I partly made this point last week. Now here’s Marc Faber saying it well:
The Fed has been flooding the system with money. The problem is the money doesn’t flow into the system evenly. It doesn’t increase economic activity and asset prices in concert. Instead, it creates dangerous excesses in countries and asset classes. Money-printing fueled the colossal stock-market bubble of 1999-2000, when the Nasdaq more than doubled, becoming disconnected from economic reality. It fueled the housing bubble, which burst in 2008, and the commodities bubble. Now money is flowing into the high-end asset market – things like stocks, bonds, art, wine, jewelry, and luxury real estate.
Money-printing boosts the economy of the people closest to the money flow. But it doesn’t help the worker in Detroit, or the vast majority of the middle class. It leads to a widening wealth gap. The majority loses, and the minority wins.
Bold added. Faber has neglected to mention that Big Government is “closest to the flow” of anybody; money-printing is, first and foremost, a hidden tax to pay for Obama’s oh-so-ingeniously-productive(!) deficits and spending. And a regressive tax, at that. Obamunism at work!
By the way, the effect that Faber talks about is well known to Austrian School economists and other believers in sound money; it’s called the Cantillon Effect.
And if anyone wants to say it’s Bernanke doing it, not Obama, my answer is this: Yes, but Bernanke was re-appointed by Obama and is absolutely doing what Obama needs and intends.
The banks are sitting on vast reserves of quantitative easy money to loan out hither and yon. You might say that the banks are the beaver dam holding a lot of this money back from circulation.
However, the banks are stuck with a huge problem of supply and demand. They have a huge supply of money to loan, but there is a dearth of sound, credit worthy borrowers.
Sure there are lots of people who need money, have dreams that need financing, etc. But, they are not particularly credit worthy. People with long, solid credit histories are just getting by. Why would a bank take a chance on risky borrowers in this economic climate?
Businesses have cut back on inventory. Businesses are hunkered down and weathering the slow economy by cutting staff, closing marginal outlets, stripping the frills. They don’t need money for expansion, they need cash flow which comes from through the front door in pockets of consumers.
There is a “funny money” bubble and it is full of kinetic energy. When it bursts, that energy will become full blown inflation as (H.T.: Gresham’s Law) the funny money drives the good money out of circulation.
The FED has acted to keep inflation “under control.” But it has printed $85 Billion a month and bought up bonds from the US, European banks, and all other manner of junk with the money. It has, in fact, laundered it into “securities” that will come due “down the road.” Full faith and credit be damned, we are living in the age of dual currencies and “money” to be made is in the con game of passing the stuff off.
I see a lot of lending to non-creditworthy people happening in the form of mortgage refis, other mortgage modifications, the (tragic) revival of subprime lending in real estate, and the subprime lending bubbles in autos and education.
With excess reserves on their balance sheets, the banks also participate more readily in the government and corporate lending bubbles (also known as the bond market), and in the stock market. Thus, the banks supposedly have “idle, excess” reserves that they “aren’t lending” in the textbook process of money creation; but that money has huge effects in encouraging many kinds of speculation across the financial markets.
Again, recovery for the wealthy. If it isn’t what Obama wanted, then he must be a very stupid president, because it’s what he’s getting – as the natural result of his policies.
P.S. If the banks did lend to consumers and small business in the textbook process of money expansion, then we would see much more inflation in consumer prices (the CPI). (Not that we haven’t seen some of it already; but, “more”.) Since the banks aren’t, the inflation goes more into the financial markets. And that makes people feel good… if they don’t understand what’s really happening.
All this while “small banks” are disappearing from the land.
And “recovery for the wealthy” is a bad thing? I thought this blog opposed higher taxes for the wealthy, demonizing of the wealthy, and investment by the wealthy.
Yes MR – It is absolutely a bad thing, if (note IF) it comes artifically at the expense of others.
Who’s demonizing the wealthy, here? I know I’m not. Who is calling for higher taxes on them? Not me!
You seem to have some familiarity with the blog, but without understanding our ideas. Kindly permit me to enlighten you, at least as regards my ideas.
Taxation, especially ‘redistributive’ taxation, is theft. There is no good reason why the wealthy should be stolen from, or demonized.
Money-printing is also theft, of a different kind. As I’ve indicated in these posts of mine, money-printing is a regressive (and hidden) tax that steals from all productive people, including (or especially) the “working poor” and middle class. There is no good reason why the poor or the middle class should be stolen from, or demonized.
I oppose stealing from any working person – be they poor, middle class, or rich capitalists.
I favor an honest, market-based playing field for everybody – be they poor, rich or middle class. I favor letting people keep the fruits of their productive efforts – be they poor, rich or middle class. All of which requires a small government which respects individual rights (to life, liberty and property) under the Rule of Law – and sound money.
Obama’s racket is Big Government. Obama wants to steal from the rich to give to the poor (say, welfare programs), then steal from the poor to give to the rich (say, money-printing and “recovery for the one percent”), then steal from the rich to give to the poor (say, higher taxes on the wealthy to make it supposedly more “fair”), then steal from the poor to give to the rich (say, corporate welfare like Solyndra for Obama’s big donors, or the GM bailout which was for the union elites, or bailouts in general), and on and on.
Why does Obama want all that? Because government is the
middlemanruler, in all of it. Obama and his supporters want everyone submitting to government, government, government.But I oppose nearly all that. Because having government steal from the rich to give to the poor, and from the poor to give to the rich, and back again, and back again, all the while violating everyone’s natural rights to life, liberty and property – is IMMORAL, as well as insanely inefficient.
To say the same thing, positively: A laissez-faire government which has police, courts and military to impartially protect people’s rights to life, liberty and property – and which leaves people alone as much as possible, after that – is both an efficient and genuinely moral way to run society. Because then people have freedom (including the freedom to help each other if they want to) and must rise or fall, becoming rich or poor, on their productive efforts.
Clear now?
I applaud your commitment to libertarianism- it goes nowhere in the US. All Democrats and Republicans tax and re-distribute wealth to suit their purposes. To blame Obama, or the Democrats, or Big Government for such a systemic fundamental is ideological claptrap. Small laissez-faire government was fine for Hong Kong and Singapore (even if not so fine for the former colonized peoples), but the concept no longer exists there. And the US is neither place.
I agree “money-printing” is a “beggar-thy-neighbor” proposition. We have a fiat currency. Experiment with a return to a precious metal-based money, reform or disband the Federal Reserve, create a national bank, get rid of depository insurance…they’re all the same. Separate the commercial and investment banking sectors as Glass-Steagall once did, and there’s a real reform (what’s old is new again). Tinkering with the money supply creates asset bubbles and irrational exuberance (such an oracle, Mr. Greenspan), though the intent may be to whip inflation now.
You, like many persons who comment here, assume that I care what you think of Pres. Obama. Let me disabuse you of that curious notion: he is merely another in a long line of US presidents, whose executive powers end every four years. What I do care about are Congress members, who are re-elected for multiple terms of a few decades, and whose powers are limited only by rulings of courts and repeals.
If I wanted to re-watch “Freedom to Choose,” I could waste my time on YouTube, but the thoughts presented on this blog are so novel when expressed with such fiery conviction.
…while in your next sentence, dismissing as “ideological claptrap” my critique of Big Government which flows from that very commitment. And then ignoring the historical fact that the U.S. is the country which virtually invented small government and thrived on it (as no country in history has thriven before) for the better part of 140 years.
When freedom has friends like you, MR, its enemies smile. You sound annoyed that someone would dare call for freedom in this day and age.
“money-printing is, first and foremost, a hidden tax to pay for Obama’s oh-so-ingeniously-productive(!) deficits and spending… the effect … is well known to Austrian School economists and other believers in sound money; it’s called the Cantillon Effect.”
ILC, again, your position makes sense, as long as you hold that a necessary effect of printing money is inflation. Normally and in the long run, it is, given the assumption of there being no money illusion; but, in this case, there is a lot of evidence that posits that we are in a liquidity trap–and as such, inflation is not an issue since banks, corporations, and individuals are holding extra liquidity because of worries concerning the viability of the current recovery. This is something that the Cantillion entry at the vM website does not talk about. In the long run–your position makes sense, but in the medium run–and we have had YEARS of these monetary flows, we do not see the hyperinflation, or even the inflation that one would expect, if you were right. Once we get out of the liquidity trap, I expect that things will follow the course that you suggest–but then, I would also expect the Fed to tighten liquidity and raise interest rates as well, when that happens.
ILoveCapitalism,
“the historical fact that the U.S. is the country which virtually invented small government”
In Western Europe, I suspect Switzerland might have the US beat on that “small is beautiful” score. When California set up its constitution, its framers (such as they were) looked closely at the Swiss cantonal and federalized systems as sources for its own government. I’m sure you scorn California, though I mention the influence only as representative of that state’s own intended small and democratic framework.
It would be boring of me to mention the small democracies of the ancient Greek city-states.
Yes, you as a libertarian hate the Income Tax, else those blissful 140 years of these United States would never have ended. Pres. Jefferson’s land grab, that little US defeat in 1812, the trumped up Mexican Wars under Pres. Polk, and the whole Triumph of Manifest Destiny have little correlation to the concomitant increasing of land mass and government size in your US History 101. Nor does the discovery of gold in California, which enriched the US beyond measure, and built the factories and railroads and stock markets of the Eastern Seaboard.
The Revenue Act of 1916 had a little something to do with those railroads, so follow the money. One hundred years ago, my grandfather agreed with you (but he had a little something to do with a couple of railroads, so I excuse him). Still, one hundred years later, I read the comments of some on this blog regarding the IRS, taxes, and the like- the crackpots you shall always have with you. SCOTUS upheld both the Revenue Act and Obamacare, so enjoy the frivolity. Don’t like that one bit? Try to remember which branch of the US Federal Government has control over taxation. Then take action. Don’t expect to starve the beast for too long, for it is always the way that the small is overtaken by the big, no matter what St. Ronald of the Golden Screen said.
I don’t hold that. I hold, rather, that money-printing *is* inflation.
I work with a different definition of inflation, than you. You define inflation the Keynesian way, as “Consumer price increases, and insofar as such increases may be measured/acknowledged by the government (CPI).” I don’t.
I define inflation the Austrian way, as “Dilution of the value of money, by printing more of it.” Consumer price increases may then be one symptom to follow. Or we may see other symptoms hit first, such as what we are seeing today: Asset price increases, a variety of bubbles in the different financial asset markets. (^^and remember that so-called low interest rates are, by definition, HIGH bond prices: a bubble in the bond markets)
Yet another symptom of such inflation may be the destruction or erosion of real capital, with consequent decline of real production and real living standards. But in any event, what we call “the inflation rate” ought to be the measured increase in money supply (and preferably the Austrian measures of money supply: TMS or TMS-2). Not price index increases.
As to liquidity traps: Again, they are mythical in the sense that the term “liquidity trap” in no way represents or illumines their actual causes. One may as well call a sunburn cancer, or cancer sunburn.
The cause of the economy’s malaise is (and, is always) the inhibition of real capital, production, entrepreneurship and job creation, by government. It was the same in the Great Depression.
In today’s situation, we have: Obamacare which demonstrably crushes job-creation; vast regulation increases not limited to Dodd-Frank; the bailouts which have violated the social contract and preserved the incompetent at the expense of the competent; and other causes. Not least is, again, the Fed’s money printing which, again, is a hidden tax on all productive people and which erodes the economy’s real capital, diverting the economic value of same into financial speculation, or into consumption in the form of welfare or bailouts, etc.
Yeah…and why? Why are they worried? Why is the recovery so fragile? See the paragraph immediately above. “Liquidity trap” is not remotely descriptive; doesn’t begin to cover it.
But the Fed can’t. All the talk from Fed officials of them having an exit strategy, is just posturing – to keep the game going awhile longer (see below).
I’ve been thinking of writing a full-length post on this (and I may yet). It would be called, “Obama’s Debt Bomb”. Because our national debt has been increased to $16-17 trillion, the government cannot afford even a slight rise in interest rates. Even a 1-2% point rise would bust the government budget, on debt-servicing costs.
Also, because the Fed has increased its duration (i.e., bought so many long-term bonds), the Fed itself can’t afford it: Rising interest rates would cause huge losses on the Fed’s balance sheet and income statement, turning the Fed into a deficit center that the Treasury must bail out, and so forcing still more government spending and creation of base money.
There will be no exit… Except hyperinflation. All hyperinflations follow a pattern.
1) Deficit – The government racks up huge debts, which must be monetized (i.e., bought by the central bank).
2) Disbelief – The central bank creates a lot of new base money (in bailing out the government). People can hardly believe it. But people are thrilled to be so cash-rich, so they don’t question it.
3) More disbelief – As people sit on their hoards of cash, NOT much consumer price inflation comes. So everyone figures the central bank is getting away with it.
4) Abuse – The central bank itself figures that it is getting away with it, so it creates yet more base money. It makes noises about the increases being reversible, i.e., only temporary. The pretense is essential to postponing the next stage as long as possible, which is…
5) Crash – People suddenly realize that the increases are permanent, because the central bank can never reverse, and indeed will print continually more. So they abandon the currency. Its purchasing power spirals to zero (or equivalently, prices go sky high).
The first four stages overlap. We are at stage 3-4. Would I care to predict when stage 5 hits? Not very closely, no. But it’s coming. Could hit this year, or anytime in the next 5 years. Most likely, will hit when China’s new trade-financing plans mature and the “petrodollar” is overthrown – whenever that is.
If I’m wrong, and the Fed does raise interest rates: The result will be rapid crashes across the financial markets. And that would be a good thing in the long run (a painful part of the healing process, like surgery) because it would re-connect the markets to reality (real pricing, real capital formation from then on, etc.). But I’m predicting that the Fed won’t, because Obama won’t stand for it.
Obama is spending a lot, but there is also–or, at the very least, has been–a recession, and the money printing is largely a stimulative policy, not a debt-paying policy. And the debt would also be large even if Obama didn’t embark on a liberal spending policy; Obama only increased the debt (greatly).
I disagree. I mean, OK, that’s what conventional economics *says* it is. But conventional economics has long since gone off the rails of logic and common sense.
Money printing is actually an economic sedative; something that’s been inhibiting real recovery. As I said at #11:
Note that, even aside from government direct spending on bailouts, the money printing is itself a bailout of various bloated, inefficient enterprises that should have been allowed to collapse in the recession.
The economic activity it stimulates is ‘false’ activity, that is, activity that does not make any economic sense except in a context of continued (and in fact, increasing) money printing.
And the false activity crowds out real activity, that is, activity which would produce real economic gains even in the absence of money printing. So, no real recovery: no rise in real living standards, few (or no) real job gains, etc.
Money printing – and artificially-low interest rates; the two do largely go together – induce false economic booms. A.k.a. bubbles, or “the bubble economy”. The economy becomes clogged with deadwood.
Recessions are the time when the deadwood is cleared.
We can’t have a real recovery today, precisely ***because*** we keep trying to prevent/postpone our recessions with so-called “stimulus” policies. Just like a drug addiction, the bad effects of so-called “stimulus” policies are cumulative, and we’ve been applying them for decades now.
But that’s exactly the point. An $11 trillion debt is easier to deal with than a $17 trillion debt.
If the debt were only $11 trillion, then maybe we could normalize interest rates; to say it another way, maybe the Fed could exit. Obama made that impossible, having taken us in the wrong direction.