Monetary Inflation is Our Future

The Daily Reckoning ^ | 26 March 2006 | Puru Saxena

[Lorianne]

Hong Kong, China Last week, Mr. Bernanke announced that the Federal Reserve would buy $300 billion worth of U.S. Treasuries and another $700 billion worth of government-agency mortgage debt. In order to finance these purchases, the Federal Reserve would simply create this money out of thin air.

It is worth noting, that the Federal Reserve has already dropped the Fed funds rate to a historically low range of 0-0.25% and now it is desperately trying to use other unconventional methods (quantitative easing) to stimulate the economy. In my view, this latest development of the Federal Reserve monetizing debt is inflationary and confirmation that the Federal Reserve wants to debase the U.S. dollar. It is worth noting that the total debt in the United States now exceeds $60 trillion, and its economy is around $14 trillion. So, the United States is already bankrupt, and the only way it can ever hope to repay this gigantic sum is through monetary inflation and debasement.

[sickoflibs]

The other scenario is that other countries drop their dollars once some inflation starts and the fed has to contract money supply to combat it, raising interest rates.

BTW: Thanks for your opinion. No one has a crystal ball.

[Pelham]

” The other scenario is that other countries drop their dollars once some inflation starts and the fed has to contract money supply to combat it, raising interest rates”

Yes, that’s what the Fed will try to do when inflation shows up. They will sell their stock of Treasuries, and maybe even the new “Fed Bond” that they have proposed, in order to soak up the massive amount of dollars now being issued.

One other item that is holding down inflation is that “the velocity of money” is currently very low. Everyone is holding on to the money they have. If this psychology changes and the velocity of money gets high, then we could easily see the inflation you suspect is due us.

[sickoflibs]

RE “Yes, that’s what the Fed will try to do when inflation shows up. They will sell their stock of Treasuries, and maybe even the new “Fed Bond” that they have proposed, in order to soak up the massive amount of dollars now being issued.”

This was Schiff on 3/19/09 and 1970s was the example of waiting too long:

"Because the Fed has started down this road of monetizing debt it’s sending a message to holders of bonds around the world that they better sell now or lose purchasing power if they hold these bonds to maturity. People around the world, individuals and foreign central banks are going to rush to hit the Fed big trying to sell theirs(which would raise interest rates.). The Fed thinks they will buy 300B in treasuries. But they will be overwhelmed with trillions of treasuries offered for sale. As the dollar really starts to lose value and inflation starts to accelerate and the Fed has to monetize more debt there will be a run on our currency and bonds. The only way the fed can stop the collapse is to aggressively raise interest rates. How are they going to that? Rates are at zero. We’re too over-leveraged as it is. The more debt we accumulate the harder it’s going to be and the further out of control inflation gets, the higher rates will have to go. What if they don’t have the political courage to reign in the dollar, as they don’t have it now? “

Peter Schiff Vlog Report (Inflationary Depression coming=Obama Hell)

[Pelham]

I think deflation is going to catch many people by surprise. It’s a very rare monetary phenomenon, but we have the right ingredients in place for it. Without huge quantities of dubious loans it wouldn’t happen, but this time we have them in unbelievable numbers.

The psychology of the crowd has taken a severe hit- I’m not sure how soon people will get back to the carefree, spendthrift attitude that inflation feeds upon. Some will depend upon how long this downturn lasts - the longer it lingers, the more that unemployment rises, the more lasting will be the propensity to save. And saving keeps that monetary velocity nice and low.

[Pelham]

I’d like to see higher interest rates. I don’t think the ZIRP, the zero interest rate policy, is going to work anyway, and in the meantime it is punishing savers who didn’t contribute to the bubble.

Here’s to the Bond Vigilantes! May they beat the hell out of the Fed’s game of flooding the system with new money!

[April Lexington]

Thanks for the clarification. I suspect German public unrest in a wobbly Wiemar Republic with communist and royalist factions fighting in the streets had some bearing on the government wanting GDP to rise. In any event, the economy was in shambles and the zillions of Marks in the system created the hyper-inflation. They did cheat the debt holders, though!

[April Lexington]

Coins will be better than cash. The base metal has some industrial value and one could expect that 4 quarters would be more valuable than a $1 Federal Reserve Note. Gold coins are tricky because it will be impossible to make change. Likewise, keep singles and fives. The $100 bill has the same problem with making change. Hope this helps. Better yet, hope you won;t have to worry about this problem.

[Toddsterpatriot]

It is worth noting that the total debt in the United States now exceeds $60 trillion, and its economy is around $14 trillion. So, the United States is already bankrupt

I bought a house and suddenly my debt was higher than my income. And I wasn't bankrupt.

This idiot should write about something he understands, because this ain't it.

[sickoflibs]

HERE! HERE! You get the idea

It’s not just democrats and Obama. Its the public and the MSM and even many at FNC. Its so called conservatives that claim debt is OK under republicans. America expects Washington to be an endless Santa Claus and the govermnent, including wars, to be free. Blame both party’s. Country wants high wages, cheap high tech goods, low (hidden) taxes , a strict mommy giving us an allowance.

This is not something I like saying, but it may take total economic collapse under democrats to cure this country. It’s Schiff logic but he is right. There is no way out. 1970s disaster, Johnson, Nixon , Ford and Carter ended with stagflation and Reagan.

[sickoflibs]

RE “I think deflation is going to catch many people by surprise”

Thats an understatement. Me too!

[sickoflibs]

RE :”I think deflation is going to catch many people by surprise. “

Another thing that Schiff is talking about, that resonates is that while unemployment is rising, wages are falling (pay cuts) many prices and cost of living is still rising. Food, energy (except gasoline) is still rising. Schiff said the CPI was 0.4% for the month. Remember how prices of everything was supposed to go up with oil prices? And many prices went up? But they are not coming down now.

Government deficit spending with the printed money is keeping that from happening, but if you dont have a government(or contract) job. You are screwed. Your income is dropping while many prices are slowly rising.

[GOPJ]

bttt

[Camel Joe]

In their minds the money supply is equal to currency in circulation plus available credit. Since there is little credit available the money theorists conclude that you can and should print money to make up for the lack of credit. Seems logical on paper but has proved in the past to be impossible to determine when you should take money back out of circulation in time to head off the inflation. Keynes theory was followed by Italy in the thirties along with Germany and look where that got them. To further exacerbate the problem is that Gub’ment is spending the money so corruption and cronyism draws the money away from where it is needed or useful (Acorn and pet projects) rather than the laws of supply and demand. We're in for it I'm afraid so get yourself out of debt while you still can since the idjits in Washington now have control of the banking system and debt will now come with political strings attached.

[sickoflibs]

RE “Seems logical on paper but has proved in the past to be impossible to determine when you should take money back out of circulation in time to head off the inflation. “

Yup. And there are too many incentives to not cut back in time anyway, debt interest, economy slowdown. But they are just delaying the disaster and making it worse, that disaster is cutting it off later once we have inflation so we have unemployment, high interest rates and inflation all at the same time.

But these guys say, “They can just cut it back ”. Sounds like the Hannity conservatives that say we can invade and rebuild Iraq and have tax cuts and just tell the public that the country cant afford all their desired social programs. Just tell them we cant afford it. Sounds easy if you are Hannity even though his hero did the opposite. Just do it. Politically you cant have unpopular wars (and nation building) without the free butter, so you end up with lots of social spending, lots of national debt, and Obama and end of a great military power.(like England before us)

Actually the Hannity's are disingenuous because when Bush ran for re-election and didnt promise spending cuts, Hannity was still happy that position worked for GWB. It was only afterward that he claimed he was still a conservative because he disagreed with Bush social spending, but still loved Bush. I know I pick on him but so many still agree with him. Then they say “Well if the voters dont understand they are stupid“.

Sorry for the rant.

[SunkenCiv]

Last week, Mr. Bernanke announced that the Federal Reserve would buy $300 billion worth of U.S. Treasuries and another $700 billion worth of government-agency mortgage debt. In order to finance these purchases, the Federal Reserve would simply create this money out of thin air... It is worth noting that the total debt in the United States now exceeds $60 trillion, and its economy is around $14 trillion. So, the United States is already bankrupt, and the only way it can ever hope to repay this gigantic sum is through monetary inflation and debasement.

"Debasement" means "not on a 'hard money' standard". We haven't used a so-called fixed currency or so-called hard money in a very long time, and there are no productive countries which do.

The total debt of the US *gov't* isn't anything like $60 trillion.

The total value of everything in the US is in excess of $60 trillion (200 million households times $100K average value of housing yields $20 trillion just in primary dwellings, irrespective of who owns it). Even my little hovel is mortgaged for $70K, at (currently) pretty low rates, but everything made and used and owned has value, and that value exceeds the entire money supply. So, the money supply is harder now than it ever was when we still used specie (and that wasn't the way that it was even when it was the way that it was).

Assuming a 200 million person workforce at $25K per worker (average could be higher), that's $5,000,000,000,000 iow a $5 trillion annual total payroll. Here's a page showing a couple decades' worth of per capita income by state, and the lowest is over $30K, meaning $6 trillion annual total payroll is a conservative estimate. Using the ballpark rate for $30K income, federal personal income taxes would be at least $720 billion, and obviously will be much higher than that.

[SunkenCiv]

Oh, the US per capita in 2009 was $39,751. I guess I’m a slacker.

So, make that $7.9502 trillion in annual payrolls, and well over $1 trillion in personal federal income tax.