Currency Bubble,The Next Great Recession?

[Alexander Stephenson]

Have you ever heard of a currency bubble?  

One could liken it to what happened to Germany after World War 1.  The government printed money at an exorbitant rate in an attempt to stimulate the country's economy.  Did it work?  Loaves of bread costing 80 Billions German Marks and no jobs would say no (1).  

One could also liken it to Japan (not sure why countries in WW2 make such great examples, but they do).  Now this article does not blame Quantitative Easing (the printing of money to buy bonds) solely, but here's another example of a country that has devalued its currency in the name of stimulus.  Yet, Japan has been one of the weakest developed markets for decades now.  The economy there is not great.  People can't find jobs, and therefore can't afford to make children.  I don't have any of those things (children), but I hear they are quite expensive (2 & 3).

As a final example (I feel like I'm still in college), I'll refer you to an Amazon offering where you can buy a Zimbabwean 100 Trillion Dollar Note (Yes, with a T: TRILLION) for about 93 USD.  Keep in mind Amazon is not a currency exchange so this bill is likely marked up for convenience.  Also, fun fact, I found this link in the toys & games section, same place you'd find monopoly cash (4).

Why is all of this important?  The Great Recession, about 1/3 of my life ago, the United States of America copied this model with our quantitative easing programs led by Ben Bernanke of the Federal Reserve.  We went from about 1,400 Billion USD in the Money Supply to 3,528 Billion from the start of the recession to today.  That's 2 and 1/2 times where we started.  When you print more money, you expect prices to go up.  Not necessarily proportionally, but at least up in a semi-quasi-relative fashion AKA inflation.  The reason we can't reasonably expect a proportional increase is because economics is a fickle beast and the first person that tells you they understand it fully is a liar.  I may have been running around trying to figure out how high school works at the time, but I'm sure I didn't miss 2 to 3 times inflation of our prices during that period.  So, where did all of that inflation go?  (5) (This is the most credible source here because it comes from the horse's mouth, if you don't believe in anything I have to say here that's fine, but I didn't lie about those numbers and there's something to be said about them).

I'd guess that Zimbabwe and some other countries have given us a little bit of help by switching to our currency as their national currency and siphoning away some of that money supply in the meantime, but that's not likely to fix the whole problem.  Our economy surely hasn't grown into this money supply because there are still plenty of underemployed and unemployed people out there.  The Fed is even looking at reversing Quantitative Easing in the future by buying selling away their treasuries for our money and pressing delete on the computer with the digitally-created dollars.  Is this a good idea? I don't know, I'm 22 and I don't know what I'm talking about some 99% of the time.  Does it sound like one?  Not really.  People are getting smarter and wising up to the way the Federal Reserve operates.  Who's to say that cutting the money supply back down won't spook investors and lead to a crash?  I haven't heard of a healthy economy deflating recently, not that it's impossible it's just that our world governments don't like the prefix de- so they don't let it happen.  (6)

So what if we do nothing?  Well then there's 2 to 3 times inflation that we are just missing, what if it hit tomorrow?  Now, don't think of this as appreciation where your home's value is now 2 to 3 times higher.  The value is still proportionally the same because all other prices have gone up too (think 80 Billion dollar loaf of bread), but now our trips to Europe, Asia, South America, and even Africa have gotten a lot more expensive.  Imports are no longer affordable and that amount of inflation kills cash reserves (think Apple with it's Scrooge McDuck-esque vaults of cash).  I don't think those of us with W-2s will mind the sound of our COLA percentage increases come raise time, though.

So what do you think?  Is this the next crash that is heard of for a century or am I way off base?  

I will disclose that I have a Bachelor's in Business Economics, which likely makes me less qualified to have an opinion on this.  These opinions are not just my own, but of others I've spoken with on the topic and one extremely influential professor who once worked at the Fed despite his animosity towards the institution (fix it from the inside kind of guy).

1. http://www.joelscoins.com/exhibger2.htm

2. https://www.weforum.org/agenda/2016/02/why-is-japa...

3. https://www.theatlantic.com/business/archive/2017/...

4. https://www.amazon.com/Zimbabwe-100-Trillion-Dolla...

5. https://fred.stlouisfed.org/series/M1SL

6. https://qz.com/260980/meet-the-countries-that-dont...

[Alexander Stephenson]

Alexey, you make great points and yes I was leaving all of this open to discussion so I did not put my own time frame estimate on a potential crash, I like to stir the pot.

Germany was beaten, and needed to rebuild.  Where there are things that need to be rebuilt there are jobs, no?  So why was the economy not able to regrow?  They had some great resources and german ingenuity dates back that far.  Surely it was possible to decrease poverty.  Yes, the currency was made easily accessible to the people, but ours is accessible via banks as well.  They seem to be scared to loan out as much as they are allowed per regulation, but what if they felt comfortable enough to loan more and our money flowed freely to the entire population?

Japan has had the ability to grow much more than they have in the past few decades since the inception of their QE programs.  It would appear that there is a correlation between the economic affects of the QE programs and the young, declining population in Japan.  

As for Zimbabwe, I'll give you that one as it was a cheap shot, but in every great science experiment you test first with a micro-experiment so as to not ruin things.

Unofficial agreements are just that, unofficial.  The governments of the world have done some shoddy things and I'm not first in line to believe they know what they're doing about monetary policy.