way central banks print all of their money. The central bank lends money into existence.
The problem with central banks guaranteeing as much cash as is needed to capitalize the entire banking system is that this might well require printing a whole lot of money. And when a bank prints a whole lot of money, the value of the currency goes down. At least in comparison with other currencies. This makes investors leave that currency and go to others that are more scarce and valuable.
If all the major banks agree to save their equally bankrupt banking industries and if they all engage in massive currency printing, then all their currencies will go down at essentially the same rate. They will all go down together. Money gets less expensive for ailing banks, but it also becomes less valuable for everyone.
What are investors to do at this point? Most of the big investors I know – the multimillionaire investor types – have been sitting on cash for the past year. (They all knew the market was going to crash, even if they were keeping their clients in the market.) They kept a majority of their savings in cash instruments of one kind or another. But now the central banks have given plenty of notice that they’re going to devalue cash by printing a whole lot more of it. What are the investors to do? Get out of cash, and quickly buy all these cheap stocks.
If it were me, I’d probably go and buy gold. Almost none of these guys are. They all learned in business school that gold is not a “productive asset.” It’s not like investing in a factory that makes stuff, or a drug company that might innovate some new chemical. It just sits there.
But in a contracting global economy, I think the object of the game is to find things that are going down in value less rapidly than everything else. Gold may not be productive, but it may have certain ‘brakes’ on its decline in value that declining, formerly productive assets don’t.
In any case, the smart money knows that money is about to get cheaper. That’s why they’re getting out of it.