Controlled Inflation

American consumers are not only feeling good.  They are feeling great. They are borrowing money – and spending it – like tomorrow will never come.

 

After an extended period of indulging in excessive moderation (left), the US consumer makes his innermost wishes known (right). [PT]

 

On Monday the Federal Reserve released its latest report of consumer credit outstanding.  According to the Fed’s bean counters, U.S. consumers racked up $28 billion in new credit card debt and in new student, auto, and other non-mortgage loans in November. This amounted to an 8.8 percent increase in consumer borrowing.  It also ran total outstanding consumer debt up to $3.83 trillion.

 

US non-mortgage consumer debt – this exercise in admirable restraint seems to have served as a template for corporations and the government. [PT] – click to enlarge.

 

Perhaps this consumer spending binge will finally propel price inflation, as measured by the personal consumption expenditure (PCE) deflator, up to the Fed’s elusive 2 percent target.  Academic economists and central planners consider 2 percent price inflation to be the sweet spot for attaining economic heaven on earth.  We have some reservations.

Controlled inflation, or what is sometimes called financial repression, is what the Fed is after.  Because controlled inflation is the grease that keeps the gears of the debt based monetary system turning.  You see, through controlled inflation, and the subsequent slow erosion of debt burdens, borrowers can make good on their debts with dollars of diminished value.

And, of course, the biggest debtor of all is the federal government.  Controlled inflation benefits Washington more than anyone else.  The government can borrow massive amounts of money and inflate its debts away.  Yet this isn’t without consequences…

 

Binges wherever one looks…  [PT]

 

Disaster in the Making

Remember, a Treasury bill – a debt based asset – does not represent goods produced.  It is merely a claim on future production.  The interest that a Treasury bill yields is paid with taxes drawn from the labors of citizens.

Creditors are certainly aware of the inflationary character of government deficits.  They know that if the Fed loses its handle on this controlled inflation scheme, and yields abruptly spike upward, their Treasury holdings will rapidly depreciate in value.

Nonetheless, creditors prefer controlled inflation with the risk of uncontrolled inflation to the alternative of deflation.  Because in a debt based fiat money system, deflation results in unpaid debts and outright defaults.  This is why ever increasing levels of debt are needed – or the financial system breaks down.

As an aside, in a stable money system, like the international gold standard of the late 19th century, in which economic growth is financed through savings and accumulated capital as opposed to debt, deflation is a welcome byproduct of capitalism.  Cheaper prices for goods and services benefit consumers without the risk of cascading defaults.

So, will the Fed succeed in attaining the miracle of 2 percent controlled inflation?  We don’t know, and we’d much prefer a stable money system.  But we do know these sorts of schemes rarely go according to plan.  We expect the present monetary experiment will ultimately end in disaster. Here is why…

 

The purchasing power of the US dollar since the founding of the Fed. This chart looks like the reverse of a bitcoin chart and certainly suggests that the Fed is quite adept at inflating the value of the money it issues into oblivion. This is what essentially happens when one permits self-anointed “inflation fighters” to centrally plan money. It is a miracle that the economy has actually managed to generate fairly decent real growth over most of this lengthy period of monetary debauchery… it shows that even a severely hampered market economy is quite powerful.  [PT] – click to enlarge.

 

As the Controlled Inflation Scheme Rolls On

“I was eating a lot of Domino’s Pizza before my heart attack,” explained our neighbor in all seriousness, not long after suffering a myocardial infarction.  “Now, I eat Papa John’s.”

Was Domino’s Pizza the cause of our neighbor’s heart problem?  Maybe.  Maybe not.  But it’s doubtful that Papa John’s Pizza is the solution.

The point is, the human animal has a difficult time discerning a simple cause and effect relationship. When it comes to understanding multifaceted non-linear relationships humans don’t stand a chance.

Complex systems, incrementally built up over time, eventually hit a tipping point.  Seemingly out of nowhere they go haywire.  Thoughtful consideration and deliberate action can’t stop it.  “Men made it,” said John Steinbeck in reference to big banks.  “But they can’t control it.”

 

Not as simple as it looks… [PT]

 

The early Wednesday morning scuttlebutt from Bloomberg was that Beijing may be halting purchases of U.S. Treasuries.  A decade ago this would have caused a significant market freak out.  Presently, such a gloomy prospect no longer matters.

Within hours of China’s presumed dismissal of U.S. Treasuries, the Treasury Department auctioned $20 billion of 10-year notes, with bids exceeding the amount offered by 2.69 times.  Investors can’t seem to get enough of these claims on future production.

Then yesterday, not long after China’s foreign exchange regulator called the prior day’s story “fake”, 30-year notes sold out like boysenberry funnel cakes at the county fair.  In fact, at a yield of 2.867 percent, the $12 billion debt offering posted the largest demand of a 30-year auction, relative to its size, in over three years.

 

Lettuce give thanks to the comrades at the PBoC… [PT]

 

And so it goes.  The controlled inflation scheme rolls on. Still, where there is smoke there is usually fire.  China’s call to halt purchases of U.S. Treasuries may be fake news today.  Tomorrow, it could be as real as it gets.

 

Growth in Chinese forex reserves definitely isn’t what it used to be, irrespective of what anyone says about China’s intentions. [PT] – click to enlarge.

 

Charts by St. Louis Fed, Tradingeconomics

 

Chart and image captions by PT

 

MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “As the Controlled Inflation Scheme Rolls On”

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • How the Fed Robs You of Your Life
      Fiat Currency Rankings - From Bad to Worse Today, as we step into the New Year, we reach down to turn over a new leaf.  We want to make a fresh start.  We want to leave 2019’s bugaboos behind. But, alas, lying beneath the fallen leaf, like rotting food waste, is last year’s fake money.  We can’t escape it.  But we refuse to believe in its permanence.   This is what “monetary stability in the Fed-administered fiat money regime looks like: in the year the Fed was...
  • Wealth Consumption vs. Growth - Precious Metals Supply and Demand
      GDP – A Poor Measure of “Growth” Last week the prices of the metals rose $35 and $0.82. But, then, the price of a basket of the 500 biggest stocks rose 62. The price of a barrel of oil rose $1.63. Even the euro went up a smidgen. One thing that did not go up was bitcoin. Another was the much-hated asset in the longest bull market. We refer to the US Treasury.   BofA Merrill Lynch high yield master II option-adjusted spread: on Dec. 23 it tightened to the  lowest level...
  • Geopolitical Shocks and Financial Markets
      Involuntary Early Retirement of a Middle Eastern General The procession of news through the week – namely that chronicling the aftermath of the targeted drone strike and killing of Iranian General Qasem Soleimani – advanced with an agreeable flow.  The reports at the start of the week were that Orange Man Bad had spun up a Middle Eastern mob of whirling dervishes beyond recall. World War III was imminent.   The recently expired general, when he was still among the quick...

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!