subject: Inflation / Deflation.....which is winning? [print this page] Inflation / Deflation.....which is winning?
Inflation / Deflation....QEII, Markets and mayhem
Question: How can the "money printing" of the central bankers around the world NOT be inflationary?
Many would answer that with a simple - It IS INFLATIONARY Stupid!
To a degree they would be correct, it has an inflationary bias to it, introducing more money (actually credit) to a system can certainly be inflationary. There is however much more to the answer than4 wordscan cover.
First lets understand what is happening. Central Banks, in the main, are facilitating the expansion of Government debt by buying the said debt from the Prime Brokers who buy at auction.
Much of this Government is issued to repay maturing debt so it replaces existing debt and does NOT add to the outstanding levels - No inflationary effect.
Some of this Government debt is issued to pay the massive interest expense on existing Government debt (such is the disastrous fiscal position most Governments find themselves in) - No inflationary effect.
Some of the Government debt is new and is used to fund military adventures in foreign lands - Here the new money (inflationary) is used to destroy assets, installations and productive capacity (read people) in other parts of the world - This destruction of productive capacity is NOT inflationary and can cancel out the inflationary effects of the new debt spent on these endeavours.
Some of the new Government debt is used for productive projects - inflationary - Actually there is more to this than this brief post covers and not even all of this is inflationary, but lets assume it is for the sake of this brief argument.
So what percentage of the $600B of QEII is inflationary? I do not know but it is significantly less than $600B. Now that $600B is part of an economy with a GDP of around $14trillion. Mmmm - How much affect is this QEII going to have on an economy of that size?
Oh but lest we forget QE1 and all that Fed balance sheet explosion we have witnessed since the chaotic days of 2008. Well we have a Fed balance sheet that has exploded by about $1.5 - 2Trillion. Much of that through thepurchases of toxic waste from the Fed's owners - The Banks. What did they - the Banks -do with it?
Lend it out into the general economy - Inflationary
Keep it as reserves for future crisis - Not Inflationary
US Bank reserves have exploded at a similar rate to the Fed's balance sheet - they did not, have not, will not lend it out - Not inflationary!
So, with a cigarette packet calculation, we can assume that at least half, probably far more of the various "liquidity" programs the US Central Banks - and by extension the other major Central Banks (all from the same family and follow the same model) have not made it into the real economy and are therefore NOT inflationary.
Of course if you ASSUME the Banks will LEND all this new money and the FED will actually print currency (not legally allowed) then you could safely assume we will have a hyperinflation event......BUT WHY - Why would you make such an assumption when the Fed is not allowed to print currency and the Banks have made no effort and shown no inclination to lend DESPITE significant pressure from Governments to do so?
Conclusion - The efforts of the Central Bankers are NOT substantially nor directly inflationary.
These efforts have though had a significant effect - One that they have had many times before - Pushing bullish sentiment to extremes. 1987 - Greenspan's clearly stated desire to stop crashes and liquefy the system added more fuel to a reignited bullish sentiment. 1998 - ditto. 2002/3 ditto - All this added to the debt pile which finally STOPPED growing in 2007 - THAT IS THE KEY POINT - In 2007 The world's appetite for more and more debt STOPPED. The world started to repay debt - Again NOT inflationary. (Of course Government debt levels have sky rocketed since the end of the trend in 2007but that is the way it always is - Governments are the last to act on a trend and often act on it when it has already ended - The investing public have signalled that this Government trend must also stop - re Greece, Ireland, Portugal etc etc)
Now lets consider what has happened in the markets AND real Economy since 2007.
Stock Marketsaround theWorld have collapsed and then bounced back - In most Western economies remaining well below 2007 highs - Effect - Trillions of dollars in wealth destroyed.
Housing markets in many many countries have collapsed - Trillions of dollars destroyed
Millions upon millions of people have been made unemployed - Trillions of dollars in income destroyed
That's a very brief review - Do you get the point?
The "Inflationary" policies of the Central Bankers have added SOME money to the system.
The Deflationary action of the markets has undeniably DESTROYED Trillions in asset values and income.
