U.S. Government: Reflation By Any Means Necessary 9 comments
an article to
-
Font Size:
-
Print
- TweetThis
For investors, the burning question is “What Happens Next, and where do I put my money?” Sometimes the answer is obvious, sometimes not. One way to develop an answer is to flesh out possible scenarios and play them into the future, then look for clues as to which is most likely. This article is meant to stimulate thought and does not provide easy answers. There are no easy answers.
At the beginning of any such analysis must be First Principles: I consider it axiomatic that we are living in a command economy. As far as government is concerned, the purpose of economic activity is to furnish a stream of cash flow from which they can skim wealth. The “free market” in the West and elsewhere is merely tolerated as the goose that lays the golden eggs (which are then stolen by government and redistributed to its partisans), and which furnishes labor a means to support itself.
These facts, along with the existence of central banks and the regulatory state, force us to acknowledge that the role of government intervention in the market can never be ignored; hence the old saw “never bet against the Fed.” Sometimes the heavy hand of government must be the prime consideration; now is one such time. Normal business fundamentals are unimportant. The burning question on every investor’s mind, then, is obviously this: “What is the government going to do next, and what will be the effect?”
Ours is a “Faith-Based” economic system; it is based on a “fiat” currency that has value only because men say it does and people believe it does. This is an undeniable fact, and it must be taken into consideration under our current circumstances. Fiat currency is a token which is redeemable until it isn’t; “isn’t” arrives when faith is destroyed. The IMF already has interventions in various stages in several nations where “isn’t” has arrived.
At its core, to be valuable, currency must be backed by something. Currencies are anything but stable; severe pressure is plainly evident on any FOREX chart. Currencies’ values are, in effect, backed by the world’s perception of the soundness of their host economy and by the ability of the host government to successfully tax its subjects to pay off debt. In other words, modern debt currencies are backed by the labor of the subjects in the host economy. If you don’t believe this, then ask yourself what would happen to the USD if a viable tax resistance movement arose in the USA.
The major scenarios that need to be considered are these:
- Reflation succeeds and is controllable
- Reflation succeeds and is uncontrollable
- Reflation fails marginally
- Reflation fails totally
Due to length I will discuss today my view of Scenario #1, as I believe it is considered by government to be “Best Case” and is their aim. Coming installments may evaluate the other scenarios, though their outcomes in many ways are much more predictable. Scenario #1 is the most relevant because it is where our “leaders” are taking us, kicking and screaming notwithstanding.
Treasury and Fed officials act as though they believe they can inject enough newly-created money to prevent collapse, and then pump in just enough additional new money to reignite credit and engender economic “growth” as seen in employment, and especially in tax revenues.
In my opinion, governments are totally committed to reflation by any means necessary. We can see the measures that are already being taken, and those that are likely to be taken, and then ponder their outcomes. Rather than beggar-thy-neighbor competitive currency debasement, we now see coordinated currency debasement. “Credit” is vanishing, and fractional-reserve leverage is working in reverse, so monetary authorities are trying to replace “credit” with new “money.” The dilutive impact to the actual value of paper currencies should be readily apparent. When done in a coordinated manner the impact becomes relative. This impact also depends on your evaluation of the difference between money and credit-money.
Clearly, in a fractional reserve system, the monetary base is the basis for leveraged credit expansion. Right now, the credit-creation machine is broken; there is “money,” but it is not being used to create new “credit,” leverage is not working, and MZM is falling even while M1 is being pushed up.
People without jobs have no ability to take on new debt. Job losses have begun to garner attention. Governments worldwide are now announcing various “fiscal stimulus” measures in hopes of job creation. Like currency debasement, stimulus packages are pursued globally in a coordinated manner. This coordination, along with coordinated central bank currency debasement, is an effort to prevent capital flight without overt capital controls; simply put, if capital has no non-debased currency to flee to, it might as well be debased at home. It seems that coordinated international banking is to be a trap from which no escape is allowed; this also explains the war on gold.
Governments have signaled their willingness to coordinate their efforts to try to force economic outcomes. Ultimately, using tax policies and the regulatory state, private money can be forced to flow to where governments want it; this is the destination of “The Road to Serfdom.”
Bernanke hopes that he and his international cohorts can manage money creation in real time, creating enough new money to “inject liquidity” into the system to keep it from collapsing. If successful, the values of the troublesome toxic securities will stabilize, and then start to rise. Banks will start lending, and business will get back to “normal,” at higher government (taxpayer) debt levels.
How will this expanded monetary base be dealt with once reflation is successful (assuming it is, of course)? By raising interest rates, by selling back into the market the securities that were bought or created, and vacuuming up all those excess dollars. This would have to be done in the middle of an economic expansion, one that finally came after what could turn out to be a long and difficult downturn. This action would have to be finely tuned, only slowing down activity enough to prevent reigniting “inflationary expectations” while allowing expansion to continue.
Is Scenario #1 possible in practice? Factors to consider include:
- Liquidity vs. solvency – is this a liquidity crisis or a solvency crisis?
- Total government debt levels – how close is the debt trap?
- Total consumer debt levels – are consumers ready, willing and able to increase their debt levels?
- Existence of political will – is there ever a political “window of opportunity” for Fed tightening?
- Belief in Omnipotent Man – is any man or group of men smart enough to manage an economy?
- Faith levels – can the mainstream media prevent a loss of faith and a complete collapse of consumer spending?
- Market bottoming – how much new money will need to be created to begin a turnaround, and is this amount too great for currency markets to bear?
- Can a debt crisis be solved with higher debt levels?
According to CNBC, the Fed and the Treasury have already spent or committed $4.3 Trillion, more than the U.S. spent on all of WW2. Chuck Schumer was on Sunday morning TV and said that we need another $500-700 Billion stimulus, and soon. Any number could now be named and ultimately would be approved by Congress, over the objections of American subjects. The path is chosen. Will it lead to salvation?
Disclosure: Long gold.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
According to CNBC, the Fed and the Treasury have already spent or committed $4.3 Trillion, more than the U.S. spent on all of WW2. Chuck Schumer was on Sunday morning TV and said that we need another $500-700 Billion stimulus, and soon"
Answer: Yes.
Inflation makes debt worth-less. Inflation will prop up everyone's home values. Inflation is the "fix" that's in already! Where are these trillions of dollars coming from!
Precisely. Hints of deflation are only temporary. Look out above people.
Be sure to reference the expert on that scenario, the Might Mogambo Guru (MMG).
I firmly believe 1 & 2, mainly 1. I do believe initially we will rocket to 2, jut like we are having the deflation scare, there is always an over reaction.
I have begun scaling into TIPS, floating rate funds, and a couple of commodity ETF's. (there will be plenty of time, for now I will DCA my way in, then round out the positions when the first rate increases gp through,may be months or years)
Just my thoughts
if:
- you are not smart enough to prevent this crisis,
- once in it you invent things to mitigate its effects without understanding the consequences,
- and to get out of it you throw stimulus at the crisis to see what will work
things will naturally be out of control.
but for sure we are piling up debt, and more will come because of our government's guarantees (in a normal business there would be reserves budgeted but we are talking about the government here). debt will grow at historical rates. if the economy ignites, the economy will be too unstable and will crash.
hence, back to my nightmare - no economic growth, inflation, and no mechanism to fight inflation.
I assume you mean a kind of "stag-high inflation", and I see your point. #3 is this scenario; growth does not return, but the monetary authorities continue to try by printing.