Weekly Comment - July 15, 2021

Jul 15, 2021 | Nick Foglietta


The reality is the central bank is printing money at the fastest pace on record.

Central Bank Tapering and Limitless Debt

While working on our farm last weekend, I found myself pondering the concept of “limitless debt.” Weird, I know, but the farm is a place where nature’s rules are immutable and nothing is limitless.

There are constraints on everything and the farmer works to find optimal balances.

Is money really any different? The historical rule of thumb has always been the greater quantity of money in circulation the lower the quality per unit of money.

Money (currency) is a medium meant to facilitate exchange between parties. Rather than having to decide if 15 bales of hay is fair trade for five chickens, money acts as a secondary unit of exchange.

A market price can be established for each item. In this example, $120 for the hay bales and $90 for the chickens rather than trying to cut a chicken in half.

In a healthy economy, the money used to pay for these transactions had to be earned. It was not magically produced from some limitless reservoir and dumped into the system.

This is clearly an oversimplification, but the point is “healthy” money requires effort or service to be acquired and, therefore, is more virtuous than free money.

So how does the introduction of limitless debt impact the value of money?

It is suffice to say that limitless debt slowly (then quickly) destroys the underlying value of the medium of exchange.

The following chart shows that, for all of the talk by the Federal Reserve officials about tapering the amount of money printing, the reality is the central bank is printing money at the fastest pace on record.

Yes, I smiled too….

But to really get a feel for where the world sits in terms of money printing and debt, one has to use a yardstick to compare with.

Gross Domestic Product (GDP) is an imperfect, but adequate yardstick.

World War II was an expensive proposition that had a termination date. The present trend higher in debt is equally dramatic and has no visible finish line.

The concept to be considered in light of the above commentary is there is no exit strategy from the present process of central bank subsidized and enabled asset price inflation.

If there is no exit strategy, then the process will continue forward. Our job as investors is to act appropriately given those conditions.

As a summary statement I write the following for your consideration. Please send me your comments back about any thoughts you have, or how you think this statement might be modified:

The current process of creating limitless debt is unsustainable. At the same time, the ability to “taper” central bank asset purchases to a degree that reverses the direction of debt growth is not an option without asset price deflation.

If/when asset prices begin to sputter, it is far more likely the US Federal Reserve follows the lead of the Bank of Japan and expands its buying to stocks and stock market related assets.

Risk of shocks to asset prices will likely remain constrained to short, sharp declines followed up with even larger central bank liquidity injections and broader asset targets for the newly minted capital.

Let’s see if we can begin a discussion about how investors need to try to invest under the present conditions. Your comments are welcome and encouraged! At your leisure, please email me your thoughts, then get out and enjoy this beautiful summer weather.