Here is the value of the US Gold Reserves in Dollars based on the market price versus the St. Louis Fed's Adjusted Monetary Base.
This chart is from goldchartsrus.com.
"As it was in the days of Noah, so shall it be with the coming of the Son of man. In the days before the flood, they were eating and drinking, marrying and being given in marriage, even to that very day in which Noah entered into the ark. They did not know what was happening, even as the flood came and swept them all away." Matthew 24:37-39
"How could I have done this? I was making a lot of money. I didn’t need the money. Am I a flawed character?
I realized from a very early stage that the financial market is a wholly rigged job. There’s no chance that investors have in this market....It’s unbelievable. Goldman-- no one has any criminal convictions. The whole new regulatory reform is a joke."
Bernie Madoff
"Unfettered capitalism is a revolutionary force that consumes greater and greater numbers of human lives, until it finally consumes itself."
Chris Hedges
"I preyed upon the weak, the harmless and the unsuspecting. This lesson I was taught by others: might makes right."
Carl Panzram, psychopath, serial killer
“Trickle-down theory represents the less than elegant metaphor that if one feeds the horse enough oats, some will pass through to the road for the sparrows.”There wasn't a Fed database entry for the income of the one percent, but if there had been it would be doing very well indeed.
― John Kenneth Galbraith
"Significant changes in the growth rate of money supply, even small ones, impact the financial markets first. Then, they impact changes in the real economy, usually in six to nine months, but in a range of three to 18 months. Usually in about two years in the US, they correlate with changes in the rate of inflation or deflation.This is much more than a liquidity trap. The financial system is broken. It is corrupted and distorted, and it is acting like a weight on the real economy. And the banking system has been broken since 1990's. Perhaps broken is not quite the right word since it implies some accident and not a willful campaign of intent.
The leads are long and variable, though the more inflation a society has experienced, history shows, the shorter the time lead will be between a change in money supply growth and the subsequent change in inflation."
Milton Friedman
"I see some commenters reacting to the failure of major inflation to break out by insisting that inflation is defined as an increase in the monetary base — that is, the bank reserves plus currency that are what increases when the Fed “prints money”. As it happens, that’s wrong: very old dictionaries defined inflation as a rise in money and/or credit, but the modern usage is, of course, a rise in prices.
But that’s really a side issue. Nobody would care about the size of the monetary base except for the belief that increasing the base leads to a rise in prices. That’s not a question of definitions, it’s a question of your model of the economy."
"Here are the data — I’ve included commodity prices (IMF index) as well as consumer prices for the people who believe that the BLS is hiding true inflation (which it isn’t)"Let's see. The BLS is not distorting inflation measures because the model is working, and we know the model is working because of the BLS inflation measures. That seems a little shaky to me. Especially in light of the other data that shows that certain price sensitive assets are rising in price, and sharply, in response to negative real interest rates, as some other models and theories would hold.
"Economic models are no more, or less, than potentially illuminating abstractions...The belief that models are not just useful tools but also are capable of yielding comprehensive and universal descriptions of the world has blinded its proponents to realities that have been staring them in the face. That blindness was an element in our present crisis, and conditions our still ineffectual responses.and the associated essay of mine, The Seduction of Science in the Service of Power
Economists – in government agencies as well as universities – were obsessively playing Grand Theft Auto while the world around them was falling apart."
John Kay, An Essay on the State of Economics
"Confidence...thrives on honesty, on honor, on the sacredness of obligations, on faithful protection and on unselfish performance. Without them it cannot live."
October 7, 2011, 3:15 pm
Way Off Base
By Paul Krugman
I see some commenters reacting to the failure of major inflation to break out by insisting that inflation is defined as an increase in the monetary base — that is, the bank reserves plus currency that are what increases when the Fed “prints money”. As it happens, that’s wrong: very old dictionaries defined inflation as a rise in money and/or credit, but the modern usage is, of course, a rise in prices.
But that’s really a side issue. Nobody would care about the size of the monetary base except for the belief that increasing the base leads to a rise in prices. That’s not a question of definitions, it’s a question of your model of the economy. The underlying belief of all the people accusing Ben Bernanke of doing something dastardly is that “printing money” has caused or will cause high inflation in the ordinary sense.
The thing is, of course, that the past three years — the post-Lehman era during which the Fed presided over a tripling of the monetary base — have been an excellent test of that model, which has failed with flying colors. Here are the data — I’ve included commodity prices (IMF index) as well as consumer prices for the people who believe that the BLS is hiding true inflation (which it isn’t):
A couple of notes: for the commodity prices it matters which month you start, because they dropped sharply between August and September 2008. I use the IMF index for convenience– easy to download. (Thomson Reuters I use when I just want to snatch a picture from Bloomberg). But none of this should matter: when you triple the monetary base, the resulting inflation shouldn’t be something that depends on the fine details — unless the model is completely wrong.
And the model is completely wrong. You don’t get more conclusive tests than this in economics. By contrast, the model of an economy in a liquidity trap, in which big increases in the monetary base don’t matter, comes through just fine.
And this in turn tells you something about the people pushing this stuff. They had a model; it made predictions; the predictions were utterly, totally wrong; and they have just dug in further.
"The receptivity of the masses to information is very limited, their intelligence is small, but their power of forgetting is enormous. In consequence of these facts, all effective propaganda must be limited to a very few points and must repeat these until the lowest member of the public understands what you want him to understand by your slogans...The law of selection justifies this incessant struggle, by allowing the survival of the fittest. Christianity is a rebellion against natural law, a protest against nature. Taken to its logical extreme, Christianity would mean the systematic cultivation of the human failure."
Adolf Hitler
soph·is·try (s f -str ). n. pl. soph·is·tries. 1. Plausible but fallacious argumentation. 2. A plausible but misleading or fallacious argument.
Pragmatic Capitalism
The Fed Is Not Monetizing U.S. Government Debt
By Cullen Roche
February 9, 2011
The Fed’s purchases of Treasuries continue to attract a huge amount of attention. Despite solid evidence that the program is failing to have any real fundamental economic impact, there are other worries about the program. None has been more apparent in recent weeks than the Fed’s supposed monetization of the US government’s debt. These fears of monetization are unfounded due to the various myths that are perpetually touted by the mainstream media, supposed experts on the US monetary system and even Fed officials. (Quite a collection of the mistaken, certainly not the hoi polloi and not so easily dismissed, but let's read on. I have to add though that flags get raised in my mind whenever I pick up this tone in an argument early on. - Jesse)
In an article Monday, Bloomberg reported that the Fed has been buying an exorbitant proportion of the recently issued Treasury debt:
More than 40 percent of the government bonds the Fed bought in January for its so-called quantitative easing were auctioned in the previous 90 days, up from 20 percent in December and 15 percent in November, according to Bank of America Merrill Lynch. The central bank is concentrating on newer securities as its $600 billion program depletes primary dealers’ holdings of Treasuries to the lowest since November 2009.
Why does this matter? Because it gives the appearance that the US government is directly funding itself via the Fed’s purchases. This would be nefarious if it were true and would give credence to the endless complaints about the high rate of inflation in the USA (which is currently running at a staggering 1.5%-2.25% depending on the source). Fortunately, the concerns are unfounded. (Unfortunately they are not, but read on. - Jesse)
The issuance of bonds continues to this day due to Congressional mandate. In reality, our bond market funds nothing and serves only as a reserve drain which helps the Fed maintain its overnight target interest rate. It has nothing to do with funding the government. (It would be interesting to test this theory. For example, if the US were to have a failed bond auction this year. - Jesse) When the US government wants to spend money they do not call China and ask for a line of credit. They do not count tax receipts. And they most certainly do not call the Fed to ensure that we have any money left. No, the truth is that the USA never really has nor doesn’t have any money. So the entire implication that the Fed is helping to fund US government expenditures is entirely inaccurate and anyone who implies as much is still working under the now defunct gold standard model and clearly doesn’t understand the workings of the modern monetary system.
(This is the heart of the sophistry. For the theory as it stood for many years was that market discipline and an independent Fed would take the place of the gold standard in placing some constraint on the value of the bond and the dollar. Otherwise why would the Treasury simply not create the bonds to satisfy its obligations and place them on the Fed's balance sheet? Or better yet, just issue currency and skip the interest? Because the theory is that by using interest rates as a governing mechanism and forces the debt to be placed through an open system of auction, the efficiency in valuation of the market would act as a standard and as a restraint. - Jesse)
When the US government was working under the gold standard the US Treasury would literally print up certificates to purchase gold from the gold mines. These gold bars would be delivered to the government and the Treasury would issue a check to the miner. This new money would end up at the Federal Reserve Bank in the form of deposits. This would naturally increase the money supply. An increase in the money supply is scary for obvious reasons. So, the term debt monetization has its origins in the days of the gold standard, but persists to this day despite the fact that we are no longer on a gold standard. Not surprisingly, the term is still used today despite the fact that the US government can’t monetize its debt via Fed purchases (I elaborate below).
(This description of the gold standard is regrettably cartoon-like, and completely ignores the role it played as a market force in international trade. Most of the gold volume was related to the exchange of goods in trade, and not through the purchase of new supply from miners. In a situation where a nation consumed more than it produced, the decline of its gold holdings would weaken its currency, forcing a unit devaluation vis a vis gold. And vice versa with those countries with a mercantilist bent. Since actual gold was changing hands, and a relatively modest increase is added each year to total supply, it was difficult to game the system. Monetary policy in the form of devaluation was still very possible, but a bit awkward if one used actual specie instead of certificates. But it was enforceable and transparent. I am on the record as not favoring a return to the gold standard in the US at this time, because its financial system is too unstable and corrupted. But gold and silver represent a major attraction for international trade in some manner, for the reasons outlined above. The US dollar was purported to serve this purpose as the world's reserve currency post 1971, but it has failed in the exact manner predicted by those who said it could not work because of the vagaries of human weakness and the corruptibility of policy. - Jesse)
This issue was magnified yesterday when Richard Fisher of the Dallas Fed invoked the evil “debt monetization” term in his speech:
The FOMC collectively decided in November to temporarily undertake a program to purchase U.S. Treasuries that, when added to previous policy initiatives, roughly means we will be purchasing the equivalent of all newly issued Treasury debt through June. By this action, we have run the risk of being viewed as an accomplice to Congress’ fiscal nonfeasance. To avoid that perception, we must vigilantly protect the integrity of our delicate franchise. There are limits to what we can do on the monetary front to provide the bridge financing to fiscal sanity. The head of the European Central Bank, Jean-Claude Trichet, said it best recently while speaking in Germany: “Monetary policy responsibility cannot substitute for government irresponsibility.”Fisher’s implication is that the Fed is directly helping to fund the US government’s spending. After all, if they’re buying the debt then they’re obviously funding the spending, right? Wrong. As regular readers know, the US government is never constrained in its ability to spend. Our monetary system underwent a dramatic change when Richard Nixon closed the gold window. It removed any constraint on the US government’s ability to spend. Nonetheless, the operating structure of the gold standard (issuing bonds, etc) still largely remained intact.
The entire FOMC knows the history and the ruinous fate that is meted out to countries whose central banks take to regularly monetizing government debt. Barring some unexpected shock to the economy or financial system, I think we are pushing the envelope with the current round of Treasury purchases. I would be very wary of expanding our balance sheet further; indeed, given current economic and financial conditions, it is hard for me to envision a scenario where I would not use my voting position this year to formally dissent should the FOMC recommend another tranche of monetary accommodation. And I expect I will be at the forefront of the effort to trim back our Treasury holdings and tighten policy at the earliest sign that inflationary pressures are moving beyond the commodity markets and into the general price stream. I am a veteran of the Carter administration and know how easily prices can spin out of control and how cruelly markets can exact their revenge. I would not want to relive that experience.”
(The constraint is softer, and more pernicious than when the US was on a gold standard. The constraint is now the external valuation of the bond in the generic sense, and the dollar, which is a bond of zero duration. During the Carter administration, for example, the dollar was constrained by monetary inflation, the decreasing valuation placed on the bond and dollar by the rest of the world. A gold standard acts as a hard restraint, stopping the monetary authority from debasing the currency early on. Without that constraint perception make the process non-linear. Rather than a hard stop, with a transparent and visible devaluation process, the value can erode slowly over time until it reaches a tipping point, and a more precipitous slide into a collapse. The Fed is confident they can stop this based on the Volcker experience. This remains to be seen. They have no prove of it in theory because it involves human behaviour and significant, if not critical, international exogenous variables. - Jesse)
For a brief instant, Mr. Fisher appears as though he is on the verge of understanding the system he now heavily influences as a new voting member of the FOMC. Mr. Fisher says that the spending effectively comes first:
But here is the essential fact I want to emphasize and have you think about today: The Fed could not monetize the debt if the debt were not being created by Congress in the first place….The Fed does not create government debt; Congress does.Lights should be going off in Mr. Fisher’s head at this point as he says this. This is important because Mr. Fisher is essentially acknowledging that the Fed is not the entity that actually conducts helicopter drops. Of course, spending comes before debt issuance. It can be no other way in a monetary system such as ours. The Fed’s role in this process is purely monetary. It has nothing to do with the fiscal side. The Fed does not “print money”. Congress is the entity that prints money via deficit spending. (And the Fed is supposedly the independent constraint on this, and of course the printing of money that occurs in the private banks and the shadow banking system. - Jesse) And they always decide how much to spend before considering any potential constraint from taxes or bond issuance. Unlike a household or state the US government does not need money before it spends. (The Fed is the only relatively unrestrained source, as well as being the regulator, the governor if you will. Because the US must issue a bond at some point to cover its spending. This is not a mere detail. It is a rhetorical device to argue the timing, for it is implicit in the process of governance.. But only the Fed can expand its balance sheet ex nihilo, from nothing. - Jesse) From a common sense perspective, you would think that this would set alarms off in most people’s heads, however, it does not. The idea that the US government is never revenue constrained is so foreign to most people that their minds repel it. (And rightfully so, since such an outlook is a tenet of the Robert Mugabe School of Business, University of Zimbabwe - Jesse)
By now you might be thinking that this is all semantics. Who cares if the Fed isn’t helping to fund the spending? They’re still buying the bonds and the spending is occurring regardless of the Fed’s actions. Well, it’s important for several reasons:
1. Someone who understands the modern monetary system understands that a sovereign government with monopoly supply of currency in a floating exchange rate system has no solvency issue. Therefore, it should not be treated as if it is a household, business or state. (This sounds as though it could be the motto of the Weimar school of modern monetary economics. What is missing is that for this to be correct that monopoly must be comprehensive, ie, there must be some force that cause the misallocation of wealth in the world from a central planning commission, and a mispricing of risk. In other words, its necessary to be the world's reserve currency and to own the ratings agencies. Otherwise the only floating that gets done is the value of a currency printed ad infinitum down the drain. The value of a fiat currency is tenuously based on the belief that the monetary authority will not assume it has no solvency issue because it owns a printing press and is willing to use it recklessly, that the currency retains some stable relationship to some useful goods.- Jesse).2. If solvency is not a concern (and here reason departs from reality, especially given the many serious instances of high inflation experienced by countries not on a gold standard since the end of World War II. Technically Russia was not insolvent when the Soviet Empire collapsed. It merely re-issued a 'new ruble' after knocking a few zeros off the old one. Tell the good news to those whose life savings were destroyed. - Jesse) then clearly the concern is inflation or potential hyperinflation. But as we’ve seen over the last few years the Fed has not succeeded at creating inflation anywhere close to the historical average and certainly not dangerously high levels of inflation. To someone who understands how the modern monetary system functions it not surprising then, that the Fed has been unable to generate inflation during a balance sheet recession. (Inflation is how one measures it. I would submit that the Fed is quite expert at generating asset inflation in things like financial assets and housing, having done it quite well a few times now. But I would agree that this is not sustainable, for the reasons noted by Jefferson so many years ago, that this printed money is used for merely speculative as in gambling, not adding the 'mass' of the economy but merely serving as a subtle means of wealth transferal. For fiat money is not wealth, but merely the means of allocation and transference. - Jesse)
3. Fear mongerers want you to believe that the Fed is the evil entity that “prints money”. The truth is that the Fed can do no such thing. Only Congress can print money and it’s clear that their actions in recent years have failed to generate significant inflation. This is a sign that the government’s spending has been ineffective and misguided. Although I acknowledge that the US Congress is never constrained in its ability to spend this by no means implies that the US Congress should spend beyond its means. To do so can possibly result in malinvestment or very high inflation. (As a general rule of thumb, name calling, also known as poisoning the well of a counter argument, often introduces and highlights the weakest points in a discussion. Having said that, in a fiat system the interest rates are a key bellwether and governing mechanism to the money supply and the expansion of credit which is the source of money. To this extent to say that the Fed is not involved is to use the same defense that the Wall Street banks used in the subprime mortgage crisis. They did not originate the loan. They merely bundled them, helped to misprice them, and then sold them to the unsuspecting, the marks in this great con game. - Jesse)
4. The idea that the Fed is buying government debt might imply that there are is a shortage of buyers of US debt. This is impossible as government debt issuance serves only as a reserve drain. Auctions are designed around calculated reserves and are carefully designed so as not to fail. (There are a shortage of buyers at certain prices, so the Fed steps in to buy them in the act of mispricing of risk. - Jesse)
5. Voting members of the FOMC do not understand the actual workings of the Federal Reserve System and the US monetary system and have played a direct role in the misguided policy response in recent years. Of course, this is nothing new. This problem has persisted throughout the entirety of the last 40 years and is largely to blame for the structural flaws in the US economy currently. (If those voting members included Greenspan and Bernanke and I would most heartily agree, but I do not think that is what Mr. Roche intends. - Jesse)
6. The overwhelming majority of US citizens have no idea how the US monetary system actually functions and therefore are reluctant or unable to force any sort of real change. (As I recall those same citizens rose up almost en masse and besieged their Congressmen to vote against TARP. They were ignored by the Congress which has been inundated by money from the banking lobby. The desire for change is clearly there. What is lacking is choice, and I think it is fraud with intent. - Jesse) Those with political or monetary motivations tend to invoke fearful language that incites anger and in truth only adds to the problems in the US economy by driving the voter base to react to their emotions and not their knowledge of the system in which they reside.
7. Quantitative easing does not increase the money supply and is therefore not inflationary. (Apparently the Adjusted Monetary Base escapes his attention, in addition to the Fed's role as 'the standard in proxy' acting in lieu of an external standard such as gold or a peg to a hard currency - Jesse) Although this operation can have significant psychological impacts (such as inducing undue speculation) (You bet your ass it does, and it is doing it right now - Jesse) QE can only work in the same manner that traditional monetary policy is implemented at the short-end of the curve. This occurs by setting a target rate and by being a willing buyer of any size at that rate. This is NOT how the current policy is designed. The current structure of QE leaves interest rates entirely controlled by the marketplace and not the Fed. Therefore, the mixed results should come as no surprise to anyone as the policy was poorly designed to begin with and is likely doing little more than contributing to excessive speculation and promoting the continued financialization of the US economy. The Fed’s implementation of such policies (such as QE) and complete misunderstanding of such policies does nothing but help create disequilibrium in the marketplace and increase the odds of future instability. (What Mr. Roche seems to be saying is that the Fed should just set rates across the curve, and chuck the marketplace. Now THAT's bare-knuckled monetization. It might work if the Fed could also set a price for oil, food, gold and silver, and make that stick for example. They are trying with gold, and silver with less success, but not even that much for the others. - Jesse)
8. Monetization is achieved by act of Congress via deficit spending and is independent of the Fed’s monetary policy. Anyone who uses the term in the context of the Fed’s contribution of government spending does not understand how the modern monetary system works. In a strict technical sense, monetization is always
(This ignores the role of private banks in creating credit which becomes money. Certainly the Congress plays a key role in the creation of money through government spending and the issuance of debt. But the private banking system plays a key role as well. And the gatekeeper for all this is the Fed. This also ignores the Fed's new ability to buy purely private debt and mortgage obligations. Indeed, as I recall in those distant days when there was a misplaced fear that with its illusory surplus the Fed might run out of sovereign debt to buy, the Fed reassured us that it could buy debt from many other sources. They can do it, and they are doing it. - Jesse)
“The Constitution is not an instrument for the government to restrain the people, it is an instrument for the people to restrain the government - lest it come to dominate our lives and our interests.” Patrick HenryOne can rationalize almost anything in the service of the power that sets all value and serves none other. It becomes a matter of duty, of merely following orders. As an official of another empire destined to its decline once asked, "What is truth?" and then turned and washed his hands of it, which was the expedient thing to do. Truth is what the few say it is, when the hubris of the will to power is at its zenith. And then it consumes all, for the will to power serves none but itself.
Economic commentator Marty Weiss has put out this chart with the somewhat florid headline, Bernanke Running Amuck
"Fed Chairman Bernanke is running amok, and for the first time since the birth of the U.S. dollar, our government is egregiously abusing its power to print money.
Specifically, from September 10, 2008 to March 10 of this year, he has increased the nation’s monetary base from $850 billion to $2.1 trillion — an irresponsible, irrational and insane increase of 2.5 times in just 18 months.
It is, by far, the greatest monetary expansion in U.S. history. And you must not underestimate its sweeping historical significance."
This chart with its editorial commentary are from Marty Weiss.
Here is a closer look at this monetary expansion, without the editorial comment
Is it without historical precedent? I wondered.
Let's take a look again at a prior period of dollar devaluation and monetary expansion in a period of deep recession, the period in the 1930's in which the US departed from specie currency to facilitate the radical expansion of the monetary base.
As you can see, the Federal Reserve increased the monetary base in several steps, resulting in an aggregate increase of about 155% in four years. In this chart above one can also nicely see the contraction in the monetary base, the tightening, that caused a dip again into recession in 1937.
It is also good to note that the recession ended and the economy was in recovery prior to the start of WW II, which I would tend to mark from Hitler's invasion of Poland in August, 1939. There was a military buildup in Britain before then, but I believe that the common assumption that only the World War could have ended the Great Depression was mistaken.
If real GDP is any indication, the recovery of the economy was underway, but somewhat anemic compared to its prior levels, reflected in a slow decline in unemployment. It is absolutely essential to remember that the US had become a major exporting power in the aftermath of the first World War. The decline therefore of world trade with the onset of the Depression hit the US particularly hard. But the recovery was underway, until the Fed dampened it with a premature monetary contraction that brought the country back into recession, a full eight years after the great crash. Such is the power of economic bubbles to distort the productive economy and foster pernicious malinvestment.
What prolonged the Depression in the US was the Federal Reserve's preoccupation with inflation that caused it to prematurely contract the money supply. In addition, the Supreme Court overturned most of the New Deal employment programs before the economy had fully recovered from the shock of the Crash of 1929, and the severe damage inflicted by liquidationism on the financial system and the real economy. One can hardly appreciate today the impact of repeated banking failures, with no recourse or insurance, on the public confidence.
It is instructive to look at the Consumer Price Index for that period of time to see what was motivating the Fed.
It is fair to say that the Fed made several policy errors out of a fear of inflation. Keep in mind that it was only 1933 that the Fed had been freed of the gold standard, and there was tremendous pressure from the monied interests to maintain a strong currency, as we can see, to a fault. The public interest was sacrificed to protect the pre-Crash gains of the wealthy.
The US economy had a more difficult time adjusting to the collapse and the Depression because it had been a net exporting nation in the 1920's. The decline in markets for its exports, and the constrictions in international trade symbolized in the US by the Smoot-Hawley tariffs, affected it much more than other nations that had been net importers, and which exited the Depression earlier.
With the collapse of its export business, the US would have been well-advised to stimulate its domestic markets, to help take up the slack and help to rebalance its productive capacity. In this case, domestic liquidationism was exactly the wrong thing to do. This, by the way, is why the Wall Street money men starting looking at foreign direct investments in the domestic production of recovering economies such as Germany and Italy in the late 1930's. Indeed, the search for profit was so compelling that several of the money houses, and famous men, did not stop investing with the Nazis until they were prosecuted under the Trading with the Enemy laws.
This provides an instructive example to the exporters German and China in this modern crisis perhaps. Now is the time for them to stimulate domestic markets. China must create internal markets, and Germany best try and hold the EU together and keep it healthy.
Japan is in a much more difficult circumstance because of its particular demographics and cultural homogeneity. I see no way out for them in the short term.
Here is what the monetary base did during World War II. As one can easily see, war is bad for people but good for industrial output and monetary expansion.
Expansion of the monetary base during the war was nothing short of astonishing, if one forgets that there was a significant monetization of war debts occurring, and there was less opportunity for inflation because of rationing and wage and price controls. But inflation there was, and it gained a significant leg up after the War.
Here is our real GDP chart extended through the War so one can more easily see the build up and then the flattening of growth post War.
Where Do We Go From Here?
The status quo has failed in its own imbalances and artificial distortions. But while avoiding bubbles in the first place through fiscal responsibility and restraint is certainly the right thing to do, plunging a country which is in the aftermath of a bubble collapse into a hard regime, such as the liquidationists might prescribe, is somewhat like taking a patient which has just had a heart attack and throwing them on a rigorous treadmill regimen. After all, running is good for them and if they had run in the first place they might not have had a heart attack, so let's have them run off that heart disease right now. Seems like common sense, but common sense does not apply to dogmatically inclined schools of thought.
What the US needs to do now is reform its financial system and balance its economy, which means shrinking the financial sector significantly as compared to its real productive economy. This is going to be difficult to do because it will require rebuilding the industrial base and repairing infrastructure, and increasing the median wage.
The US needs to relinquish the greater part of its 720 military bases overseas, which are a tremendous cash drain. It needs to turn its vision inward, to its own people, who have been sorely neglected. This is not a call to isolationism, but rather the need to rethink and reorder ones priorities after a serious setback. Continuing on as before, which is what the US has been trying to so since the tech bubble crash, obviously is not working.
The oligarchies and corporate trusts must be broken down to restore competition in a number of areas from production to finance to the media, and some more even measure of wealth distribution to provide a sustainable equilibrium. A nation cannot endure, half slave and half free. And it surely cannot endure with two percent of the people monopolizing fifty percent of the capital. I am not saying it is good or bad. What I am saying is that historically it leads to abuse, repression, stagnation, reaction, revolution, renewal or collapse. All very painful and disruptive to progress. Societies are complex and interdependent, seeking their own balance in an ebb and flow of centralization and decentralization of power, the rise and fall of the individual. Some societies rise to great heights, and suffer great falls, never to return. Where is the glory that was Greece, the grandeur that was Rome?
The lesser concern for the US now is globalization, new trade agreements, and its debt, which is largely held by foreigners who have provided vendor financing while using exports to build their own economies. The mercantilists are addicted to exports because it provides them the means to bring in national wealth for the benefit of a narrow elite, without empowering the masses and allowing them a greater measure of say in their government, with only a modestly improved standard of living.
This Will Not Be Your Father's Inflation
Why is this important? Because as I think is apparent in the stunning chart contained in Debt Saturation in the US Dollar Economy, the US dollar is already entering an inflationary spiral that will lead to its destruction and reissuance.
Although as you know I always allow that deflation and inflation are policy decisions, at some point a threshold can be passed, and the likelihood of one event or the other becomes more compelling. The US is at that crossroads wherein it must change, or go down the painful path of selective monetary default, of a degree different than a hyperinflation, more similar to that which was seen in the former Soviet Union, than the monetary implosion of a Weimar.
One can watch the growth of the traditional or even innovative money supply figures, and be reassured at their nominal levels, only to misunderstand that money has a character and quantity of backing, that can erode as surely as the supply of money can increase, to produce a type of inflation that comes upon a nation quickly, like a thief in the night. It will bear the appearance of stagflation, because it is caused by a degeneration of the productive economy coupled with a disproportionately increasing money supply.
A transactional economy can have all the appearance of vital growth and activity, when in fact it may be an increasingly hollow shell, a Ponzi scheme, and prone to unexpected collapse. Such a systemic collapse was almost witnessed when the US financial system was threatened by the fall of Lehman Brothers. That event was averted. But the system still remains in a precarious, unreformed state of imbalance.
What does a country have to providing a backing to its money, except its natural resources, its productive labor, and the ability to create products of value? Some countries, or more properly empires, may provide the backing for their currency through force and fraud, and a sort of indirect or de facto taxation on the many. These types of arrangements can last many years, but can disappear quickly, based as they are on conditional situations, subject to relatively sudden change.
Cutting expenses to reduce deficits is a weak attempt to reform. One does not starve themselves back to health. What is needed is growth, savings and investment, the reallocation of capital and true valuation of goods and services. The productive economy must come back into balance with the administrative sectors, those being finance and government.
At the end of the day, some of the greatest impediments to economic recovery reside in the selfish and fearful desire for control and power in rather narrow oligarchies, both in the East and the West. They were the primary beneficiaries of the status quo, and they will seek to maintain and even recreate it, even though it has proven to be unsustainable.