Why Money Printing Makes You Poorer

Except for the few insiders, speculators and sharpies who are first in line to get the EZ money, everyone else gets poorer

by Bill Bonner

We can barely catch our breath. We can't stop laughing.

Last week, Japan announced that it would undertake a bold and radical experiment. After 23 years of on-again, off-again deflation, the new government decided it had had enough of things getting cheaper.

The Bank of Japan will now obediently monetize debt until inflation reaches 2%. This, the country's central bankers believe, will encourage people to spend. The economy will take off.

Why is it better for people to spend more tomorrow than they want to spend today? Why is it better for prices to go up 2% than to go down 2%? Why is an economy that "takes off" better than one that sits calmly on the runway?

Those questions will have to wait for another day; no one bothers to ask today. Economists say the secret to prosperity is to stimulate demand. Anything that stimulates demand is thought to be a good thing.

It doesn't seem to matter that this proposition is transparent poppycock. People always want stuff. Demand is infinite. Government doesn't have to stimulate it.

What really matters is buying power. And buying power is limited. The authorities try to get around this problem by printing money. Then, with this new money in hand, it is almost as though people had real demand!

The Demand Delusion

But that's what is so breathtaking and so funny about this time we live in. Who really believes you can increase demand... and make people wealthier... by just printing up money? Who really believes you can give people more buying power by giving them more pieces of paper?

Apparently, just about everybody! Ha ha ha!

Real demand depends on real earnings, not more currency. People buy things by producing things. That's "Say's Law," named after Jean-Baptiste Say. Buying power -- or demand -- comes from production, not pieces of paper.

Economists and central bankers cannot increase real demand. But they can sure move it around!

Giving money to poor nations -- foreign aid -- does not make them richer; it undermines local industries and makes them poorer. But some people get richer. Mercedes-Benz dealers in Africa noticed that whenever a new foreign aid program was announced, sales of their high-end models shot up. The insiders knew they could skim millions from the aid programs.

Now, when new QE programs are announced in Japan, Ferrari sales shoot up. From Bloomberg:

Registrations of Fiat SpA (F)'s ultra-luxury brand surged 40%, to 144 vehicles, in Japan last quarter, according to the Japan Automobile Importers Association yesterday. That's more than twice the pace in the larger U.S. market, while demand is slumping in China, at home and across Europe.

The surge in demand for luxury cars adds to signs that Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda are succeeding in reviving spending in the country. Stock prices are climbing back to levels before the September 2008 collapse of Lehman Brothers Holdings Inc., and households have become more confident about the economic outlook.

"The growth is very promising, and I think we can expect these super luxury brands to introduce more models that they hadn't introduced to Japan before and to strengthen their dealership networks," said Yoshiaki Kawano, a Tokyo-based auto analyst at industry researcher IHS Automotive. "The optimism for an economic recovery is spreading."

To sustain growth, Ferrari opened a new after-service facility in Japan this month, said Herbert Appleroth, head of the company's operations in the country.

Getting Poorer

When you print money, it's like issuing new shares in a public company. The existing shares become worth less than they were before... because each one represents less of the total company.

Likewise, the currency of a nation represents the goods and services that the nation produces. Print more currency and each unit will have fewer goods and services behind it.

But some people get the new shares... or new money... and are richer. Everyone else may be poorer, but the people first in line for the free cash come out ahead. Economists and other dim observers look at the increase in Ferrari sales with approval. Again, from Bloomberg:

"It seems like demand is coming back," said Michiaki Ishida, a spokesman for the auto importers association. "Some people are reacting to Abenomics, so the trend may continue."

What the mainstream press doesn't realize is that, although high-end demand goes up as insiders make wins from speculating on asset prices, real demand goes down.

That's because new money reduces the buying power of the old money. Except for the few insiders, speculators and sharpies who are first in line to get the EZ money, everyone else gets poorer.

Is that funny... or what?