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The Devil's Lesson About Inflating Fiscal Problems Away

We were reminded today in a WSJ article that using the printing press to inflate away money troubles is anything but a new idea. Even Goethe warned us of the troubles that follow. In his play "Faust", the devil Mephistopheles and Faust visit the Emperor's court. The empire's extravagance has left it in financial ruin, but Mephisto and Faust offer a way out.

Up until that time the empire conducted its transactions in gold. But what could it do with all of its gold having been pledged?

Well, they remind the Emperor, there's still gold in the ground, isn't there? Yes.

And doesn't all of that gold, in the ground or not, belong to the empire? Of course.

Well then, the empire can simply issue paper money as promissory notes backed by the value of gold as yet unmined from the earth.


As Mephisto tells the Emperor:

Such paper notes, instead of pearls and gold,
Are practical, you know how much you hold;
No need to be a trader or a vendor,
To lust for love and wine you can surrender.

The initial results are wonderful. The empire's spending problems are solved thus allowing them to…spend more money! The implication of course being that even if the short-term problems are solved, there is actually only so much gold in the ground, and beyond a certain point the volume of paper currency will sow the seeds of its own collapse.

It took Goethe sixty years to write Faust, with Part II published (posthumously) in 1832. 180 years later, new emperors in the guise of central bankers at the Bundesbank, Federal Reserve and ECB should keep the playwright's lesson in mind as "Global QE Infinity" continues apace.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.