I recently posted an article for GoldMoney showing how US True Money Supply (TMS) appeared to be growing at a hyperbolic rate, and that gold was also on a hyperbolic course. The difference between hyperbolic and exponential is a hyperbola’s rate of growth increases with time, while exponential growth does not. Hyperbolic growth in the quantity of money ends with hyperinflation, while exponential growth can go on for ever. Both TMS and the dollar price of gold are pointing to a hyperinflationary outcome. This article explains why this might be so.
There are five apocalyptic engines pushing the growth in US money supply: they are the government’s budget deficit, its debt trap, the financial condition of the banks, the delusion of Keynesian solutions, and lastly simple compounding arithmetic.
- The US government collects only 55c in taxes for every dollar spent. It is relying on economic recovery to reduce welfare payments and increase tax revenue to close the gap. This prospect is receding and establishment economists advise against cutting government spending.
- The US government’s debt trap is concealed by the exceptionally low interest cost of funding. The only reason this cost is not higher is the Fed maintains a zero interest rate policy. However, as surely as night follows day, price inflation will start rising as monetary inflation feeds through, forcing the Fed to allow interest rates to rise long before any economic recovery occurs. The rise in interest costs will escalate the budget deficit, which will be financed, directly or indirectly by further monetary expansion.
- The banks’ balance sheets are considerably weaker than stated, because of unrealised losses on assets, loan collateral and write-downs on their own debt. Real estate collateral write-downs alone probably exceed bank equity of $1,400bn. On an honest analysis the US commercial banks are collectively bankrupt. To simply survive the banks have no alternative other than to reduce loan exposure while requiring continuing monetary support from the Fed.
- Keynesian economists, aware of the banks’ difficulties are terrified of bank credit contraction. For this reason, the macroeconomic establishment strongly promotes the expansion of narrow money to buy off a deflationary depression.
- As the purchasing power of the dollar falls, the result of past monetary expansion, yet more dollars have to be issued to cover increased government costs. Past inflation becomes a compounding factor behind price rises.
Essentially, money will be printed at an accelerating rate to buy time rather than face the three realities of government default, an over-indebted private sector, and a bankrupt banking system. The Keynesians are belatedly aware of the dangers and see no alternative to printing as much money as is required to defer these problems. The monetarists in the central banks are hesitant, torn between Keynesian fears of outright deflation and worries about the rate of monetary expansion so far.
However, the history of monetary inflation confirms that once it enters a hyperbolic phase, it is almost impossible to stop. Armchair critics have derided the stupidity of central banks and economists in past hyperinflations, such as in Weimar Germany, Argentina and Zimbabwe. The truth is that when hyperinflation has become visible at the price level, it has already gone past the point of no return at the monetary level.
This article was previously published at GoldMoney.com.
Please could you state the underlying figures and arithmetic for how “The US government collects only 55c in taxes for every dollar spent” including which year this is for?
Thankyou.
Dan
Dan
Well spotted! I missed the typo: it should have read 75c (deficit was $1.3tr on $3.6tr in 2011). It doesn’t change the argument which was based on 75c.
How can anyone not trust fiat currencies?
After all the Federal Reserve hand out trillions of Dollars (which it creates from nothing). Very nice for the people who get the handouts.
The Bank of England is creating money as fast as they can (thus destroying any point in saving – because of the low interest rate policy).
And the European Central Bank (and the Swiss “minime” Central Bank) has been denying it will hand out (newly created money – created from nothing) for years – whilst doing exactly that.
Just last week it handed out almost 500 billion Euros in sweetheart loans to the banks.
I am sure this fiat money system works perfectly (well it certainly does for connected people).
No chance of a collapse here – none at all.
But, just as a personal sillyness, I think I will get as much physical gold as possible.
Hello Alasdair,
Nice article, but I have a couple of issues with your argumentation.
Dollars are not just printed the same way Lincoln Greenbacks were. Dollars are bank liabilities and an asset is needed to create them. Those assets are normally debt assets (bonds, mortgages, commercial paper, etc).
Since private agents and private banks are not willing to borrow / lend, this area will be a deflationary black hole. No creation of new dollars here, destruction indeed.
Only the Government and the Fed are left to create new credit / dollars.
(1) Is the Fed going to issue dollars by itself, buying S&P500 futures, for example? Is not impossible, but I doubt it.
(2) If the government gets indebted ad infinitum, wouldn´t the bond market plummet as it did in Greece?
(3) If (2) happens, would the Fed impersonate the full bond market to hold its price? Why would the Fed buy something that the market rejects? Would the Fed destroy the dollar, which is their main business? I think that if they have to choose, they´ll choose deflation, as the did in the 30´s.
If this were a fiat currency system I agree that hyperinflation is around the corner. But in a credit currency system, which is the one we have, deflation will run its course first. And probably after that, hyperinflation. Regarding the difference between fiat and credit currency, find here a brief post: http://eleconomistaprudente.com/?p=574
Regards,
Manuel.
The Federal Reserve system has already vastly increased the monetary base (although, yes, the modern definition of the “monetary base” does not just include notes and coins).
Indeed the Fed is (directly and indirectly) the biggest buyer of government debt – which it buys with money it creates (creates from NOTHING).
We do not need to speculate on what the Fed “might” do – as the Fed has ALREADY DONE IT.
The ECB has just handed out almost 500 billion in newly created Euros (on top of all its previous antics). And the Swiss Central Bank is acting (as I said) as a “minime” to the European Central Bank.
And the Bank of England has also vastly increased the monetary base.
“But they can not”.
THEY ALREADY HAVE.
Exactly. And what they have done is monetizing debt, not printing currency out of nothing. So, I don´t see how we should expect they are going to do something different.
So, if we agree that the mechanism is not going to change, whose new debt is going to be monetized?
what they have done is monetizing debt, not printing currency out of nothing
The U.S. government decides it needs, oh, say, $1 billion to pay the bills this week. It issues $1 billion in bonds (which are just pieces of paper at this point). The Fed creates $1 billion and buys the bonds.
Yet you insist they’re “not printing currency out of nothing.” That is nonsensical.
I don´t see how the dollars created by the Fed are different from government bonds, or a private promissory note or a mortgage. If actual dollars are created out of nothing, then gold backed bills also were, since they are also just paper and ink or account entries. A different thing is how much we like or dislike what is in the asset side of that liability.
Government Bonds are also liabilities, but they are far from being nothing. Like it or not (I profoundly dislike it) they are backed by the taxation power of world´s biggest economy. Ask any taxpayer if delivering a big stake of their effort and work to the Government is nothing.
The market also considers that U.S. Bonds are still valuable. That´s why deflation hasn´t developed its potential. If the market rejects U.S. Debt, which I believe it will happen, Bernanke and the Fed are not going to be able to sustain the whole market by themselves, and even before trying, I think they will refuse to do it.
As Craig points out “monetizing the debt” is the same thing as “creating Dollars from nothing”. The Federal Reserve buys the debt – and it also (because it is incredibly corrupt) it lends out (freshly created money) to people like Goldman Sachs and J.P. Morgan Chase to buy the debt.
Why? Because the rate of interest that the government gives to Goldman Sacks and J.P. Morgan Chase (and ….) is higher than the rate of interest that the Federal Reserve charges these banks for the money (the money created out of nothing) that it lends them. So they make a profit.
And many of the people at the Federal Reserve (in New York and so on) just happen to have worked for and have other connections with…….
Of course Manuel Palabieja understands all this (I am not saying you do not).
However, “Bernanke and the Fed are not going to be able to sustain the whole market by themselves, and even berfore trying, I think they will refust to do it”.
As every major bank (and other such) in the United States is totally dependent on the Federal Reserve – why should they refuse to do anything the Fed tells them to do? Would that not be suicide?
As for dear Ben – he has made it clear (in many writings) that he would litterally throw money from the roof tops before he let deflation happen.
There is only one circumstance that MIGHT lead him to do it – if a Republican won in November.
B.B. might be told (by various powerful people) that the best way to discredit the new Administation would be to create a stock market and banking collapse – and he could do that (do that in a hours) just by cutting off the supply of new credit/money.
The financial system is basically like a junkie – without endless “fixes” the markets fall apart (the cold sweats, the screaming, everything).