# Here comes the money-printing



## james4beach (Nov 15, 2012)

This news is just unfolding now, but apparently the US Federal Reserve has announced a massive amount of support for financial markets, an extension of QE and support for corporate bond markets. Different than 2008, it seems the Fed is not capping the amount of $ they will use to buy bonds (also known as printing money)
https://www.washingtonpost.com/business/2020/03/23/fed-unlimited-credit-coronavirus/

I expected this some time ago, as I think the US (and western economies generally) have been chronically weak since 2000. The last few years of 'strength' was fuelled by low interest rates/ZIRP/QE and, in my opinion, was a stimulus driven economic boom and stock rally. I always said it was artificial and dependent on stimulus. It came with a huge amount of corporate borrowing, which is now blowing up in our faces.

This reinforces my earlier thesis, which is that western economies have been fundamentally weak since 2000. By my count, we're now 20 years into chronic weakness (and reliance on stimulus) and I think there's easily another 10 or 20 years like this to come. This is a big reason that I carry a significant 20% weight in gold. Gold has already outperformed stocks for 20 years and if I had to make a guess, I think that trend will continue.


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## londoncalling (Sep 17, 2011)

and the market has shrugged it off and continued to drop as a result. Not sure if there is anything that can be done to reverse things. Are our governments out of bullets? With 500k applying for EI last week and many more to come there must be some longer term pain to bear.


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## CPA Candidate (Dec 15, 2013)

I don't Western economies have been weak, they have just been blindsided. Things were decent just a couple months ago.

However, now I think government intervention will ultimately hurt much more than it helps. Shuttering the economy and then handing out money is a very ineffective and costly way of addressing the pandemic. We should be protecting the most vulnerable, and those at low risk should carry on working.


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## m3s (Apr 3, 2010)

Unfettered paper money printing eh.. if only there was a modern digital currency with a mathematical monetary policy.


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## agent99 (Sep 11, 2013)

londoncalling said:


> and the market has shrugged it off and continued to drop as a result. Not sure if there is anything that can be done to reverse things. Are our governments out of bullets? With 500k applying for EI last week and many more to come there must be some longer term pain to bear.


There is talk in USA of using Milton Friedman's 'Helicopter Money'. Fed prints money, but sends it directly to public instead of into bond markets . Another type of bullet, I think originally suggested to be used to combat deflation.


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## james4beach (Nov 15, 2012)

Some people are observing that this could be a setup for serious inflation. At first the extra money is needed, but once the disaster passes and business gets back to normal, all the extra money-printing causes inflation.

Who knows


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## agent99 (Sep 11, 2013)

james4beach said:


> Who knows


Economists do. But then they sometimes don't agree


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## Thal81 (Sep 5, 2017)

If that serious inflation causes interest rates to go up, I won't complain...


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## andrewf (Mar 1, 2010)

m3s said:


> Unfettered paper money printing eh.. if only there was a modern digital currency with a mathematical monetary policy.


Then we could all have deflationary depressions everyday!

Just like when we used the gold standard and regularly had depressions.


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## m3s (Apr 3, 2010)

Everything in real life involves ups and downs as far as I can tell

Propping things up artificially just means there will eventually be bigger problems to face

Easy enough if it's the next generation's problem


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## MarcoE (May 3, 2018)

It seems like all they know how to do is lower interest rates and print money. When setting up my portfolio a few years ago, I listened to Ray Dalio and put 7.5% in gold. It's risen in value about 40% since then and still growing fast. Now I wish I had listened to Harry Browne and put 25% in gold!


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## james4beach (Nov 15, 2012)

Beware though, gold is very volatile. And there's also no guarantee it will rise further, even if there is lots of money printed.


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## twowheeled (Jan 15, 2011)

MarcoE said:


> It seems like all they know how to do is lower interest rates and print money. When setting up my portfolio a few years ago, I listened to Ray Dalio and put 7.5% in gold. It's risen in value about 40% since then and still growing fast. Now I wish I had listened to Harry Browne and put 25% in gold!


I also put 10% into bullion back when it was 1500-1700 cad an ounce. My only regret is listening to the barbarous relic crowd, doubting inflation pressure and not buying more. Now I am trying to add and coin dealers are either sold out or asking a $500 an ounce premium and a 3-6 week wait time. Meanwhile I am selling all the CAD I have because I think it's toxic.


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## :) lonewolf (Feb 9, 2020)

I think holding gold in the form an annuity using a Swiss insurance company is probably the safest way to hold it. Shortly after the last 90 year crash cycle in the US it was illegal to own gold. I think the safer bet is silver.


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## :) lonewolf (Feb 9, 2020)

The powers that be can do all the money printing they want it still does not mean it will cause inflation if people hoard money.


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## Money172375 (Jun 29, 2018)

Inflation fears were abundant during 2008-09 too.


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## londoncalling (Sep 17, 2011)

Debt nation: Canada borrowed itself into a tough spot, now it must borrow its way out of coronavirus crisis



This article from the Financial post is making comparisons to the Great Depression in regard to debt and debt repayment.


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## :) lonewolf (Feb 9, 2020)

The greater depression has started


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## MrMatt (Dec 21, 2011)

They're printing like crazy, we're going to have an inflation problem.

I just hope the economic masters put down the textbooks and realize this is a depression due to the mandated shutdown, it actually isn't an economic problem.
That being said, the debt problem is really adding to it, I'm not sure how they'll keep the debt bubble from popping if this goes on for 18-24 months in areas like Toronto.

Oh, I think the Goldbugs were finally right.


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## sags (May 15, 2010)

Trillions of dollars have been taken out of the economy, so $60 billion cash to people (the rest is tax deferrals and loans) isn't inflationary.

The more likely problem is deflation if consumers don't have money to spend. Homes and all asset values will fall.

Prices on everything will fall if companies have no paying customers for their goods or services.


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## james4beach (Nov 15, 2012)

An interesting situation because I can see arguments for both deflation and inflation. There was significant deflation during the Great Depression, for example. But we are also now getting unprecedented money printing, never before attempted by US/Canada/Europe.

I think this just underscores why it's important for investors to design portfolios which are positioned for the potential of either deflation or inflation. For example you don't want a 100% GIC or 100% cash portfolio; that works great in deflation but could be a disaster if inflation sparks up.

At the other end of the spectrum, you wouldn't want a 100% stock/gold/commodity portfolio because then you will get hit very hard by deflation.

I also wouldn't be surprised to see initial deflation (probably what we're getting now) followed by inflation. I think passive approaches like the Permanent Portfolio are the right way to handle this; they are designed to respond well in both inflation and deflation.

Video on Permanent Portfolio:


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## :) lonewolf (Feb 9, 2020)

MrMatt said:


> They're printing like crazy, we're going to have an inflation problem.
> 
> I just hope the economic masters put down the textbooks and realize this is a depression due to the mandated shutdown, it actually isn't an economic problem.
> That being said, the debt problem is really adding to it, I'm not sure how they'll keep the debt bubble from popping if this goes on for 18-24 months in areas like Toronto.
> ...


 The 90 year crash cycle is right on target which is why the economy is in a depression & the markets are down. Emotions causes the events. There has been far, far worse then Covid & the global economy has not been shut down. 

If a pedestrian is crossing the street & a truck is traveling @ breakneck speeds about to run over the pedestrian. The pedestrian lunges to safety instantly bypassing any lengthy thought process. Emotion Energy in motion causes people to act in accordance with the emotion involved.

The depression in the economy & the down markets is the result of the emotions of the masses. Man biological distinguishable trait is reason or his ability to think which is needed for survival. Man must examine ideas in their entirity both positively & negatively @ all degrees of trend to gain truth. Truth is needed for survival. 

Thinking the markets & economy is controlled by Corona now will get you burned. Emotions are causing the events in the economy & the markets. Different emotions cause different actions.


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## :) lonewolf (Feb 9, 2020)

Emotions always come 1st then reaction


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## m3s (Apr 3, 2010)

Crypto is steadily rising with the announcements of stimulus packages

The USA alone - $6 trillion out of thin air is enough to buy the entire market cap of BTC more than 48 times (according to Forbes article)

Meanwhile Europe and other regions governments are signing to legitimize crypto


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## MrMatt (Dec 21, 2011)

m3s said:


> Crypto is steadily rising with the announcements of stimulus packages
> 
> The USA alone - $6 trillion out of thin air is enough to buy the entire market cap of BTC more than 48 times (according to Forbes article)
> 
> Meanwhile Europe and other regions governments are signing to legitimize crypto


I don't imagine they'll be approving anonymous crypto any time soon.
It looks like they're only approving traceable crypto currencies.


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## james4beach (Nov 15, 2012)

Some positive thoughts on the stock market direction in this Bloomberg article. Optimistic things to consider:

1. The Federal Reserve has unleashed insane amounts of stimulus
2. We almost had a credit crisis, but it's been averted. *This is hugely positive*.
3. Social distancing works. We ARE able to control this thing... with work.

I think these are big positives. The central bank stimulus alone is huge intervention that can boost prices.

But #2 is pretty big too. For a few weeks there, it looked like we were going to have a very serious credit crisis, where corporate credit froze, companies starve (no liquidity) and start collapsing, which causes a cascading effect including a banking crisis. I have some insider info through friends at large banks and people were VERY scared. Increasingly, I'm thinking that this was the main factor behind the sharp stock crash -- and _not_ COVID19, _not_ the growing case count.

Therefore, once the central banks successfully intervened and averted #2, we averted a massive disaster. It makes a lot of senses for prices to bounce back somewhat on that.

Finally, we should not gloss over the hugely positive message of #3. A lot of the fear and panic was due to the possibility of a runaway exponential curve, something that can't be controlled, totally overwhelms hospitals and collapses the healthcare system. But instead, *we have been able to control it*. Yes it comes at a huge cost, but now we know we have the ability to control it. Other countries are doing an even better job at controlling it.

In other words, this does not appear to be a runaway/uncontrollable catastrophe.


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## undersc0re (Oct 7, 2017)

If everyone is printing money does it not kind of even it out...or create conditions that require even more money printing...


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## james4beach (Nov 15, 2012)

undersc0re said:


> If everyone is printing money does it not kind of even it out...or create conditions that require even more money printing...


I think that's the plan. If Europe, Japan, US, Canada all print money simultaneously, then relative to each other, the currencies remain stable instead of devaluing.

However, those currencies would likely devalue against other currencies (like gold) which can't be printed. Another way to say the exact same thing is that "gold goes up".

And I think that's generally what has been happening since roughly 2003. We're now nearly 20 years into a period where all countries are keeping interest rates very low, continuing to provide monetary stimulus, and generally printing money. The aggressiveness of the printing keeps increasing as the economic fundamentals deteriorate.

I don't think it's an accident that gold has been strong. My thesis is that we've been in a certain monetary stimulus mode (an era) since about 2000, and for the foreseeable future. Chronically low interest rates, ongoing stimulus, and money-printing.


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## andrewf (Mar 1, 2010)

Exchange rates could remain level in terms of ratios, like EUR:USD etc., but if everyone moneyprints there will definitely be inflation. The exchange rate that ultimately matters is currency to real goods & services.


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## m3s (Apr 3, 2010)

james4beach said:


> I don't think it's an accident that gold has been strong. My thesis is that we've been in a certain monetary stimulus mode (an era) since about 2000, and for the foreseeable future. Chronically low interest rates, ongoing stimulus, and money-printing.


This is what inspired the creation of crypto currencies. It may be an accident but it has outperformed gold

The BoC announced it is developing its own digital currency in case crypto currency goes mainstream


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## nathan79 (Feb 21, 2011)

m3s said:


> This is what inspired the creation of crypto currencies. It may be an accident but it has outperformed gold
> 
> The BoC announced it is developing its own digital currency in case crypto currency goes mainstream


You can bet it won't be limited in supply or decentralized. On the other hand, it could act as an on-ramp for wider adoption of Bitcoin, etc.


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## andrewf (Mar 1, 2010)

I think the problem with bitcoin is that it is just another made up currency with essentially no intrinsic value. Like using seashells as currency. At least gold is shiny/can be made into physical products. There may be a limit on the quantity of bitcoin but there is no limit on cryptocurrencies. And most of them have made for very poor replacements for fiat currency: medium of exchange, store of value and unit of account. Highly volatile value makes it unsuitable for roles 1 and 3, and poor at role 2. By design, bitcoin will never be suitable for role 1 and 3, as it is inherently deflationary. And everyone should remember than deflation is a whole lot more perverse than inflation (except maybe hyperinflation, and only just).


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## james4beach (Nov 15, 2012)

As CMF's resident gold lunatic, I feel obliged to add this:

I recently was talking with a Wall Street friend (a trader) during the oil futures crash, with oil going negative. I joked with him and said: "boy I sure hope gold futures go negative... I've got a lot of space in my house" -- referring to being forced to take delivery for a commodity that nobody wants.

He said something like: "yeah, never going to happen. Before it even gets close, every trader on earth will buy it."

That was a funny exchange, but it actually touches on something really important. Humans think gold has intrinsic value, and this is so universal that it _spans all countries and all recorded history_. You can go back 5,000 years and find evidence of humans finding gold useful and valuable. It's not a "new" thing.

The price of gold _cannot_ go to zero. The same can't be said for crypto coins. First of all, there are zillions of competing crypto coins out there. Burger King issues one, for god sake. Any one of these could catch on and render the others obsolete -- and worthless.

Crypto currencies are interesting but they've been in human culture for about 3 years (mainstream) versus 5000 for gold. And so far, they don't have the liquidity or infrastructure to be taken seriously. It's just so young, and I think, too early to know if it's going to last.


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## james4beach (Nov 15, 2012)

Bloomberg has an article on the possibility of inflation

I find the comparisons to wartime interesting:



> “What we are doing is creating a policy framework that has an inflation bias in it, which is the first time we’ve had that in generations,” said Dario Perkins, chief European economist at TS Lombard in London and a former U.K. Treasury official. “The policy response is a war-time policy response.”
> 
> That conflict theme is one that Goodhart finds apt. In a March 27 article with Manoj Pradhan, founder of Talking Heads Macroeconomics, he wrote that commodity costs will rebound with an economic recovery after lockdowns are lifted and stimulus takes effect. Inflation could exceed 5% in 2021, and perhaps even reach 10% -- outcomes resembling the aftermaths of World Wars I and II.
> . . .
> Some economic data might already point to price pressures. U.S. money supply is surging, and Tim Congdon, a longtime watcher of such data, anticipates it will see its largest increase in peacetime this year -- followed by an “inflationary boom.”



But who knows. If you can predict this, you'll make a fortune!

Inflation bet: MNT, XMA
Deflation bet: XBB, ZFL


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## m3s (Apr 3, 2010)

I agree @james4beach but it's no different than paper money in those ways. It's only worth what somebody will exchange for it

Bitcoin was intended to be another form of currency but yes it has design flaws as it grew that make it closer to a clunky store of value. I prefer to use gold for that purpose but also don't think it's failproof either. We could also discover an abundance of gold or another generation might just decide they don't want to hoard a shiny heavy metal.

Talking about Bitcoin is completely irrelevant to the current situation though. To give an analogy you are looking at the 90s internet, saying dial up has all these design flaws while being completely oblivious to what is currently in development that just isn't fully understood or adopted yet with no vision of what could be.

Ethereum 2.0 is like high speed internet compared to dial up Bitcoin and it's launching now. Burgerking and Facebook currency are as relevant as your geocities website from 1999


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## andrewf (Mar 1, 2010)

james4beach said:


> As CMF's resident gold lunatic


One thing to consider is that gold is somewhat rare on the surface of the earth, but there is lots of the stuff out there. Asteroid mining is a risk to the value of precious metals. As space becomes industrialized, it will become easier and cheaper to exploit resources in space. Once it becomes clear that companies are seriously pursuing harvesting asteroids and returning precious metals to earth (platinum and palladium are more desirable, but gold may be a byproduct), the value of gold will crash in anticipation of a large increase in supply. How long this will take is unclear, but what is clear is that space as an industry is being disrupted and the cost to access orbit is radically decreasing. Space-based internet/telecom is going to be a massive industry and will be very profitable. It will be the demand that helps to bootstrap and scale low-cost access to space. The demand for orbital refueling will be what helps to bootstrap asteroid mining (watery asteroids initially rather than metallic).

All this to say, if one is counting on gold to be a low-risk long term store of value, you may want to diversify.


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## andrewf (Mar 1, 2010)

m3s said:


> Ethereum 2.0 is like high speed internet compared to dial up Bitcoin and it's launching now. Burgerking and Facebook currency are as relevant as your geocities website from 1999


I agree that Etherium has more merit, but isn't it more like a service than a currency?


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## m3s (Apr 3, 2010)

andrewf said:


> I agree that Etherium has more merit, but isn't it more like a service than a currency?


Yes ethereum is laying the foundation for a decentralized financial network with 2.0. Far more than a digital currency. It's no coincidence that central banks around the world are taking notice now

“If one or more alternative digital currencies threatened to become used widely as an alternative to the Canadian dollar then a central bank issued digital currency could be used to defend monetary sovereignty"

BoC is only starting to investigate the concept. Most new digital currencies happen to operate on the ethereum platform..


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## m3s (Apr 3, 2010)

andrewf said:


> How long this will take is unclear, but what is clear is that space as an industry is being disrupted and the cost to access orbit is radically decreasing. Space-based internet/telecom is going to be a massive industry and will be very profitable. It will be the demand that helps to bootstrap and scale low-cost access to space. The demand for orbital refueling will be what helps to bootstrap asteroid mining (watery asteroids initially rather than metallic).


SpaceX already has serious plans for orbital refueling. They are already testing Starship which will basically be a stainless steel space cargo ship as well as the refueling platform. NASA just awarded SpaceX a contract to send Starship to the moon, and a celebrity already paid for the first ride around the moon

So while it's still a long ways out, closer than many think. Starlink internet however is on track to disrupt telecom industry in Canada within a year or two. IMO this will also be a catalyst of decentralized (cloud) computing, and potentially also the massive disruption that is decentralization finance.


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## james4beach (Nov 15, 2012)

Buffett cautions on 'extreme consequences' from the Fed's recent moves



> Without mentioning specific worries, Buffett said he is concerned about the longer-term ramifications.
> 
> “We’re doing things that we really don’t know the ultimate outcome to,” the 89-year-old investing legend said at the virtual meeting. “I think in general they’re the right thing, but I don’t think they’re without consequences, and I think they could be of extreme consequences if pushed far enough. But there would be kind of extreme consequences if we didn’t do it as well.”


He doesn't disapprove of the central bank's actions, but is reminding us that there will be consequences. Nothing like this has ever been done before.

Personally I think that the Federal Reserve has inflated the S&P 500, creating a massive stock market bubble which has not yet burst. I would not be surprised if the stock index falls 60% to 90% at some point.

Normally, stocks fall during bad times, and the sharp declines remind investors of how risky stocks are (examples being 2018, 2020). So humans learn from this pain and *are more cautious* going forward. But by consistently suppressing volatility -- for over a decade! -- the Federal Reserve has changed the dynamics of the S&P 500. Investors have come to expect constant Fed intervention, so they are not as cautious as in past generations.

That's why I think the S&P 500 could fall very severely at some point. The Federal Reserve has changed the game by suppressing all volatility. They have deprived investors of the pain & suffering experience.


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## andrewf (Mar 1, 2010)

90% fall in S&P is wishful thinking. Japan didn't fall that much from its epic bubble (at 80 times CAPE ratio). Only way to get S&P to that kind of decline is maybe full-out nuclear war or bolshevik-type revolution. US at CAPE of 23 is not going to CAPE of 2.3 without something really extreme driving it.


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## james4beach (Nov 15, 2012)

I think you're forgetting to factor in earnings contraction. Let's use regular P/E. Today:
Earnings = 140
P/E multiple = 20.4
S&P 500 = 2856

(I am using trailing 12 month figures for Earnings & PE, so these are consistent)

Let's say earnings contract 40%, which would be dramatic but easily possible in a depression. In fact Goldman Sachs has recently come out with a 33% decline forecast, similar.

Earnings therefore drop to 84, about where they were in 2010. And say negative sentiment brings P/E down to 7, which you can see has happened several times in history, even during peace time.

We would then have:
Earnings = 84
P/E multiple = 7
*S&P 500 = 588 ... which is 80% decline*

So maybe you're right, not 90%, but rather 80%. My mistake!

(A short-hand for all the above is 40% drop in earnings and 66% decline in the multiple)

And that's not nuclear war. That's simply 40% earnings contraction, and P/E back to what it was in 1980. Nothing very dramatic, actually. In fact the economy would keep running, and life would still be pretty good.


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## andrewf (Mar 1, 2010)

I find TTM earnings kind of irrelevant. I pay more attention to CAPE. TTM is usually just noise...


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## james4beach (Nov 15, 2012)

james4beach said:


> I think that's the plan. If Europe, Japan, US, Canada all print money simultaneously, then relative to each other, the currencies remain stable instead of devaluing.
> . . .
> My thesis is that we've been in a certain monetary stimulus mode (an era) since about 2000, and for the foreseeable future. Chronically low interest rates, ongoing stimulus, and money-printing.


And this mode appears to be continuing for the foreseeable future. Here's an article on what the Reserve Bank of Australia is doing. It's worth watching other central banks because they all, more or less, act the same way. These economists all share the same training, ideology, and same way of thinking.

Even with some improvement in Australian GDP, their central bank has cut rates even further. Previously 0.25% and now 0.1% and simultaneously increased their bond purchases (QE) to drive down bond yields as well. It is widely known that it will take YEARS to even consider raising rates. Same in Canada. The central banks are praying for inflation. They desperately want inflation.

Japan has had near-zero interest rates since 1995 ... that's now 25 years.


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