As everyone can see, the stock markets around the world have exploded higher. It really doesn't matter if you look at the London FTSE 100, German DAX, Shanghai Index, Nikkei 225 Index, Dow Jones Industrial Average or even the Athens Stock Exchange (ASE): They're all surging higher. What is the one factor that all of these economies have in common? It's money or, more precisely, money printing. All of the central banks that control the currencies of these nations are printing currency like never before.
The Federal Reserve made this popular many years ago, however, it took money printing to new all-time levels once the credit crisis began in 2007. Since then, the Bank of London, People's Bank of China, Bank of Japan, Swiss National Bank, European Central Bank and others have continued to inflate their equity markets by implementing easy money policies (essentially money printing). Can central bankers simply print money forever? The answer to that question is a resounding 'no'. At this time, though, it seems that they will continue to print money into the foreseeable future.
Gotta Pay Up At Some Point
Obviously, we all know that there is a price to pay when a currency is artificially deflated. The usual and most common effect will be inflation. Inflation will help to lift the value of asset prices, so many investors may think that is good. The downside is that it will make the price of goods that people need to survive more expensive. Food, oil, gasoline, heating oil, jet fuel, and other energy products will increase. Commodities such as copper, iron ore, and building materials will also inflate in price making products more expensive for everyone.
What also happens when there's this much monetary easing going on around the world is the global stock bubble. Generally, the bigger the bubble is when it's created, the bigger the decline when it pops. For example, just look at the bubble that was created in the late 1980's in Japan. In January 1990, the Nikkei 225 Index traded as high as 39,922.00. Today, the Nikkei 225 Index trades around the 11,100.00 level. It is safe to say that the Japanese markets have faced deflationary pressures for over 20 years. Now, the Japanese are trying to inflate there stock markets on a daily basis. They are doing this to try and boost their exports as goods become cheaper outside of their own country. Almost every country on the Earth that has a central bank is trying that same method right now. In the short term, it will boost the markets, but in the long term there is always be a price to pay. Unfortunately, the price could be a long twenty plus year sluggish economy.
Another negative impact from all of this money printing is a lack of faith in a nation's currency. Once that happens, hyper inflation can occur, which is when goods and products explode higher in price. According to Wikipedia, hyperinflation occurs when a country experiences very high, accelerating and perceptibly "unstoppable" rates of inflation. Many countries have experienced this in the past. Some notable countries that have include Germany, Argentina and -- recently -- Zimbabwe. It's not fun when you need a month's worth of wages to buy a loaf of bread.
The USD is the world's reserve currency, which means that if you are Japan, China, Russia or any other country that does not use U.S. Dollars for trade you will need to convert your capital into U.S. Dollars in order to buy oil, gold, copper, wheat or any other commodity. If other nations ever lose faith in the U.S. Dollar there could be serious problems around the world. Already, there are countries such as China and Brazil that have initiated trade deals with each other, which could lead to future problems.
Gold's Two Cents
Gold and precious metals have exploded higher over the past thirteen years. In 1999, gold was trading around $250. Today, it trades around the $1600, having reached a high of $1923.70 an ounce on September 6, 2011. What's gold telling us? It's saying that many smart people are losing faith in fiat currencies like the U.S. Dollar and other printed money. You see, you just can't print gold; it has to be taken from the earth when you can find it. Recently, Germany asked for some of it's gold deposits back from the New York Federal Reserve. Was that a sign of things to come? Perhaps, but in the meantime, central bankers are printing a lot of money.