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Creating Currency, Not Wealth

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Market rallies reflect fall in value, not rise in price.

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Editor's Note: The following originally appeared on December 1, 2005 and, in light of current events, has been reprinted here for the benefit of the Minyanville community.

One could view the world's recent stock market rallies as a fall in currencies, rather than a rise in stock prices.

Because I view the actions of central banks as particularly insidious (as compared with what the Fed has been doing for years, if only because the degree has accelerated and other central banks have now gotten into the act, and just as egregiously), I want to make sure that I fully explain that statement.

Whenever you talk about stock prices, you're inherently talking about a level of currency. Let's take an example: An American company -- ticker symbol BS -- is trading at \$100. A US investor can call his broker and buy one share for \$100. An investor in Japan, with the yen trading at 100 (100 yen equals \$1), can call his broker and buy that same share for 10,000 (100 yen x \$100) yen.

Now let's say the yen rises against the dollar to 90 (it now takes only 90 yen to buy \$1). The Japanese investor who likes BS stock can now buy that same share for only 9,000 yen. He thinks this is a bargain, so he instructs his broker to buy more BS until it gets back to the old price. The stock is bought until it reaches the Japanese customer's limit of 10,000 yen. Back in the US, the stock is bid up until it reaches \$111.11 (\$100/.9) and then stops.

The US investor who owns the stock at \$100 "feels" 11% wealthier. He decides, because he is wealthier, that he can afford to borrow a little from his credit card and buy his wife that new mink coat.

To our Japanese investor, however, BS is still trading at the same price as before. It's trading at \$111.11, but still only 10,000 yen (90 yen x \$111.11). He "feels" no wealthier than he did before.

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I debunked the idea of the US borrowing Asian savings and showed it for what it really was: A printing process. For every dollar the US prints, the Japanese/Chinese neutralize that dollar by printing one of their own pieces of currency. The Japanese and European stock markets have been rallying more than the US market recently because their currencies have been falling more rapidly than ours.

Falling more rapidly than what, you say? Falling more rapidly than gold (when you compare currencies to gold, central bankers cringe and cry foul). All currencies have been falling against gold, because all central banks are printing currencies, just some more rapidly than others. In fact, it seems that each central bank is "taking turns," in a coordinated way, in printing currency.

But all currencies are falling against gold. In fact, if you priced all these rallies in gold instead of currency, you would find that there haven't been any rallies at all (or not much).

No real wealth has been created in terms of gold.

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No positions in stocks mentioned.

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