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The Daily Reckoning

What will printing money and creating debt lead to?

Ben Bernanke believes that making people feel richer is the key to generating actual wealth. Is he right? We're about to find out.

By Guest blogger / November 15, 2010

United States money printing plates are seen at the Museum of American Finance in New York on Oct. 15. What will result from the Fed's decision to buy up $600 billion of Treasury bonds, effectively distributing over half a trillion dollars into the marketplace?

Shannon Stapleton / Reuters

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“Debt delenda est,” we told our audience in London this morning. “This is a debt story. It’s not a liquidity story. It’s not a ‘capitalism has failed’ story. It’s not a regulatory story. It’s the story of debt. Too much debt. Too much to pay back.

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“So how does the story develop? That’s what we’re watching. Ultimately, when you have too much debt, there’s no point in refinancing it. There’s no point in rescheduling it. There’s no point in delaying the inevitable. You need to destroy the bad debt. As fast as possible.”

The Dow was down 73 yesterday. Where is the follow through?

Hmmm… The Fed promises $600 billion to speculators. Alan Greenspan, writing in yesterday’s Financial Times, says the Fed is out to lower the value of the dollar. Ben Bernanke says the Fed wants to increase asset prices.

And still stocks don’t go up. They go down.

What is the meaning of it?

The whole idea of pumping money into the bond market – Bernanke admitted himself – was to get asset prices up. What else could it be?

Higher asset prices are supposed to make people feel richer. Then, they’re supposed to act richer. What do rich people do? They spend money! And before you can say “prestidigitation” they WILL be richer.

How exactly does that work? Oh never mind the details…it’s…like…magic!

Ben Bernanke, one of the world’s leading economists…and certainly the most powerful economist in the world says it works.

Do you believe it, dear reader?

We don’t. If you could make people richer simply by printing money well, heck, we’d print it night and day. Maybe even weekends too.

But of course, it doesn’t work.

So what DOES all that money printing do? Well, that’s what we’re going to find out.

One thing it doesn’t seem to do – at least not yet – is the very thing it was supposed to do: raise asset prices. Instead, investors seem to be wary. It is as if they didn’t trust it.

And why should they? Investors aren’t stupid. They can put two and two together. Sometimes. They know as well as we do that all this money printing MIGHT do is to create a speculative, short-term bubble. As it looks now, they don’t seem to have an appetite for that kind of thing.

So, as near as we can tell, our Great Correction hypothesis is still the best explanation of what is going on. The US (and other nations) went into bubble mode in the 2002-2007 period. The bubble blew up. And now they’re paying the price. It will take years to clean up the damage – even under the best of circumstances. With Bernanke and the Feds doing even more mischief, it could take decades.

But the big risk is that the Feds will make so many mistakes…and such big mistakes…that it will be impossible to correct them in a calm, orderly way.