The Purpose of Money Printing

The ever articulate Jim Grant, publisher of the most perspicacious newsletter, "Grant's Interest Rate Observer," came on Yahoo Finance's The Daily Ticker and pondered the weighty issue of Federal Reserve's bond purchasing program with conjured dollars. Here is what he said:

"I think the Fed's actions are counterproductive," he says. The Fed's intentions to jump start growth are actually working against the economy, Grant argues.

"If it were as easy as printing money or creating credit to levitate an economy or to reactivate business activity the world would have been richer many generations ago," he says.

Of course, money printing creates no wealth. However, in 2008 the financial market faced both a liquidity and a solvency problem. If all asset prices take a dramatic enough fall, no banks in the world can remain solvent. That's what happened in 2008. By suppressing interest rate and injecting trillions of dollars into the banking system, the Fed succeeded spactacularly in levitating the prices of stocks, bonds, real estate, commodities, gold and art works. Now most banks and home owners alike have more assets than liabilities. Furthermore, their liabilities are priced so cheaply that they can actually afford the interest payment. So problems solved, liquidity and solvency. The Fed does not create wealth, but it can certain plunder from those who save to rescue those who borrow.

As individual investors, we just need to make sure we are not on the wrong side of Fed's redistribution scheme. "Don't fight the Fed." Often times, the simplest works the best.