Adam Smith is spoken of as the father of modern laissez faire capitalism, as well he should be. But the market system Smith described in The Wealth of Nations (1776) no longer exists. Instead, it has morphed into a system of fiat money that owes its existence to another man: the German printer and publisher Johannes Gensfleich zur Laden zum Gutenberg (1398-1468). Gutenberg was, of course, the inventor of movable type and the modern printing press, a device without which the modern economy could not function.
As commentators near and far speculate on what 2012 will bring to the global economy and markets, there is little question that one factor will be decisive: the central banks’ printing presses. As I recently said in an interview on MSNBC, both the Federal Reserve and the European Central Bank (ECB) will keep printing dollars and euros around the clock until their presses run out of ink. This vomitoria of paper currencies is the major force driving financial markets around the world. There may be a lot of “known unknowns” to worry about, but central bank money printing is one “known” that can be taken to the bank. The only question is whether the bank will still be able to cash the check when it is asked to.
Whatever the problem, the Federal Reserve has given the same answer over the past three decades – PRINT!! The stock market crashes in 1987? PRINT!! Computers might shut off at midnight on 12/31/99 (we should have been so lucky…)? PRINT!! The Internet Stock Bubble bursts in 2001? PRINT!! The housing bubble implodes in 2008? PRINT!! Europe got into the act during the 2008 financial crisis but is now taking the art of printing money to a new level. As of the end of 2011, the ECB’s balance sheet has swollen to €2.7 trillion ($3.4 trillion), even fatter than the Federal Reserve’s $2.7 trillion. Without exception, every proposed solution to the European debt crisis involves the printing of huge amounts of money in the form of debts that can never be repaid in real terms.