WORLD BANKS PRINTING MONEY AT AN ALARMING RATE TO TRIGGER ECONOMIC GROWTH IN A STRANGE WAY

As the world's central banks print money and buy each other's bonds with abandon, very few seem to realize the implications for the world's finances -- or their own. 

On Tuesday, Japan announced that it intends to buy European Stability Mechanism bonds using its foreign exchange reserves in order to help weaken the yen.

This is not new news that Japan will be buying this paper, as it has purchased European Financial Stability Facility issues in the past. But I thought the juxtaposition of this with how government finances and currencies around the world have devolved made a poignant statement.

Just think: The Japanese have told us they are going to print as much paper as it takes to generate more inflation and drive the yen lower (which is also the unstated aim of the rest of the G-7 central banks).

Ponzai!
They are then going to use this literally worthless paper they have conjured up to buy the bonds of an organization that is backed by the same insolvent entities that are issuing the paper that it intends to backstop. The whole concept is rather comical, but to me this one act is a perfect illustration of where we are in modern-day finance.

The fact that the gold market doesn't go berserk on a daily basis just shows you that an enormous chunk of the G-7's population is still oblivious when it comes to this sort of lunacy. 

I don't want to call the bond bull market a bubble, because it has not precipitated the behavior change that goes on in bubbles among the masses. However, this idea that central banks can simply print up the money to finance government deficits is completely absurd, and if it wasn't, John Law would be one of financial history's great success stories instead of one of its great con men. (Learn about John Law and the Mississippi bubble on Bing.)

At least we're not that bad . . . are we?
I've highlighted this example from Japan in light of the news there, but lest we forget, Federal Reserve Chairman Ben Bernanke plans to buy $1 trillion worth of government paper (offsetting 70% to 100% of our deficit). That folks are bullish on the dollar, bonds and/or stocks with those policies at work just goes to show that even after our stock and real-estate bubbles, the citizens of the U.S.A. remain sound asleep.

Meanwhile, Wednesday's Wall Street Journal carried a front-page story about the absurd lengths to which the Swiss National Bank has gone to weaken the franc. It is truly remarkable (which is why I keep remarking on it) how incredibly enormous and powerful -- yet ignored -- these central bank activities are when one goes down the list of actions the G-7 central planners are doing, as they are operating at a multitrillion-dollar​ run rate of monetization.

As I noted above, I don't think one can characterize the central bank buying and the long-running (though possibly ended) bond bull market as a bubble, because it hasn't really warped the behavior of the public, though it has allowed governments to continue their wrong-headed ways worldwide.

It is also quite likely, given the rampant money-printing around the globe, that at some point Asia may "catch a bid" and start moving. Given Japan's current policy plans, and if China decides to get serious about stimulating its economy, it is hard to see how that won't affect other countries in the region -- especially considering that many Asian currencies are in effect pegged to the dollar, so the Fed's policies abound there as well.

You're going to need a bigger boat
To say that there is a sea of paper money out there is an understatement; it is more like an ocean. All of that is quite likely the reason the Standard & Poor's 500 Index ($INX) is as firm as it is, that coupled with the fact that too many in the paid-to-play (i.e., professional money management) crowd had too much angst about the recent fiscal soap opera and now are scrambling to own however many equities they need to catch up to their beloved benchmarks.

In any event, I believe that the result of all this madness will inevitably be much more inflation and a worldwide bond bear market, though as we learned in both of our bubbles, and Japan's before that, when crowd psychology is this disoriented, it is impossible to predict exactly when sanity will return.

By Bill_Fleckenstein