Money Printing Abounds!

In looking at last week’s events, the world saw more monetary stimulus applied to the global economy. Specifically, the most prominent application of monetary policy came from the ECB, who bought the bonds of Portugal ahead of their auctions of 4 and 10 year bonds last Tuesday. Specifically, the ECB purchased approximately 2 billion euros of PIIGS debt, which in turn freed up room for investors to buy €1.2 billion of debt coming out of the Portuguese auctions. Why didn’t the ECB just buy the debt directly from Portugal? Because, like the Fed, they conduct a charade of buying debt in the secondary market, so it does not appear as if they are monetizing the debt. But from what I can tell, they purchased €2 billion of debt to support the issuance of €1.2 billion.

Japan jumped into the fray last week, saying they will purchase the debt of the ESFS, the European Stabilization fund, which can ultimately reach €440 billion. Japan is not investing in the debt of the PIIGS, but rather the credit of the stronger EU members which will be guaranteeing the debt issuance of the ESFS. While China said that they would invest in the debt of the PIIGS, Japan is not being so reckless. I guess China has more surplus reserves to lose than Japan does.

And what about the ECB, which increased their capital from €5.2 billion to €10.2 billion Euro’s in December? Supposedly the ECB owns over €70 billion Euros of PIIGS debt, according to sources I have read, while the ECB’s website is rather cryptic. How can €10 billion in capital support €70 billion of junk, or soon to be junk rated PIIGS debt? Theoretically, the ECB cannot just print money at will as the US’s Fed can. With over €70 billion in PIIGS debt, isn’t is just a matter of time before the mark to market losses on these investments, (or whatever you want to call it), exceeds the €10 billion of capital which the ECB has?

As I add this up, all it means is that the members of the EU will figure out a way to guarantee the debt of the PIIGS, so the solvency of the ECB never gets called into question. The move in December to increase the capital position of the ECB is a step in the right direction. However, €10 billion is not enough capital to carry the day, which leads me to the conclusion, that as much as Jean-Claude Trichet likes to talk about how the ECB should not be intervening in the debt markets as a bail-out measure, the fate of the ECB is now dependent on the bail out of the PIIGS. It is for this reason that when push comes to shove, that the Germans, who like to talk a hard line, will fold on their hard line, and underwrite whatever PIIGS bail-outs are needed.

* And along the lines of bail outs, did anyone catch Ben Bernanke’s interview with CNBC’s Steve Leisman last week? If you did not, here is the link:

http://www.cnbc.com/id/15840232?video=1742147015&play=1 

In this brief clip of the interview, Bernanke clearly links QE1 and QE2 as having a positive impact on the stock market, citing their QE operations as being good for business. While not an explicit goal of the Fed’s money printing operations, one has to wonder if the Fed is banking on a rising stock market to kick up consumer sentiment and spending another notch to help elevate an economy with persistently high unemployment. And to that end, will the Fed continue to feed the markets what they want with more money printing?

To that end, I am clearly being careful about shorting stocks in here. While these markets are stretched thin, if the Fed creates an environment which supports rising equity prices, other asset categories will rise as well. While I believe that there are many deflationary factors at work in the economy, if the money printers and deficit spenders continue to control the levers, then an inflationary outcome is possible, equities and all. I am not advocating such an outcome, but one needs to be wary of this possibility. Over the course of 2011, I plan to add modest amounts of energy exposure to my savings accounts, which for all practical purposes is 50% cash.

It will clearly be interesting to see how the Republicans in the house manage to try to bring spending and the deficits down, and whether the more hawkish members of the Fed manage to limit QE2 or prevent QE3. If you believe that common sense about spending and money printing will prevail in 2011, then you should be selling everything in sight. I am not sure how I feel about that either, especially when it comes to precious metals. To be continued…