Monetary Madness in a Single Chart: Hyperinflation's Just Around the Corner 35 comments
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Is there anybody left who still thinks deflation may pose a problem in the future after looking at this horrific chart?
Arthur B. Laffer has penned an article for the Bubble Street Journal (WSJ), arriving at the conclusion that hyperinflation is not a possibility but a must, given the panicky monetary policies the Federal Reserve has applied in this millennium. Hat tip goes to Duncan Robertson.
Here come some excerpts from Laffers article:
Here we stand more than a year into a grave economic crisis with a projected budget deficit of 13% of GDP. That's more than twice the size of the next largest deficit since World War II...
With the crisis, the ill-conceived government reactions, and the ensuing economic downturn, the unfunded liabilities of federal programs -- such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid -- are over the $100 trillion mark. With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.
But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.
About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.
The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base -- which prior to the expansion had comprised 95% of the monetary base -- has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!...
It's difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed's actions because, frankly, we haven't ever seen anything like this in the U.S. To date what's happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn't a pretty picture.
There is not much to add beyond the warning that monetary deflation is the last thing to worry about.
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On Jun 12 03:58 PM The Geoffster wrote:
Our system of government
> has given us two symbiotic parties hell bent on giving us what we
> want.
We do not have a credit crisis, we have a debt crisis. We have 3x the number of malls we need; we have 20 x times the # of coffee shops we need; we have too many restauraunts, too many/much of everything. Our supply outstrips our demands, and now our ability to meet our demands ( most of which are wants, and not needs ), by so much- just who exactly will be going to the banks to borrow to build and expand what? Malls? Houses? More commercial RE? Cars? Steel mills? What?
On Jun 12 02:32 PM Mayer Amschel Rothschild wrote:
> Thinkr is right. Inflation will be kept in check for a little while...
> but don't wait until the last bank is closed or the last home foreclosed
> upon. As soon as downward momentum stops, and banks feel secure loaning
> money, is when the dam will crack. Look at the summer of '08 - after
> Bear Sterns collapsed, hardly the most positive environment for inflation,
> yet money was sucked out of the market and put into oil, just what
> we're witnessing now.
We need to stop calling rising prices inflation. Inflation is growth (just like blowing up a balloon - a bubble) in the money supply. This growth causes a decrease in the Purchasing Power of Money (PPM). Laffer states in his article the Fed signaled a 180 shift from an anti-inflation position to an anti-deflation position. The Fed has NEVER been anti-inflation and has ALWAYS been anti-deflation. Unless you know of any one else besides the Fed who can create money either by printing new paper slips (Federal Reserve Notes) or increasing member bank reserves (expansion of bank credit) only the Fed can create inflation.
Why do we continue to discuss the Fed as if it is sometimes "hawkish" on inflation. The purpose of the Fed is to be the "lender of last resort" and to inflate the money supply. Here's a quick peice of trivia: since 1913 the U.S. dollar has lost approximately 96% of its purchasing power under the watchful eye of the ever hawkish Federal Reserve Bank whose initial mission was, get this, price stabilization. In the 93 years prior to the birth of the Federal Reserve Bank (1820-1913), a terrible time for sure since there was no Central Bank run by geniuses whose very words were worshipped by the chattering classes, what cost $1.00 in 1820 cost $0.63 in 1913 due to increased productivity and the growth of goods and services in the market place competing for dollars. This was a time when money still had both of its original purposes (1) a meduim of exchange and (2) a store of value. It is no longer a store of value thanks to our wise rulers in Washington D.C. But I digress.
Laffer's predictions are most likely true which proves one can actually be right, some times, even for the wrong reasons. Currency devaluation is a better description of what lies ahead and it will entail both rising prices and rising interest rates. It will be very interesting.
If "around the corner means this year", I disagree. But is around the corner 3-10 yrs, then seems plausible if things go bad. But how do I play that. 3-10 yrs is an eternity in the markets with this volitility.
I will be broke before it ever happens if I listen to the doom-sayers who predict it every year.
It makes much more sense to look at broad money supply as you then see the monetary base had been expanding at a much faster rate than this graph shows and the collapse in the repo market for ABS was the hugely deflationary event this stimulus was designed to counter.
Were we have seen hyperinflation, eg Weimar Germany or Zimbabwe, you see shocks in the relationship between prices and wages. Efforts to create price controls which lead to lack of supply of goods followed by large wage increases to counter price rises when those controls are reduced. I don't see this happening in the US....
On Jun 12 10:35 AM thiazole wrote:
> I agree that the deflation argument seems to be pretty weak right
> now, but I can't quite see hyperinflation either. The money supply
> has doubled according to your chart, so wouldn't that imply that
> the absolute most inflation we could have would be 100%? And what
> happens when the Fed start reeling the money supply back in? Now
> if the Fed doubled the money supply again next year and the year
> after that, then I could see hyperinflation.
>
> All that said, I will agree that serious inflation is certainly in
> our future. We will see 7-10% in typical years and could see single
> year spikes as high as 15% at the peak of inflation over the next
> 5-10 years. Severe, but not hyper.
An added point; this is also the time the gov't started charging income taxes (1913). Anybody see a corelation here?
Another question:
Should we be raising taxes now?
On Jun 12 05:47 PM austrian63 wrote:
> Not to dminish Laffer's points but he didn't see this coming in 2005
> and 2006 when he said the U.S. economy was stronger than it's ever
> been.
>
> We need to stop calling rising prices inflation. Inflation is growth
> (just like blowing up a balloon - a bubble) in the money supply.
> This growth causes a decrease in the Purchasing Power of Money (seekingalpha.com/symbo...).
> Laffer states in his article the Fed signaled a 180 shift from an
> anti-inflation position to an anti-deflation position. The Fed has
> NEVER been anti-inflation and has ALWAYS been anti-deflation. Unless
> you know of any one else besides the Fed who can create money either
> by printing new paper slips (Federal Reserve Notes) or increasing
> member bank reserves (expansion of bank credit) only the Fed can
> create inflation.
>
> Why do we continue to discuss the Fed as if it is sometimes "hawkish"
> on inflation. The purpose of the Fed is to be the "lender of last
> resort" and to inflate the money supply. Here's a quick peice of
> trivia: since 1913 the U.S. dollar has lost approximately 96% of
> its purchasing power under the watchful eye of the ever hawkish Federal
> Reserve Bank whose initial mission was, get this, price stabilization.
> In the 93 years prior to the birth of the Federal Reserve Bank (1820-1913),
> a terrible time for sure since there was no Central Bank run by geniuses
> whose very words were worshipped by the chattering classes, what
> cost $1.00 in 1820 cost $0.63 in 1913 due to increased productivity
> and the growth of goods and services in the market place competing
> for dollars. This was a time when money still had both of its original
> purposes (1) a meduim of exchange and (2) a store of value. It is
> no longer a store of value thanks to our wise rulers in Washington
> D.C. But I digress.
>
> Laffer's predictions are most likely true which proves one can actually
> be right, some times, even for the wrong reasons. Currency devaluation
> is a better description of what lies ahead and it will entail both
> rising prices and rising interest rates. It will be very interesting.
Where are the genious'????
I am not one..... but I know that people, corporations are trying to de-lever and pay down debt. Therefore, I will continue to invest in it.
Collect the payments that they are trying to pay off, with debt being taboo and undervalued (still) money can be made here for 'maybe' a couple more years.
Disclosurers: (PTY), (PSY), (ACG), (MSY)
On Jun 12 08:23 PM IronMeteor wrote:
> Timing, Timing, Timing. I want an exact year, not around the corner.
> I am just too leveraged to screw up the timing and be BK. So predictions
> like this do nothing for me. Give me a date or at least a year. Otherwise,
> its useless info.
>
> If "around the corner means this year", I disagree. But is around
> the corner 3-10 yrs, then seems plausible if things go bad. But how
> do I play that. 3-10 yrs is an eternity in the markets with this
> volitility.
>
> I will be broke before it ever happens if I listen to the doom-sayers
> who predict it every year.
>
>
Tax rates will never be lower in our lifetime (I may have 30 years left). Take advantge now (that is what SA is all about).
Good Luck.
On Jun 13 09:27 AM twotraps wrote:
> So, what can we do about it? Pay the tax now on deferred accounts
> if possible. Buy that little bit of vacant land you've been thinking
> about and anything else that can rise with inflation. The dollar
> I'm not sure about since the rest of the world is just as shaky....that
> does not mean that another block currency might form if enough damage
> is done in the US.....only that scenario would take too long to unfold
> and therefore not useful as far as investments right now. We might
> see the mighty fall of the Great Health Care Scam complete with crashing
> medical stocks, insurance companies and exiting segments on CNBC
> where they will tell us '...we told you so...' and '...as we have
> been reporting for months....'. Gotta love those guys.
Balanced budgets???
You are dreaming....... WAKE UP!!!!!!!!
All I can say (from a SA viewpoint) is watch the money flows and make your money from it. To hell with any political viewpoint!!!!
On Jun 13 12:15 PM Trane250 wrote:
> Laugher (spelling deliberate): What a joke. He's the guy who proved
> that less means more, i.e. voodoo economics. Ronald Reagan bought
> into Laffer's nonsense and ran up the national treasury debt by 1.8
> trillion 1980s dollars. Bush 43 also bought in and more than doubled
> the national debt and accumulated a $3.4 trillion trade deficit to
> boot. But Laffer's probably right about the consequences of Bernanke's
> massive money printing. If we had practiced the old fashioned balanced
> budget fiscal discipline, we wouldn't be in this mess.
Obama has joined the clan now that he's in: he's not going to take unpopular decisions that may bring things to a head quickly and that in so doing will make many feel and be poor, but which will enable a line to be drawn under a very bad situation, and hopefully give us the chance to work our way out that much more quickly. No, he'll do as all politicos do, and that is anything that doesn't make him too unpopular even though it will drag the bad times out for many more years to come.
On Jun 13 04:47 AM nobby73 wrote:
> As others have said, this graph is misleading. This money has been
> created to replace the other forms of monetary assets such as MBS,
> which were sucked out of the system.
>
> It makes much more sense to look at broad money supply as you then
> see the monetary base had been expanding at a much faster rate than
> this graph shows and the collapse in the repo market for ABS was
> the hugely deflationary event this stimulus was designed to counter.
>
>
> Were we have seen hyperinflation, eg Weimar Germany or Zimbabwe,
> you see shocks in the relationship between prices and wages. Efforts
> to create price controls which lead to lack of supply of goods followed
> by large wage increases to counter price rises when those controls
> are reduced. I don't see this happening in the US....
Now, most of these securities are held by the Fed, which replaced them with the cash created in the graph above. The issue isn't about the increase in money supply, but the fact there is now a Federal Reserve Black Hole containing a few trillion dollars of assets of dubious quality with about $45 billion of capital.
1.bp.blogspot.com/_FM7...
And I would not say Greenspan created a bubble, but he did enable it.
On Jun 13 09:32 PM prudentinvestor wrote:
> But these other forms of "monetary assets" that you believe were
> "sucked out of the system" were mere fantasy, and never existed anyway.
> What was the value of all MBS before the Great Bubbles created by
> Greenspan/Bernanke?
It is a common, logical fallacy to conclude the new money being created out of thin air merely replaces the old money that was lost due the popping of the Fed's real estate bubble therefore we should not worry about devaluation. Most mainstream economists, who by the way never saw this bubble or its bursting coming, will parrot this view but it does not make it true.
On Jun 13 04:47 AM nobby73 wrote:
> As others have said, this graph is misleading. This money has been
> created to replace the other forms of monetary assets such as MBS,
> which were sucked out of the system.
>
> It makes much more sense to look at broad money supply as you then
> see the monetary base had been expanding at a much faster rate than
> this graph shows and the collapse in the repo market for ABS was
> the hugely deflationary event this stimulus was designed to counter.
>
>
> Were we have seen hyperinflation, eg Weimar Germany or Zimbabwe,
> you see shocks in the relationship between prices and wages. Efforts
> to create price controls which lead to lack of supply of goods followed
> by large wage increases to counter price rises when those controls
> are reduced. I don't see this happening in the US....
This guy is on the right track. Money will be DEVALUED, truly it already has been greatly eg: in Canada since last summer B of C holdings backing the loonie have switched from 100% AAA Gov Bonds to include about %40 bank questionably toxic and non-marketable assets and consumer debt. Interest rates have to increase to accomodate the increase in risk.
>Not to dminish Laffer's points but he didn't see this coming in 2005 and 2006 when he said the U.S. economy was stronger than it's ever been.
We need to stop calling rising prices inflation. Inflation is growth (just like blowing up a balloon - a bubble) in the money supply. This growth causes a decrease in the Purchasing Power of Money (PPM). Laffer states in his article the Fed signaled a 180 shift from an anti-inflation position to an anti-deflation position. The Fed has NEVER been anti-inflation and has ALWAYS been anti-deflation. Unless you know of any one else besides the Fed who can create money either by printing new paper slips (Federal Reserve Notes) or increasing member bank reserves (expansion of bank credit) only the Fed can create inflation.
Why do we continue to discuss the Fed as if it is sometimes "hawkish" on inflation. The purpose of the Fed is to be the "lender of last resort" and to inflate the money supply. Here's a quick peice of trivia: since 1913 the U.S. dollar has lost approximately 96% of its purchasing power under the watchful eye of the ever hawkish Federal Reserve Bank whose initial mission was, get this, price stabilization. In the 93 years prior to the birth of the Federal Reserve Bank (1820-1913), a terrible time for sure since there was no Central Bank run by geniuses whose very words were worshipped by the chattering classes, what cost $1.00 in 1820 cost $0.63 in 1913 due to increased productivity and the growth of goods and services in the market place competing for dollars. This was a time when money still had both of its original purposes (1) a meduim of exchange and (2) a store of value. It is no longer a store of value thanks to our wise rulers in Washington D.C. But I digress.
Laffer's predictions are most likely true which proves one can actually be right, some times, even for the wrong reasons. Currency devaluation is a better description of what lies ahead and it will entail both rising prices and rising interest rates. It will be very interesting.<