THE BLOG
08/07/2012 06:06 pm ET | Updated Oct 07, 2012

Money Printing Doesn't Create Jobs

The developed world's central banks are now foolishly preparing for a full assault on their respective currencies in an attempt to lower unemployment rates. Spurring these central bankers into action is persistently anemic markets and employment data, which they believe can be rectified by creating inflation.

U.S. jobs data showed that the non-farm payroll report for July produced 163,000 jobs. That sounds OK at first glance. However, the Household Survey conflicted with the Establishment Survey, in that it concluded 195,000 net individuals actually lost their jobs last month; and that the unemployment rate ticked higher to 8.3 percent. Americans continue to leave the workforce -- 150,000 left last month -- while our unemployment rate has now been above 8 percent for the last 41 months. That stubbornly high and rising unemployment rate will likely cause Mr. Bernanke to announce QE III in September.

Taking a look over in recession-ravaged Europe, the unemployment rate in Spain rose to 24.6 percent in the second quarter of 2012, which was an all-time high since records were kept starting in 1976. That has already caused Mr. Draghi to promise an unprecedented and unlimited bond buying scheme that will necessitate hundreds of billions in freshly printed euros -- just for starters.

Adding to the fears of weak growth and increased joblessness are the depressed stock markets around the globe. The Shanghai Composite Index is down 13 percent in the last three months. The Nikkei Dow has shed 15 percent in the last four months. And Spain's IBEX has plunged 21 percent in just five months.

So Bernanke and Draghi have threatened to unload a massive debt monetization and inflation strategy to get people back to work. That all sounds great and wonderful, except the total disregard for a currency's purchasing power is one of the reasons behind those long unemployment lines.

If one doesn't know their history, you might be duped into believing money printing has a chance to reduce unemployment. In fact, all central bankers need to do is open their eyes and see what is going on around them to understand their folly.

Spain's unemployment rate, which has soared from 9 percent in 2008, to just below 25 percent today, hasn't stopped inflation from rising. Spanish inflation rose 2.2 percent YOY in July, and that was up from 1.8 percent in the month prior. That's not runaway inflation by any means. However, it is certainly not deflation either. According to the philosophy of today's central bankers, having one quarter of your workforce in perpetual siesta should bring about massive deflation. Which, of course, must be fought with the full force of the printing press. But all that accomplishes is to bring rising prices along with the misery of being unemployed. The saddest part is that the ECB launched their LTROs in December 2011 and March 2012. Therefore, the full inflationary impact from these programs is only just beginning to be realized.

The history of the U.S. shows the same results. Our inflation rate reached its apex in 1980 at 13.5 percent. According to those who place too much faith in counterfeiting, that should have brought with it full employment. But the unemployment rate was a lofty 7.2 percent at that time and reached 10.2 percent within the next two years.

The truth is that destroying the purchasing power of your currency serves to increase the unemployment rate. That's because it erodes the impetus to save and invest, robs the middle class of its standard of living and leaves the economy in ruins. Economic growth comes from low and stable interest rates, low inflation, small debt loads and a sound currency. But persistent money printing erodes all of the basic principles of a strong economy.

What you eventually end up with is a crumbling currency, intractable inflation, onerous tax rates, a sovereign debt crisis and a depressionary economy. Not really such a good trade -- just to keep a few central bankers off the unemployment lines.

Michael Pento is the president of Pento Portfolio Strategies.