One of the conundrums of monetary policy over the past eight years is the Federal Reserve’s failure to cause inflation…The Fed has printed almost $4 trillion since 2008 yet inflation (at least as measured by official statistics) is barely noticeable. With so much money around, where’s the inflation?…
This article is an edited ([ ]) and revised (…) version of the original (written by Jim Rickards) to ensure a faster & easier read. It may be re-posted as long as it includes a hyperlink back to this revised version to avoid copyright infringement.[This article provides the answers and suggests that the Fed has another rabbit in their hat that, if utilized, would cause a major jump in inflation within 15 minutes it would be so effective.]
With so much money around, why hasn’t there been greater inflation?
Reason #1: While the Fed has been printing money, few have loaned it or spent it.
The banks haven’t wanted to make loans, and consumers haven’t wanted to borrow. In fact, the private sector on the whole has been deleveraging — selling off assets and paying off debt — even as public debt expanded. The speed at which consumers spend money (technically called velocity) hasn’t accelerated.
From 1996-2008, money printing increased at a steady pace, exactly as Milton Friedman and other monetarists had recommended since the 1970s and, beginning in 2008, the money supply “went vertical” with three successive quantitative easing (QE) programs of money printing. These were QE1, QE2 and QE3 – but there was declining velocity over the same period. In effect, the money printing from 2008-2015 was cancelled out by the declining velocity over the same period. The result was practically no inflation.
Increased money supply alone does not cause inflation. The money must be borrowed and spent. The absence of lending and spending (declining velocity) is one reason disinflation and deflation have been more prevalent than inflation.
Reason #2: The world has been confronting powerful deflationary headwinds, principally demographics and technology.
The rate of increase of global population peaked in 1995. Today populations are in decline in Japan, Russia and Europe. They are also stagnant elsewhere outside of Africa and the Middle East. Fewer people means less aggregate demand for goods and services. Improved technology and efficiencies from predictive analytics have lowered the cost of everything from inventories to transportation. This combination of less demand and greater efficiency results in lower prices.
Reason#3: The ability of global corporations to locate factories and obtain resources anywhere in the world (i.e. globalization) has expanded the pool of available labor.
Global supply chains and advanced logistics mean that products like smartphones are created with U.S. technology, German screens, Korean semiconductors and Chinese assembly. The phones are then sold from India to Iceland and beyond, yet many of the workers are paid little for their value-added in these global supply chains.
The above 3 deflationary tendencies have created a major policy problem for the Fed.
- Governments need to cause inflation in order to reduce the real value of government debt. Inflation also increases nominal (if not real) incomes. These nominal increases can be taxed.
- Persistent deflation will increase the value of debt and decrease tax revenues in ways that can cause governments to go bankrupt.
Governments are therefore champions of inflation and rely on central banks to cause it. In the past eight years, the Fed has tried every trick in the book to cause inflation. They have:
- lowered rates,
- printed money,
- engaged in currency wars,
- used “forward guidance” (promises not to raise rates in the future),
- implemented “Operation Twist” and
- used nominal GDP targets.
All of these methods have failed.
The Fed then shot itself in the foot by:
- tapering asset purchases,
- removing forward guidance
- and raising rates.
These tightening moves made the dollar stronger and increased deflationary forces even as the Fed claimed it wanted more inflation and, next month, [believe it or not] it plans to start shrinking its massive balance sheet. This tightening episode is proof (not that any was needed) that the Fed does not understand the dynamic deflationary forces it is now confronting…
The Fed’s tricks have all failed. Is there another rabbit in the hat? Actually, yes. The Fed can cause massive inflation in 15 minutes. All they need do is call a board meeting, vote on a new policy, walk outside and announce to the world that effective immediately, the price of gold is $5,000 per ounce. Read: Rickards: Fed Could Cause Gold To Jump To $5,000 Within 15 Minutes – Here’s How
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