By: Jim Stanford

  Imagine the semi-authoritarian leader of a medium-sized Latin American country ­ one with GDP of, say, $30 billion. The leader wants to make several major state purchases: take over a mining company here, build a showy new airport there. "But sir," warns the Finance Minister, "the state budget has no room for projects of this magnitude."
  "No matter," says El Presidente. "Call up the Treasury and fire up the presses! Just print the money we need!" We all know what comes next: hyper-inflation, currency collapse, economic chaos. And soon the IMF is knocking at the door with an appropriately punitive rescue package.
  Not many Third World leaders try this kind of thing anymore. But strangely enough, the practice of funny money is alive and well in North America's adrenaline-fired stock markets.
  Consider Canada's greatest entry in the Internet stock sweepstakes, Nortel Networks (annual sales: $30 billion). In eighteen months Nortel has completed no less than eight takeovers of other firms. The total bill for this spending spree: more than $15 billion (U.S.).
  This may seem expensive, but in reality it's been virtually free for Nortel. Almost the total $15 billion tab was covered not with money, but by issuing never-ending stacks of the company's hot-selling shares.
  When CEO John Roth sees a high-tech start-up he wants to own, he simply calls down to the corporate treasury and says, "Fire up the printing presses ­ we're going shopping!"
  Sure, Nortel's equity base gets diluted in the process. But what shareholder complains about a little dilution when the share price triples in little over a year?
  As with any hyper-inflation, a buyer's willingness to tolerate astronomical prices expands the longer the printing presses run. In December, for example, Nortel paid $3.25 billion (U.S.) in shares for Qtera, a U.S. start-up with 170 employees and no reported revenues. That's $19 million per worker. On the surface, Nortel seemed to pay 50 times more for Qtera than Air Canada just paid for Canadian Airlines (with $4 billion annual revenues and 16,000 employees). In reality, however, Nortel paid nothing but the cost of printing up a few million new share certificates.
  Nortel's $778 million (U.S.) purchase of Promatory Communications just 3 weeks later was a steal by comparison: just $7.8 million for each of Promatory's 100 employees. Prices like these are the stock market equivalent of Germany's infamous Weimar inflation of the 1920s, when consumers loaded cash into wheelbarrows to buy bread and milk.
  Nortel was trumped on January 17 by JDS Uniphase, which purchased rival E-Tek Dynamics for $15 billion (U.S.)­ in JDS stock. JDS paper is even hotter than Nortel's. With a share price that rose more than tenfold last year, JDS could probably buy itself a seat on the U.N. Security Council simply by running the presses a few extra hours.
  People have always fantasized about having the power to print money. Now it's a high-tech reality. Some obscure start-up has developed a clever new invention? Print the paper, and gobble it up. Indeed, why bother performing your own in-house R&D at all? Most scientists and engineers still quaintly demand to be paid in real money rather than shares (you can't yet buy groceries in Ottawa using Nortel or JDS stock ­ though that day, too, may come). It's much cheaper to just print the funny money to fund your next takeover.
  Meanwhile, the stock market builds the inflated value of each takeover into its own ever-expanding valuation of your own firm. This merely stokes the hunger for your company's shares, making it all the easier to fund your next funny-money takeover. Taken to the extreme, your company becomes a "paper integrator": you don't need to perform any real business internally, you just buy what you need on the stock market.
  But the game only lasts for as long as investors maintain their faith in the value of your paper. As soon as they stop believing, the gig is up, and your printing press might as well be churning out Monopoly money.
  There's a jarring irony in the stock market's descent into paper-fueled hyper-inflation.
  Canada's economy, like many others, went through a gut-wrenching process to reach the promised land of near-zero inflation. High interest rates, chronic unemployment, and falling family incomes were all justified by the supposed long-run benefits of price stability.
  The joys of the low-inflation Nirvana were always vastly overstated. But now that we've painfully arrived there, we suddenly discover that there's another inflation ­ stock-market inflation ­ that's not only tolerated, it's actively encouraged (with tax breaks for stock options, huge subsidies to the RRSP industry, and a myriad of other public handouts). Worse yet, entranced by the lure of paper hyper-profits, we now entrust the Canada Pension Plan and other social programs to the same ambitious folks running the printing presses.
  One day rueful people are going to wake up and realize that their shares in Nortel, JDS, and other hot companies are ultimately just pieces of paper ­ just as Germans quickly realized in the 1920s that they weren't rich, even though they had wheelbarrows full of cash. That will be the painful day when the bubble bursts.
  So before we throw too many more of our eggs into the stock market's basket, we might want to invite a team of those IMF inspectors up to Canada. It's not our central bank that's the problem ­ after all, it barely touches its own printing press, issuing only $3 billion in net new currency in the course of a normal year. But there are some printing presses working overtime on Bay Street that the IMF might want to close down.