Coming 2014 Explosion: EU Money Supply OR EU Itself?

EU: Print Free Or Die In 2014?  Here’s Why, Its Options, And How To Protect Yourself And Profit

 

The following is a partial summary of conclusions from our weekly fxempire.com  fxempire.com ’ meeting in which we share thoughts and conclusions about the weekly outlook for global equities, currencies, and commodity markets.

Given the quiet holiday week, we stepped back to think about some of the bigger developments in the global economy. Here’s one that few are discussing but that seems inevitable.

BACKGROUND: WHAT IS DEBT MONETIZATION?

 

This term gets thrown around a lot, so here’s a quick review of what it really is.

Monetization is the process of turning something into money. For example:

 

• When you get paid for your labor you monetize your labor.
• If you sell your house or take a home equity loan, you’re monetizing the current market value of your house.
• Bribery is an example of someone monetizing their position of influence.

 

The term printing money usually implies that newly created money is used to directly finance government deficits or pay off government debt (also known as monetizing the government debt).

When governments print money (and expand the money supply) to buy their own bonds, they are monetizing their debt, literally bonds into cash.

In the short run this is a painless way for them to spend more than they receive without raising taxes or cutting services, both of which are unpopular and can end political careers.

The risk is that if money supply expands too much, then under the right conditions (the money circulates quickly enough, the supply of goods and services doesn’t expand as quickly as the money supply, as the rate of increasing consumer and business spending, credit expansion etc.) prices rise (inflation) and the currency loses value and purchasing power.

That can happen slowly over decades, as has been the case with the USD. See 7 CHARTS TELL WHY WE ALL NEED CURRENCY DIVERSIFICATION for details. In extreme cases, confidence in the value of the currency collapses completely, resulting in hyperinflation.

It’s similar to when a company issues new shares and increases the number of outstanding shares by 5%. Unless the company does something to be worth 5% more, the value of the existing shares has been diluted.