Inflation — The Final Blow

The developed economies of the world have opened the money spigots, hardly the policy response one would expect if there were truly signs of an economic recovery underway.

The massive money and credit creation is sitting in the banking system like dry tinder just waiting for a spark to set it ablaze. How quickly it happens is anyone’s guess, but once it does we are likely to be enveloped in a worldwide inflation unlike anything before ever witnessed.

Doug Noland presents some data on what has been happening (my embolding):

Federal Reserve Credit declined $0.7bn to $2.917 TN.  Fed Credit was up $412bn from a year ago, or 16.4%.  Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 2/22) jumped $14.4bn to $3.462 TN (3-wk gain of $52bn). “Custody holdings” were up $73.3bn year-over-year, or 2.2%.

Global central bank “international reserve assets” (excluding gold) – as tallied by Bloomberg – were up $943bn y-o-y, or 10.1% to $10.253 TN.  Over two years, reserves were $2.437 TN higher, for 31% growth.

M2 (narrow) “money” supply surged $27.8bn to a record $9.80 TN.  “Narrow money” has expanded 12.6% annualized year-to-date and was up 10.1% from a year ago.  For the week, Currency increased $4.1bn.  Demand and Checkable Deposits slipped $0.4bn, while Savings Deposits surged $29.5bn.  Small Denominated Deposits declined $2.8bn.  Retail Money Funds dipped $2.3bn.

The world is now three to four years past the financial crisis and is still printing money at rates that would make John Law proud. There is no more talk of “exit strategies” by the Federal Reserve or other Central Banks. That will not happen because there is no way to stop printing. Slowing down the rate of printing would plunge the world into a massive recession (for those who believe we have ever gotten out of the last one). Liquidating credit would produce a worldwide Depression.

John Williams of warned this past Friday as quoted by Kings World News:

The seasonally-adjusted St. Louis Fed Adjusted Monetary Base just jumped to an historic high level in the two-week period ended February 22nd, as shown in the [graph to the right].  The movement here largely is under direct control of the Fed’s Federal Open Mark Committee (FOMC) and is suggestive of a deepening systemic solvency crisis.

Adding liquidity to the system usually is contrary to the action that would be taken if the Fed were trying to reduce inflation.  Indeed, the Fed is not trying to reduce inflation—despite inflation running significantly above its 2.0% inflation target—instead, the U.S. central bank continues its efforts to provide liquidity to a still severely-impaired U.S. banking system.

The political authorities have no intention of either cutting spending or cutting deficits. Frankly, they have no political will or courage to do either. Hence, growth in the money supply will continue. In order to have any hope of continuing the economic charade, ever larger doses of money will be required to maintain just the anemic economic activity that we have now.

Unfortunately for the political class (and us), markets don’t care about politics or political careers. Goods and services trade in relative terms with other goods and services. of which fiat money is merely another good/service. At some point, the world will recognize that money is plentiful relative to real goods and services. Then all real goods and services will trade for more of the plentiful commodity, fiat money, than previously. This is what is called price inflation and it will roar.

Economics is not engineering so it is impossible to say when or just how much inflation will occur. From the numbers above, one could say that about 16% per year was added by the Fed last year. Since the beginning of the crisis, Fed credit has more than tripled. So, there is a couple of a hundred percent “baked in” since 2007. Those numbers are approximations only. Once people get spooked, their willingness to hold money will decline (the velocity of money will expand). It is this latter phenomenon that moves a country from very high inflation into hyperinflation. An arbitrary definition of hyperinflation might be in excess of 50% per month.

What would you do if your food bill was increasing by 50% per month and the purchasing power of your savings/pension/fixed income contracts was declining by 50% per month? It doesn’t take but a few months for someone unprepared and well-off to become impoverished.





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  1. One more thing – another reason is that FEDs’ friends seat on gigantic pile of worthless crap and they have to replaced it with money that Fed is printing into friends coffers.
    Money don’t land on the market (no apparent inflation) since they are hoarded by bankers.

  2. As bad inflation is inflation is one way to escape from debt trap that is suffocating everything and everyone and is not sustainable in practical terms – from political reasons you can’t do Greek squeeze in USA (no more room).
    There are only two realistic ways to get rid of debt at the moment – inflation or debt amnesty.

    As long Chinese are selling their real products for American paper and put this paper under the bed… it works.

  3. I understand GDP is money supply times money velocity.
    Does all this money held by the banks tend to skew money velocity toward 1.0?
    If so, then GDP would grow very slowly, even if massive amounts of money were introduced into the system.
    Don Levit

    1. Don,

      What you refer to is an identity (MV = GDP or more commonly written as MV = PT). Government has control over M (and limited at that because of the fractional reserve banking system). V or velocity is controlled by economic actors. The Fed has made it attractive for banks to hold excess reserves by paying them interest on them. Furthermore, the banks (and only the banks) know the true condition of their assets, many of which are being carried at above market values. Hence the banks want to hold excess reserves for the time when these assets have to be written down. Thus, in a sense, much of what we call excess reserves are not excess if assets were marked to market.

      It is difficult to know where the banks truly stand. Each bank has a different portfolio of assets and real estate assets are always unique. At some point, the chicanery of these overvalued assets will collapse and put us into a Depression or the reserves which continue to rise will truly be excess. If interest rates rise, there will be an incentive to become more aggressive with respect to these reserves, whether they are truly excess or not. That is the inflation scenario.

      The politicians are aiming for the inflation scenario, not the Depression outcome. But we know how talented and bright these people are.

  4. From my understanding, the reason we haven’t seen the hyperinflation already is because all those extra dollars are being held in reserve by banks and haven’t hit the markets yet. Plus, the demand for US dollars is low from all sources. Businesses, investors and consumers. If demand goes up, the inflationary spiral could begin in earnest.

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