Fed Looks to Hyperinflate

The Daily Bell, June 28, 2010 – by Staff Report

Ben Bernanke

RBS tells clients to prepare for "monster" money printing by the Federal Reserve ... As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke (Left) given eight years ago as a freshman governor at the Federal Reserve. Entitled "Deflation: Making Sure It Doesn't Happen Here", it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy. The speech is best known for its irreverent one-liner: "The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost." Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE). Investors basking in Wall Street's V-shaped rally had assumed that this bizarre episode was over. So did the Fed, which has been shutting liquidity spigots one by one. But the latest batch of data is disturbing. – UK Telegraph

Dominant Social Theme: We'll dump as much money into the market as necessary – until it surrenders and does our bidding.

Free-Market Analysis: This potential move gives the deflation versus inflation debate a new perspective. We have written in the past that we had questions about the Great Depression based on conflicting opinions of Murray Rothbard, Milton Friedman et. al. Living through the "Great Recession" has begun to clear them up. It is a little like being a lab rat; it is painful, but the experience gives you an insider's look at the scientific method. Or in this case a fiat-money economy.

In previous articles we have examined the inflation versus deflation debate at some length. Now it could be that you, dear reader, are tired of reading about arcane monetary policy matters, but in fact, this is just what the power elite wishes will happen. The monetary economy has been made so complex through the ruse of central banking and a ridiculous vocabulary that unless one confronts the situation with the requisite ruthless cynicism, one is apt to be overwhelmed.

This is a dominant social theme of course, one that goes something like this: "We are the great collective OZ. You may petition us, though surely you will not comprehend our toolkit, understand our terminology or appreciate our strategies. We will explain the progress being made in due course – and you better believe it!" Admittedly this is a cynical reading of the promotion underway but nonetheless we think it is accurate.

Yes, complexity is important in that it obscures failure. There have been numerous grinding recessions since the central banking era began in the early 1900s. Now in the early 2000s, we look back on what has occurred and we ask ourselves, what has improved? The United States is nearly bankrupt and so are the European economies. Wherever mercantilist central banking has been tried, ruination has followed. Every cycle has produced less job growth and further centralized what industry remains, truly creating a managerial state.

Those in charge of the system have invented an entire nomenclature to impress the general public with the complexity of their strategies. Let us then examine the massive, additional "quantitative easing" that Bernanke is contemplating. (Ed Note: you can skip this part if you want and direct your attention to our considerably more succinct version below) ...

Quantitative Easing: Central banks normally set the price of money using official interest rates to regulate the economy. These interest rates radiate out to the rest of the economy. They affect the cost of loans paid by companies, the cost of mortgages for households and the return on saving money. Higher interest rates make borrowing less attractive because taking out a loan becomes more expensive. They also make saving more attractive, demand and spending reduces. Lower interest rates have the reverse effect. But interest rates cannot be cut below zero and when official rates get close to zero the effect they have on regulating the economy becomes muted. Banks still need to make a profit and in troubled times the gap between the official interest rate and the rates faced by companies and households can rise, because lenders want a greater return for the additional risk of granting a loan when times are tough.

When interest rates are close to zero there is another way of affecting the price of money: Quantitative Easing (QE). The aim is still to bring down interest rates faced by companies and households and the most important step in QE is that the central bank creates new money for use in an economy. Only a central bank can do this because its money is accepted as payment by everybody. Sometimes dubbed incorrectly "printing money" a central bank simply creates new money at the stroke of a computer key, in effect increasing the credit in its own bank account.

It can then use this new money to buy whatever assets it likes: government bonds, equities, houses, corporate bonds or other assets from banks. With the central bank weighing in, the price of the assets it buys should rise and the yield, or interest rate, on that asset will fall. Companies for example with a willing central bank seeking to buy its bond, will be able to pay a lower interest rate when new bonds are issued or existing bonds come to the end of their life and need to be replaced.

With cheaper borrowing the hope is that the central bank will again encourage greater spending, putting additional demand into the economy and pulling it out of recession. As the money ends up in bank deposits, banks should also find their funding position improved and make them more willing to lend. A side effect will be that this new money is expected to raise consumer prices giving people another incentive to buy now rather than later. – Financial Times

See how many words it takes? Our definition is a little simpler. It would run something like this: "Quantitative easing is when central banks create new electronic money out of thin air and spend it buying up mostly financial assets in the hopes that such spending will kick-start consumer purchases and end the recession." We would change the name of the procedure, too. We would call it "Making Money From Nothing and Buying Things With It." There is probably a reason why central banks don't go along with this kind of nomenclature, as it more fully reveals the ludicrousness of what's going on and does so with a minimal amount of syllables.

Of course the question really comes down to what central banks are doing with the additional money that they are creating from nothing. (It should also be noted that central banks are ALWAYS creating money out of thin air and the difference is simply that when banks are involved with "quantitative easing," they are injecting money directly into the economy, not running it through commercial banks or designated bond dealers.) In this case, central banks are going out into the market place and buying whatever they want to, stocks, bonds, IPOs, mortgages, anything that the bankers believe will inject money into the "real" economy to get the money circulating again.

This brings us back to the articles we have written previously. We pointed out only a few days ago as a matter of fact that the reason previous stimuli had worked so poorly was because the Federal Reserve was determined to go through the banking system itself or various fiduciaries rather than put the money into the hands of people who would really spend it. The reason to go through the banking system was to preserve the fiction that banks were the necessary final adjudicators of who gets what money. The idea is that you wouldn't just hand out drugs to people – you'd prescribe them through a doctor. Thus, too, money is not to be handed out either but must travel through appropriate, professional channels.

It is all, actually, simply a matter of control. And in fact the money that the Federal Reserve and other central banks will provide via this next bout of quantitative easing, if it comes to that, will not end up in the hands of people either. Here's betting it will STILL go to financial entities, though maybe not directly to banks anymore. And for this reason, among others, it STILL may not have the desired effect, certainly not right away. As we have written before, central banks will do almost anything rather than send money to individuals, entrepreneurs and small companies because to do so invalidates the fiction that the painstakingly created and cultivated banking network is necessary – it is not.

We have spent so much time of late on deflation and inflation because we are getting to the point in the business cycle when such musings become important from a real-life standpoint. Unlike central bankers, we don't fight our intuition when it comes to the business cycle. (Intuition being part of the Austrian economic approach.) We were, for instance, well aware at the beginning of the decade that gold was going to travel to US$1,000 or more based on what we understood of the upcoming money-metals bull market. Just as we were aware that the fiat-money bear market is going to run at least 15 years, which means there are about five years to go.

We base this on our understanding of current marketplace distortion. In the 1970s it took about 10-12 years to unwind the economy and cleanse it to a point where much of the distortion had subsided. But this time, THIS Western economy is a heckuva lot more screwed up. So it will take longer. And that's why we knew that all the recent talk by so many respected mainstream Western economists and politicos about a recovery was likely so much hooey. We figured there were several more shoes to drop. And they've begun to drop – or Bernanke wouldn't be looking at another US$5 trillion in "stimulus." Recovery indeed.

What's going on? Because the Western economy is still in such sad shape, still distorted – more than ever as a matter of fact because so many ruined entities have been designated as too-big-to-fail – money is still refusing to circulate and economies themselves are still spiraling downhill, refusing to create new jobs, etc. We have shown in previous articles how the power elite is using this price-deflation to set up "austerity" in Europe and America and to privatize and purchase assets at a cut-rate price.

We have also indicated, via an article on George Soros, that the elite is panic-stricken that deflation may go too far, too fast and cause widespread unrest and rioting. In fact, we think this is exactly what is going to happen. But for those who believed we were incorrect about the elite's panic in the face of a deflationary overshoot, we seem to have a definitive answer – US$5 trillion in ADDITIONAL quantitative easing. That number has flop-sweat written all over it.

We will not by the way in this article get into another discussion about whether inflation or deflation is "good." We are on record numerous times as stating that mild deflation (real deflation – a contraction of the money supply and credit) is indeed good during a downturn in a real-money (gold and silver) economy. But in a fiat money system such as the one we have now, everything is turned upside down.

It is like a Mad Hatter's tea-party and even the words themselves have lost meaning. In a fiat money environment, for instance, one can likely have a collapse of credit and subsequent price deflation without necessarily a real contraction of the money stock. Central bankers love such complexity. Being of modest intellect (versus the Masters of the Universe), we don't, however, and likely neither do you. We try to simplify relentlessly, that being the best defense against professional complicators. And in a number of articles on inflation and deflation we have applied this technique as tenaciously as possible.

Thus we are on fairly comfortable ground predicting again, as we have before, that given the slowing velocity of money, price-deflation, especially, will continue. It will continue and continue until such time as the larger Western economy is sufficiently unwound so as to begin to utilize the oceans of cash that are sloshing around within the walls of its most august institutions and under mattresses in the houses of long-suffering citizens. At this point, price inflation will arrive with a ferocity that may eventually lead to hyperinflation.

We hope we have not bored you, dear reader. Above is yet another effort at keeping up with what the banking class has in mind for us. It IS important, because the kinds of money movements that we are analyzing constitute massively powerful trends. If and when price inflation kicks in (we think it will, as it always does in these business cycles) the results will likely have a life of their own and be no more controllable than price deflation is currently.

Yes, this is important to realize. It is why we think the system may ultimately collapse. (In fact it has collapsed but remains functioning because of central banking life support.) It is why we think gold and silver will continue to travel up and are probably not in a "bubble" but represent the true valuation of current Western fiat currencies which are currently spiraling down toward zero.

Conclusion: It is, in fact, not all that complicated, even though central bankers try to make it seem so. The ultimate effects of US$5 trillion of additional money on the economy are also predictable. We must draw two conclusions if such a sizeable injection occurs. First, the elite is in fact panicked about societal unrest as a result of this gargantuan bust – the "Great Recession." Second, they are willing to risk hyperinflation later to steady Western economies now. Keep analyzing those memes.