The Coming Great Inflation – Steve Saville

See Steve Saville’s The Coming Great Inflation

You should read the whole article, as Steve has studied von Mises and Austrian theory and applies his own well thought out observations to clearly point out why things seem so confusing in the modern monetary regime, but maybe are not so confusing.

The relationship between an increase in the money supply and its economic effects is complicated by the fact that the effects will differ depending on how and where the new money is added. Of particular relevance, the economic effects of a money-supply increase driven by commercial banks making loans to their customers will be very different from the economic effects of a money-supply increase driven by central banks monetising assets. In the former case the first receivers of the new money will be within the general public, for example, house buyers/sellers and the owners of businesses, whereas in the latter case the first receivers of the new money will be bond speculators (Primary Dealers in the US). Putting it another way, “Main Street” is the first receiver of the new money in the former case and “Wall Street” is the first receiver of the new money in the latter case. This alone goes a long way towards explaining why the QE programs of Q4-2008 onward had a much greater effect on financial asset prices than on the prices that get added together to form the Consumer Price Index (CPI).

Clearly, the QE programs implemented over the past 11 years had huge inflationary effects, just not the effects that many people expected.

The former case noted above is how things should work, how they generally used to work before overly aggressive Central Bank intervention. The latter case noted above is how things have worked, especially since 2009, as ironically enough the rich got unimaginably richer (under a president reviled far and wide a socialist, no less) and the middle class and poor elected… Donald J. Trump, who would even the playing field for the masses.

Well, I don’t think so. With his constant badgering of the Fed chairman to drop to ZERO and implement QE he is in essence seeking a return to Obama era policy.

But this is not a bash Trump post. It is a wake the fuck up and get your head out of your ass post, with the crudeness supplied by me and the very intelligent and thoughtful content supplied by Saville. Read the article, think about inflation and consider why I continue to hold it open as a possibility despite how the vast majority now see it as no problem whatsoever.

It’s been there in spades since the great liquidation of 2008. It’s just that asset owners see it as good inflation (i.e. not inflation at all, simply the fruits of their investing acumen) and non-asset owners are looking at the wrong enemies. Personally, I think inflation and deflation are both there simultaneously, working on different components of the economy in different ways depending upon whether the component is real, financialized or some unholy mix of the two. What’s more, I think the final resolution is deflationary. But there could still be one hell of an inflation problem first or maybe a hell of an inflation results from another big deflation problem (like 2008). Thank you Central Banks…

But the Fed is intimately involved because it has most aggressively inserted itself into the mix since the Hero saved the financial world in 2009.

Steve gets the final word.

As is always so, the effects of this money creation will be determined by how and where the new money is added. If the money is added via another QE program then the main effects of the money-pumping again will be seen in the financial markets, at least initially, but if the central bank begins to monetise government debt directly* then the “inflationary” effects in the real economy could be dramatic.

*In the US this would entail the Fed paying for government debt securities by depositing newly-created dollars into the government’s account at the Fed. The government would then spend the new money. Currently the Fed buys government debt securities from Primary Dealers (PDs), which means that the newly-created dollars are deposited into the bank accounts of the PDs.

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