The 10th Man

Why QE Was the Worst Thing in the World

January 28, 2016

Long before I started writing for Mauldin Economics, I was a gold bull.

A mega-gold bull.

This started in 2005. I was making markets in ETFs at the time, and as head of the ETF desk at Lehman Brothers, I signed the firm up to be one of the early authorized participants in the SPDR Gold Shares fund (GLD). I was pretty excited.

This $5 Trillion Market Is Just Getting Started.

Don’t miss out on the ETF revolution. Get going with this must-read report from Jared Dillian.

It may seem quaint now, but at the time, there really wasn’t an easy way to invest in gold outside of coins or bars (high transaction costs, cumbersome) or futures (high barriers to entry). Physical gold, of course, is preferable, but you can’t really trade it, per se.

So I bought some GLD in 2005, bought more, bought more, bought more in 2008 with veins popping out of my neck, and was caught massively long in 2011.

I figured, oh well, it’s just a correction, I’ll ride it out. Except I didn’t know that it was going to be a 40+% drawdown and last five years. If I’d had that knowledge, I probably would have sold.

But my investment thesis on gold hadn’t changed.

Let me explain.

Why Gold

When the financial system was melting down in 2008, I predicted (possibly before anyone else) that Ben Bernanke would conduct unconventional monetary policy: quantitative easing. In retrospect, it wasn’t a hard call. He basically said he was going to do it in a 2002 speech.

I remember the day. The long bond rallied nine handles.

Anyway, that’s when the veins popped out of my neck, because I said all this printed money was going to slosh around the financial system and cause hyperinflation. Of course, I wasn’t the only one saying this, but I was saying it pretty loudly.

Never happened. All that money never ended up sloshing around—it ended up deposited as excess reserves back at the Fed. Years later, people theorized that quantitative easing actually caused the opposite to happen: deflation.

Anyhow, in finance, it is okay to be right for the wrong reasons. Gold went up for three more years, the best-performing asset class, even though the underlying thesis was totally wrong. There was no inflation whatsoever. Eventually, gold got the joke as sentiment turned, and you know what the last five years have been like.

The Weimar Experience

When the gold bugs start talking about hyperinflation, they usually start talking about Weimar Germany, probably the best-documented example of a situation where inflationary psychology took hold.

I don’t want to rehash the whole story here, but basically, post WWI, the League of Nations saddled Germany with a bunch of war reparations it could not possibly ever repay. In the end, though, Germany did repay—with printed money.

The funny thing about inflation is that it is always fun at first. Weimar Germany boomed for a couple of years, before the inflation began to get out of control. Ultimately, the deutsche mark collapsed, replaced by the rentenmark, which was actually backed by something of tangible value: land.

The ensuing financial collapse brought about political instability, which led to the rise of Hitler, and you know the story from there.

Now, clearly that hasn’t happened in the US, and it isn’t likely to happen. We did not get inflation… of goods and services. Interestingly, though, we got inflation of financial asset prices. Stocks and bonds went up, as well as real estate—even art. Great, but as you know, not everybody owns stocks, usually only people with some money to invest.

This $5 Trillion Market Is Just Getting Started.

Don’t miss out on the ETF revolution. Get going with The 5 ETF Trading Strategies You Should Know About Before Investing, from Jared Dillian.

So as all the research shows, the rich have gotten richer, and the poor have gotten poorer. Inequality has increased massively, which has brought about political instability, which will lead to… who, as president, exactly?

Perish the thought.

Anyway, whether gold goes up or down, I continue to assert that printing money is absolutely the worst thing a central bank can do. Even under the best of circumstances, the unintended consequences are colossally bad. Even now, the Fed is just getting around to acknowledging the fact that QE might have actually caused wealth inequality.

There are those who will always say, “What, was the Fed supposed to do nothing? What do you think would have happened?”

An unimaginably bad depression. Then, the best recovery ever. And nobody would be mad at each other.

Gold Is Bouncing

You can’t deny the price action. Over the last few weeks, it is positively buoyant. If I were short, my butt cheeks would be tightening up.

I’m starting to develop a theory, which is crazy, but then again… it might not be entirely crazy. You can help me decide.

Maybe gold is starting to price in some of this political instability. Maybe it is starting to price in a Sanders or Trump presidency.

After all, if Bernie Sanders were to become president, he would double the debt overnight. If it were Trump, probably the same thing—we are talking about a guy who has spent his entire career screwing creditors.

This increases the possibility, however remote, of debt monetization. Also, populists are great for gold prices.

Like I said, maybe not so crazy. Regardless of whether gold goes up or down, or if you think gold bugs are total idiots, it makes sense (for a lot of portfolio theory reasons) to have it as part of your portfolio.

Sometimes a bigger part than others.

By the way, if your portfolio needs a boost this year, Mauldin currently has a low-price bundle offer out that includes Street Freak, Yield Shark, and Over My Shoulder. It expires in a few days, though, so check out the details here.

Jared Dillian
Jared Dillian


Get Thought-Provoking Contrarian
Insights from Jared Dillian

Discuss This


We welcome your comments. Please comply with our Community Rules.



Jan. 28, 2016, 10:49 a.m.

If you think Trump is popular because of the effects of QE, you haven’t been paying attention.

Watching a few videos of what is happening in Europe right now might be useful.

Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.

Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Mauldin Economics’ sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact


The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Patrick Cox’s Tech Digest, Outside the Box, Over My Shoulder, World Money Analyst, Street Freak, ETF 20/20, Just One Trade, Transformational Technology Alert, Rational Bear, The 10th Man, Connecting the Dots, This Week in Geopolitics, Stray Reflections, and Conversations are published by Mauldin Economics, LLC. Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.
John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.
Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Mauldin Economics publication or website, any infringement or misappropriation of Mauldin Economics, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

Affiliate Notice

Mauldin Economics has affiliate agreements in place that may include fee sharing. If you have a website or newsletter and would like to be considered for inclusion in the Mauldin Economics affiliate program, please go to Likewise, from time to time Mauldin Economics may engage in affiliate programs offered by other companies, though corporate policy firmly dictates that such agreements will have no influence on any product or service recommendations, nor alter the pricing that would otherwise be available in absence of such an agreement. As always, it is important that you do your own due diligence before transacting any business with any firm, for any product or service.

© Copyright 2018 Mauldin Economics