The art of economics consists in looking not merely at the immediate hut at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups—Henry Hazlitt
Thursday, March 24, 2016
Charts: Has the Hiatus of US Dollar Ended? Return of Risk OFF?
Friday, September 04, 2015
Infographics: 33 Fascinating Facts on U.S. Currency
Probably the most significant fact concerning U.S. dollars is that there are trillions of them making up 29.1% of global debt. Beyond that, however, today’s infographic covers 33 fascinating facts about the notes and coins themselves.Another interesting fact worth mentioning: The United States Bureau of Engraving and Printing makes approximately $696 million in currency each day. Amazingly, according to their very fitting website MoneyFactory.gov, in the fiscal year of 2014 they printed over $2.2 billion in $1 bills alone.It’s good practice, because with concerns of deflation circulating around Europe and Asia, the Feds may want to put the printing presses into overdrive.Original graphic by: HowMuch.net
Tuesday, October 22, 2013
US Fed’s Coming Centennial Anniversary of Failures and Inflationism
As we’re coming up on the 100th anniversary of the establishment of Federal Reserve, one thing has become abundantly clear– these guys are horrible at their jobs.According to the popular lie, the Federal Reserve was supposed to have been established to smooth out the economic cycle, thus preventing booms, busts, recessions, and depressions.It hasn’t really worked out that way.In the 100 years prior to the establishment of the Federal Reserve, there were 18 distinct recessions or depressions:1815, 1822, 1825, 1828, 1833, 1836, 1839, 1845, 1847, 1853, 1860, 1865, 1869, 1873, 1887, 1890, 1899, and 1902.Since the establishment of the Federal Reserve, there have been 18 recessions or depressions:1918, 1920, 1923, 1926, 1929, 1937, 1945, 1949, 1953, 1958, 1960, 1969, 1973, 1980, 1981, 1990, 2001, 2008.So in other words, the economy experienced just as many recessions with the ‘expert’ management of the Federal Reserve as without it.And this doesn’t even begin to capture all the absurd panics (the S&L scare), bailouts (Long-Term Capital Management), and ridiculous asset bubbles that they’ve created.
From Chapter VI, Europe after the Treaty from “The Economic Consequences of the Peace” [1920] (source The Online Library of Liberty) [italics original; bold mine]
Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. [very much the yield chasing phenomenon today--Benson]Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
Friday, July 12, 2013
US Stocks Hit Record Highs as the US Dollar Dives
U.S. stocks shot into record territory Thursday after the head of the U.S. central bank hinted that its current unprecedented quantitative easing policy will not end any time soon.On Wednesday, Federal Reserve Chairman Ben Bernanke, speaking after the bank's key interest-rate setting panel issued a nondefinitive statement of its intentions, said that the current employment level is overstating the health of the job market.That comment suggested the central bank would keep buying large amounts of bonds, a policy it has been pursuing to suppress long-term interest rates. That policy also has helped lift U.S. equities.
Yet a stock market boom can be engineered by governments that could destroy historical precedents. Venezuela should be an example. Venezuela’s stock market has been up a stratospheric 160% year to date. This translates to star bound 460% in one and a half years. But Venezuela’s deceiving outperformance comes at a heavy toll: the collapse of her currency the Bolivar which means rising stocks are symptoms of hyperinflation.
Wednesday, May 22, 2013
An Example of Mania Thinking to Justify the US Stock Market Bubble
A rising dollar may help push U.S. stocks higher by giving international investors more incentive to buy, according to Michael Shaoul, chief executive officer of Marketfield Asset Management.The CHART OF THE DAY displays the performance of the Standard & Poor’s 500 Index and the Dollar Index since 1994 in the top panel. The correlation between the gauges, based on the most recent 200 weeks of trading, appears in the bottom panel.March marked the first time since 2005 that the Dollar Index, which IntercontinentalExchange Inc. uses to track the currency’s value against the currencies of six of the largest U.S. trading partners, had a positive correlation with the S&P 500. Since then, the relationship has grown stronger each week.“Foreign capital flows are starting to be attracted to the U.S. equity market” in a way last seen when the Internet bubble sent stocks surging in the 1990s, Shaoul wrote. The New York-based analyst added that he expects the dollar and share prices to rise together for the next few months.
Banking on correlation without understanding the causal process signifies a hazardous undertaking.
Monday, March 11, 2013
Video: Peter Schiff Versus John Mauldin on US Dollar and Deficits
Based on the coming 'oil revolution', John Mauldin makes the point that the US can run $300-400 billion deficits and the Fed "can print trillions" and the dollar will surge (since the rest of the world demands it). Peter Schiff begins quietly adding that "we don't have that much oil" then goes on to discuss the 'ifs' in Mauldin's thesis, beginning the wildcard that "we can't suppress interest rates indefinitely" as we await this supposed oil export boom to begin - and that somehow the US is expected to generate a budget surplus when even the perpetually optimistic CBO in its most recent forecast gave up on expecting a surplus in the future of America. Ever. The ensuing 3 minutes or so is worth the price of admission as Dollar bull meets Dollar bear in a nose-dripping, face-ripping trip into the future.
Start at 5:25
Tuesday, May 29, 2012
Risk OFF Environment: Surging US Dollar
The Bloomberg reports
The dollar is proving scarce, even after the Federal Reserve flooded the financial system with an extra $2.3 trillion, as the amount of the highest-quality assets available worldwide shrinks.
From last year’s low on July 27, the greenback has risen against all 16 of its major peers. Intercontinental Exchange Inc.’s Dollar Index surged 12 percent, higher now than when the Fed began creating dollars to buy bonds under its extraordinary stimulus measures at the end of 2008.
International investors and financial institutions that are required to own only the highest quality assets to meet investment guidelines or new regulations are finding fewer options beyond dollar-denominated assets. The U.S. is one of only five major economies with credit-default swaps on their debt trading at less than 100 basis points, meaning they are viewed as almost risk free. A year ago, eight Group-of-10 nations fit that category, data compiled by Bloomberg show.
“The pool of high-rated assets has been shrinking, not just in the euro zone but elsewhere as well,” Ian Stannard, Morgan Stanley’s head of Europe currency strategy, said in a May 22 telephone interview. “With the core of Europe shrinking, and the available assets for reserve purposes shrinking, it makes the euro zone less attractive.”
In a world where debt has been the elephant in the room, especially for major economies then it would be obvious that once there will be pressure on the claims to debts then this would mean an increased demand for the US dollar. This is because debts have been denominated in fiat currencies mostly on the US dollar. Some people may have forgotten that the world still operates on a US dollar standard.
For instance, intra-region bank run in the Eurozone will likely extrapolate to higher demand for the ex-euro currencies, mainly the US dollar
From Kyle Bass/Business Insider
This means that anxieties over a shrinking pool of “high-rated assets” has also been misguided, because much of these so-called high-rated assets revolve around the problems which we are seeing today: DEBT!!!
In short, what has been discerned by the mainstream as risk-free or safe assets epitomizes nothing short of a grand myth, founded on the belief that government edicts can defeat or are superior to the laws of economics.
Yet the US dollar has not been immune to debt, except that current instances reveal that the locus of market distresses have mainly been from ex-US dollar assets or economies, particularly the EU and China.
And since current predicament has been about debt deleveraging where central bankers have been fire fighting these with intensive money printing, then the pendulum of volatility swings from either asset deflation to asset inflation—or the boom bust cycles.
As one would note, gold has mostly moved in the opposite direction of the US dollar index. The euro has the largest weighting (about 58%) in the US dollar basket.
This simply debunks the flawed idea that gold is a deflation hedge under a paper currency system.
And as Professor Lawrence H. White aptly points out on an essay over monetary reforms,
We should not expect a spontaneous mass switchover to gold, or to Swiss francs, as long as dollar inflation remains low. The dollar has an incumbency advantage due to the network property of a monetary standard. The greater the number of people who are plugged into the dollar network, ready to buy or sell using dollars, the more useful using dollars is to you.
Where the US dollar continues to surge amidst staggering gold prices, then this only means central banking actions have been momentarily overwhelmed by apprehensions over debt mostly via political stalemates, whether in the EU or in China.
Yet we should not discount that central bankers to likely step on the inflation gas to save the current political institutions based on welfare-warfare state, central banking and the political clients—the banking sector.
Prices of commodities will now serve as crucial indicators as to the conditions of monetary inflation-debt deflation tug of war.
The Risk ON Risk OFF conditions may not last, we may morph into a stagflationary landscape.
Friday, February 17, 2012
Shale Gas Won’t Boost the US Dollar
At the Financial Times, managing director of foreign exchange strategy at UBS Mansoor Mohi-uddin says that Shale Gas will be instrumental in shifting the trade balance of the US that should translate to a stronger US dollar.
The future of the dollar is more likely to be determined in the shale gas and oilfields of Dakota and Texas than in the sovereign wealth funds of Asia and the Middle East. This is because striking new technological developments are set to transform America’s energy supplies, significantly improving the US balance of payments and the long-term outlook for the greenback.
The US’s current account deficit has been a longstanding drag on the dollar. At the height of the credit boom in 2006, it reached $800bn or 6 per cent of gross domestic product. Though the deficit has halved as the credit crunch has lowered imports, it still stands at 3 per cent of GDP, largely because the US, like the eurozone, Japan, China and India, remains a major energy importer, with annual net foreign oil purchases of $300bn a year. As the US economy slowly recovers, the International Monetary Fund expects the US current account deficit to start rising again. That would lead to foreign central banks accumulating greater reserves of dollars.
But such straight-line forecasts are likely to be challenged as the US’s shale gas and “tight oil” reserves are commercially exploited over the next few years. The US has vast reserves of shale gas but, until recently, energy companies were unable to tap the gas trapped in shale rock. Now, through hydraulic fracturing or ‘fracking’, US reserves of economically available gas supplies have started to rise sharply.
While I am in accord that shale gas is the future of energy, a lopsided focus on energy as driving the US dollar risks a substantial diagnostic error.
Trade balances are largely influenced by policies, directly or indirectly. Policies which promotes boom bust cycles and increased government spending (or the debt culture) stimulates consumption activities at the expense of production, thus boost trade deficits. So even if shale gas may reduce US dependence on foreign energy, growth of consumption activities will expand to other sectors.
Today, the declining share of oil imports (above chart courtesy of Mark Perry) relative to consumption has hardly been a factor affecting the US trade balance—the latter which suffered a major bump from the 2008 recession or crisis (chart below tradingeconomics.com).
In short, the above only exhibits that there has been a shift taking place in import activities from oil to the other sectors.
The US dollar has hardly strengthened because of the improving oil trade balance but instead has functioned as a du jour shock absorber from the unresolved crisis from 2008 which lingers on today through the Eurozone.
And another thing, the Fed’s money printing activities relative to other central banks will drive the destiny of the US dollar more than just shale gas output. Money is never neutral.
Sunday, March 20, 2011
The US Dollar’s Dependence On Quantitative Easing
Since every central bank of major economies has been inflating, it’s a question of which central bank has been inflating the most. The obvious answer is the US. The US has not only been inflating her economy, she has basically been inflating the rest of the world.
A US Dollar rally can occur and can be sustained once the US withholds inflationism. But $64 trillion question is: Can they afford the consequences?
Like in early 2010, experts and officials babbled about “exit strategies” as the US economy’s recovery advanced, something which we debunked as a Poker Bluff[1]. Yet 10 months later, the Fed re-engaged in Quantitative Easing 2[2] citing “low consumer spending” and “unemployment” as an excuse even as the US moved out of the recession in June of 2009th[3].
The mainstream doesn’t get it or has stubbornly been denying this.
Quantitative Easing or euphemistically called Credit Easing isn’t about the economy but about buttressing politically the US government and the banking system.
As Mises Institute Lew Rockwell writes[4],
Another truth is that the Fed doesn’t really care about inflation as much as it cares about the solvency of the banking and financial systems. Bernanke would drive us right into hyperinflation to save his industries. Savers living on pensions just don’t have the political clout to stop the money machine.
US housing has still been struggling. Since a substantial segment of the banking system’s balance sheets have been stuffed with US mortgages, then QE 1.0 and 2.0 has managed to keep these afloat but has, so far, failed to strongly revive the US housing market[5].
Under enfeebled housing conditions, a failure to continue with the QE amplifies the risks of falling housing prices thereby jeopardizing the fragile state of the US banking system.
Most importantly, the US Federal Reserve has been buying US Treasuries which means the US central bank has been funding the profligacy of US government.
Yet much of US treasury has also been substantially held by the foreign governments.
However, there are signs that the interest to hold US debt has been waning.
According to Economic Times India[6]
China, the biggest foreign holder of US debt has trimmed its portfolio to $1.15 trillion to diversify its foreign reserve portfolio to avoid risks.
China reduced its US Treasuries portfolio by $5.4 billion to $1.15 trillion in January, according to the data released by the US Treasury Department on Wednesday.
It is the third straight month of net selling after China's holdings of US debt reached a peak of nearly $1.18 trillion in October 2010.
If the Japan repatriation trade proves to be a real event risk, then this could even further dampen interest to support US debt.
With substantial foreign held US debt maturing over the next 36 months[7], if foreign governments withhold from buying, will the US accept higher interest rates?
Given the ideological background and the path dependency by the incumbent monetary authorities, the answer is a likely NO!
The US government can’t simply put her fragile banking system at risks, and thus, we can bet that QE 3, 4, 5 to the nth, will likely occur until the market recoils from these.
The above doesn’t even include the financial conditions of wobbly states and municipalities.
Financial conditions of US states have been plodding[8] while Municipal bonds, following a huge meltdown, has also been floundering. The rally in the Muni bonds have not erased the losses.
Controversial analyst Meredith Whitney, who recently presaged “50 to 100 sizable defaults to the tune of “hundreds of billions of dollars worth of defaults”[9], has been constantly under fire by the mainstream, for such prognosis. She has even been summoned by a US Congressional Panel. Anyone who goes against the government appears to be subject to censorship or political harassment.
The point is: given all these fragile conditions, will the Ben Bernanke led US Federal Reserve bear the onus of withdrawing, what has given Bernanke and the Fed an artificial aura of success?
[1] See Poker Bluff: The Exit Strategy Theme For 2010, January 11, 2011
[2] CNN Money.com QE2: Fed pulls the trigger, November 3, 2010
[3] Reuters.com Recession ended in June 2009: NBER, September 20, 2010
[4] Rockwell, Llewellyn H. Is QE3 Ahead?, Mises.org, March 18, 2011
[5] Northern Trust, Sales of Existing Homes Moved Up, But Median Price Establishes New Low, February 23, 2011 and
Food and Energy Prices Lift Wholesales Prices, But Pass through to Retail Prices is Key, March 16, 2011
[6] Economic Times India, China continues to trim its US debt to avoid risks, March 18, 2011
[7] Osborne, Kieran U.S. Government: Evermore Reliant on Foreign Investors Merk Investments, March 15, 2011
[8] Center on Budget Policies and Policy Priorities, States Continue to Feel Recession’s Impact, March 9, 2011
[9] New York Times, A Seer on Banks Raises a Furor on Bonds, February 7, 2011
Tuesday, October 26, 2010
Will A Weak US Dollar Boost The US Economy?
Conventional thinking says that a weak currency should boost the economy via promoting exports.
But the Wall Street Journal Blog argues otherwise. (bold highlights mine)
The financial markets are focused on how nations, including the U.S., would prefer weaker currencies in order to make their exports cheaper on global markets. Indeed, multinational companies Caterpillar and McDonald’s reported Thursday that their bottom lines benefited from stronger international sales.
The flip side of that weak-currency strategy, however, is that imports into the U.S. become more expensive. If so, that will be a problem for millions of companies that don’t have an export presence. These companies, especially small and medium-sized firms, will see their profit margins squeezed because of higher costs…
Michael Trebing, senior economist who oversees the survey at the Philly Fed, says that in the past, respondents have said the prices-received index is weak because of competition and the inability of businesses to pass along cost increases. As a result, profitability is under attack.
“Accounting 101 tells us that if a company’s input costs go up, and they are unable or unwilling to pass those costs on to the consumer, their margins get squeezed,” says Dan Greenhaus, chief economic strategist at Miller Tabak.
The squeeze could get worse as import prices adjust to a weaker dollar because U.S. business depends on imported supplies. Excluding energy commodities, industrial materials and supplies account for 14% of all U.S. imports. In the first eight months of 2010, nominal shipments of these imports increased 30% compared with the same period in 2009.
To be sure, many global contracts are priced in U.S. dollars. But as the dollar weakens, foreign producers themselves will soon come under margin pressure when the dollars are translated into local currency. Over time, new contracts will carry higher prices for the components and materials that are important inputs for U.S. manufacturers and service-providers.
In one respect, higher import prices would please the Fed because bank officials want to see overall U.S. inflation head higher.
Some quick stats: (all charts from Google's public data explorer)
Exports make up only 12% of the US economy (above chart) compared to imports at 17% (below chart)
Overall, US merchandise trade constitutes only 24% of the US economy.
A weak dollar policy not only punishes imports, which ironically represents a much larger component of the US economy, importantly, it would hurt domestic trade which comprises 76% of the GDP.
So when Fed officials say they would like to see higher inflation through a weaker currency, they are simply implying that exporters should be subsidized, shouldered by the rest of the economy, at the cost of vastly lowered standard of living through higher consumer prices.
Of course, as mentioned above, instead of adding jobs, a profit squeeze on domestic non-export enterprises, through higher prices of inputs, would translate to high unemployment.
And an environment of high prices and stagnating economy is called stagflation, a dynamic the US had encountered during the 70s to the 80s.
Yet that’s how ‘subtle’ protectionism works, the rhetoric and ‘noble’ intentions depart from real events, where a few politically handpicked winners would emerge at the cost of everyone else.
Update: I forgot to add: There is another unstated beneficiary here, i.e. holders of financial assets. And the sector that requires an asset boost is no more than the banking sector, which have been severely distressed by the recent crisis. And this is why I think that a weak dollar isn't directed mainly at bolstering exports but to keep the banking system afloat.
Monday, March 01, 2010
Where Is Deflation?
When deflation advocates point to charts of bank loan activities, the money multiplier or Treasury Inflated Protected Securities (TIPS) and proclaim “where is inflation?” - they seem to be asking the wrong question.
For instance, while it is true that the US M1 money multiplier[1] is down, (as shown in the left window in figure 1 and recently used by a popular analyst as example), there seems hardly a grain of truth that the falling money multiplier equates to sustained deflation in US consumer prices (right window).
In other words, if they are correct then obviously CPI should be adrift in the negative territory- to reflect on deflationary pressures until the present. Yet the CPI, both in the ALL items and ALL items LESS Food and Energy remains in the positive zone, in spite of, or even in the face of these ‘deflation pressure’ statistics; falling money aggregates, subdued TIPS and or lackluster bank activities.
And CPI turned negative only at the height of the crisis, which makes it more of an aberration than the norm. Of course, this counterpoint extends to the validity of the accuracy of the US government’s measure of inflation, which I am a skeptic of.
However, here are more of our counterarguments to the sarcastic question of “where is inflation?”:
1. Reading current performance into the future.
Deflation exponents insist that “deflationary pressures” ought to collapse the markets as they did in 2008. They’ve been doing so for the entire 2009. But this hasn’t been happening. That’s because the reality is, we haven’t been operating under the same ‘Lehman’ conditions of 2008!
The US government’s actions to effect a cumulative network of local and international market patches, as seen in the various ‘alphabet soup’ of emergency programs plus a raft of guarantees to the tune of over $10 trillion, swaps and direct expenditures (quantitative easing), seems to ensure of such non-repetition, as we have repeatedly discussed.
So more banks could indeed fail, the FDIC upgraded its watchlist from 552 to 702 banks in danger, but the liquidity gridlock of 2008 isn’t likely to happen. That’s because the Fed has a morbid fear of ‘deflation’ than warranted, and is likely to engage in a “whack a mole”; pouring liquidity on every account of the emergence of deflation.
Let me clarify that the US banking system is a solvency issue, but this is not the case for Asia or for major emerging markets. Ergo, the contagion from the Lehman collapse of October 2008 emanated from a liquidity shortfall as US banks seized up. Since today’s scenario is different, then predicting the same contagion seems unlikely, so any arguments calling for a 2008 scenario is like calling a banana an apple.
Besides, the Fed’s manipulation or “nationalization” of key markets such as the US mortgage markets seems to have been designed to stave off the odds of having a domino effect collapse in their banking industry. This, by keeping the banking system’s balance sheets afloat, through “elevated” or inflated prices. In spite of babbles for so-called exit strategies, this isn’t likely to change.
On the contrary, a broader view of markets appears to be suggesting that inflation looks likely a future or prospective phenomenon.
To consider, if any of these “deflationary” stats begin to recover then they are likely add to ‘inflation expectations’ and thus eventually reverse the current state of “deflation subdued” CPI .
2. Misleading Interpretation of Hyperinflations.
Hyperinflations have never been caused by excessive consumer borrowings, never in history. To paint of such an impression is to egregiously mislead.
Hyperinflations have basically been caused by insatiable government spending, whose exponential growth had been financed by the printing press. On the other hand, a credit boom from consumer borrowing is most likely to result in bubble (boom-bust) cycles and not hyperinflation.
The fundamental difference is that of the political goal; in boom bust cycles, government’s role to inflate the system is largely indirect-with mostly the goal to perpetuate ‘quasi’ economic boom conditions by inflating money supply and by skewing the public’s incentives through regulation or taxation to favoured political sectors, as in the case of the recent real estate-mortgage bubble.
Whereas, in hyperinflations, the government’s role is more direct, usually deliberate or represents an act of desperation to meet a political goal for the incumbent leadership, such as perpetuation of power (e.g. Zimbabwe), or the addiction to inflationism compounded by policy errors based on theoretical misunderstandings[2], as Germany’s Weimar hyperinflation experience, and not from war reparations as others have suggested[3].
Of course one may argue that there is always a possibility of first time. Perhaps.
3. Selective Perception And Misguided Expectations
Many deflation proponents tend to argue from the perspective of the private sector’s performance in the economy. Their propensity to “tunnel” or fixate into the private sector leads them to erroneously omit the impact of the rapidly bulging share of the US government’s contribution to the economy, which presently accounts for nearly a third.[4]
Ignoring government’s contribution and policy impacts to the economy renders a handicapped analysis.
Nevertheless, looking at the global scale, we seem to be seeing more incidences of a ‘quickening’ of consumer price inflation, as in Malaysia and in Brazil, aside from previous accounts in China, India, Vietnam, and even to the real estate bubble-banking crisis afflicted UK which saw consumer price inflation rise to its highest level since November 2008 (see figure 2)-where debt deflation has been the generally expected outcome by the mainstream.
Reporting on the surprising resilience on UK’s inflation (left window), according to Finfacts.ie. ``The ONS said the CPI fell by 0.2% between December and January. Although negative, this is the strongest ever CPI growth between these two months (prices typically fall at a faster rate between December and January). This record monthly movement is mainly due to the increase in January 2010 in the standard rate of Value Added Tax (VAT) to 17.5% from 15% and, to a lesser extent, the continued increase in the price of crude oil. In the year to January, the all items retail prices index (RPI) rose by 3.7% up from 2.4% in December. Over the same period, the all items RPI excluding mortgage interest payments index (RPIX) rose by 4.6%, up from 3.8% in December.” (bold highlights mine)
Why should oil prices rise if demand has been declining as the Fisherian and Keynesian deflationists experts allege? From a “money is neutral” perspective, wouldn’t that be a paradox?
Also, why should higher taxes become inflationary, when all it does is to distort the economic structure by shifting investments from private to the public, as well as, to decrease the incentives for the private sector to participate?
Murray Rothbard provides the answer[5], ``If inflation has been under way, this “excess purchasing power” is precisely the result of previous governmental inflation. In short, the government is supposed to burden the public twice: once in appropriating the resources of society by inflating the money supply, and again, by taxing back the new money from the public. Rather than “checking inflationary pressure,” then, a tax surplus in a boom will simply place an additional burden upon the public. If the taxes are used for further government spending, or for repaying debts to the public, then there is not even a deflationary effect. If the taxes are used to redeem government debt held by the banks, the deflationary effect will not be a credit contraction and therefore will not correct maladjustments brought about by the previous inflation. It will, indeed, create further dislocations and distortions of its own.” (bold highlights mine)
In short, what could easily be seen is that the inflationary effects of bailouts, subsidies and its domestic version of quantitative easing programs have gradually been manifesting on her devaluing currency first (right window), and next, to consumer prices. And the newly increased VAT in the UK only adds to the existing distortions already in place.
Of course this account of emerging inflation seems to have befuddled the mainstream anew.
Yet, this dynamic is likely to emerge in the US too...perhaps soon.
For us, another reason why inflation is still quiescent in the US; aside from the slack in the banking system out of the reluctance to lend due to balance sheet concerns, is because of the natural belated response to the record steepness in the yield curve.
The uncertainty arising from the abrupt market cleansing adjustments and the rediscovery phase of where resources are needed, implications of new regulatory regime, prospects of higher taxes to pay for the slew of stimulus programs, risks of more government interventions, impaired and unsettled balance sheets of banks and financial institutions mired in the bubbles have all conspired to inhibit investors from taking advantage of the steepness in the yield curve.
Yet the past has shown that eventually zero interest rates and a steep yield curves will likely artificially impact the credit process to jumpstart a new boom-bust cycle. Although we aren’t likely to believe that a boom phase of a bubble cycle could happen in sectors recently affected by a bust, any seminal bubbles will most likely diffuse into other sectors untainted by the recent bubble (technology or materials and energy?) or percolate outside of the US.
This implies that the ramifications from policies are likely to gain traction with a time lag, as had been in the past.[6]
Hence, expectations for the immediacy of the markets’ response from policies have not been only myopic but also constitutes as wishful thinking-anchoring on a belief that people don’t respond to incentives.
4. The Folly Of Excluding The Role of the US dollar And Other External Forces
In addition to the lagged response, it is likely that the US dollar, as the world’s de facto seignorage provider, has the privilege to extend its inflationism outside her shores hence, inflation becomes a precursory tailwind (see figure 3)
Recessionary forces around the world, as exhibited in gray shaded areas in both the 2000 and the present crisis, required diminished US dollar financing for global trade. This led to an improvement of the US trade balance (red line), which none the less, dampened US CPI inflation (blue line).
As the world recovered from the recession or the crisis, trade deficits surged anew to reflect on the revitalization of global trade. And the US CPI eventually followed suit. One could observe that the CPI trailed trade deficits by a short interval in both accounts.
And also given that today’s situation is vastly different from the 2000-2007, where the slack in private expenditures have been replaced by monstrous government spending, the impact from the surging “twin” deficits will likely have a more meaningful impact. First, this will be reflected externally, as in the account of emerging inflation ex-US, and possibly channelled via the US dollar relative to other currencies or if not through commodities. Next, this gets manifested on the US domestic consumer price indices.
Therefore the interstice, where CPI inflation seems subdued, should be known as inflation’s “sweet spot”, perhaps where we are today.
Hence the idea that slow inflation today equals slow inflation tomorrow predicated on the money multiplier and an impaired credit process, seems to grossly underestimate on the repercussions of inflationary policies because, aside from the lagged impact from yield curve and the blatant disregard of the expanding share of the US government in the economy, such analysis discounts on the effects of exogenous forces, particularly the US dollar’s role as chief financier of global trade, and the underlying transmission mechanism from external ‘inflation’, such as competitive devaluations, impact on nations with pegged currencies-a core to periphery phenomenon. This is, aside from, misconstruing money’s role as having neutral effect on the economy.
In other words, markets and economic trends will depend on the directions of ensuing policy actions, by major economies most especially the US, to ‘reflate’ the system.
And given that Fed Chairman Ben Bernanke was again shown as seemingly in a cautious stance about the “halting” pace of economic recovery for the US from which he reassured Congress of an extended regime of low interest rates and where in addition to the apparent mounting clamour of adopting a philosopher’s stone as mainstream policy, as discussed last week[7], more professional entities seem to be joining the chorus for extended inflationism, such as the latest joint project by Goldman Sachs [Economists Jan Hatzius] Deutsche Bank [Peter Hooper], Columbia University [Frederic Mishkin], New York University [Kermit Schoenholtz] and Princeton University [Mark Watson] who arrived at the conclusion that current conditions remain tight despite the Fed’s efforts.
We don’t need to actually wish for it, but evidently, the pronounced lobbying to justify more inflationism is likely to be music in the ears for the current crops of political and technocratic overseers.
So the question of “where is inflation?”, should be substituted with the opposite, given the limited and sporadic accounts of ‘deflation statistics’, the question should be “Where is Deflation?”
As markets haven’t been collapsing and as the world have elicited signs of rising incidences of inflation, the onus of proof, is on them.
[1] coins, currency, checkable deposits demand deposits and travellers checks from wikipedia.org
[2] “The government and the Reichsbank both believe that monetary troubles arise from an unfavorable balance of payments, from speculation and from unpatriotic behavior of the capitalist class. They therefore attempt to fight the menace of depreciation of the Reichsmark by controlling dealings in foreign currency and by confiscating German holdings of foreign assets. They do not understand that the only safeguard against the fall of a currency's value is a policy of rigid restriction. But though the government and the professors have learned nothing, the people have. When the war inflation came nobody in Germany understood what a change in the value of the money unit meant. The business-man and the worker both believed that a rising income in Marks was a real rise of income. They continued to reckon in Marks without any regard to its falling value. The rise of commodity prices they attributed to the scarcity of goods due to the blockade. When the government issued additional notes it could buy with these notes commodities and pay salaries because there was a time lag between this issue and the corresponding rise of prices. The public was ready to accept notes and to keep them because they had not yet realized that they were constantly losing purchasing power.” Ludwig von Mises, The Great German Inflation, Money, Method, and the Market Process ch 7
Money, Method, and the Market Process
[3] See Wikipedia.org, Inflation in the Weimar Republic
[4] See previous post, It’s Not Deleveraging But Inflationism, Stupid!
[5] Murray N. Rothbard, Chapter 12—The Economics of Violent Intervention in the Market, Man Economy and the State
[6] See our previous discussion, What Has Pavlov’s Dogs And Posttraumatic Stress Got To Do With The Current Market Weakness?
[7] See Why The Hike In The Fed’s Discount Rate Is Another Policy Bluff