When the Fed kick-started the printing press in the wake of the 2008 financial crisis, many monetary hawks predicted hyperinflation in the United States sooner rather than later.
Ironically, inflation has decreased to 56-year lows during the period from 2009 to 2017. During this time U.S. debt almost doubled, with bank money M-2 compounding at 6% from December 2008 to April 2018. The Federal Reserve, desperate to create some “healthy” measure of consumer price inflation and leading economists said they don’t know the answer.
But to create consumer price inflation commodity prices must perform better. Commodities are non-correlated to stocks and bonds while they are highly correlated to inflation, interest rates, and high or rising GDP growth rates. All of these statistics were at historic U.S. 240-year lows over the last 9 years. Using the consumer price index (CPI) to represent inflation, this indicator made continuous new lows ending in 2017 at a 10-year compounded rate of 1.61% per year.
However, normally outright money printing should generate at least some inflation. We had a 0% nominal Fed Funds rates for seven years and three large Quantitative Easing (QE) programs, combined with an increase in the Federal Reserve Balance sheet from $800 billion to $4.5 trillion. So why isn’t it at least approaching historic compounded levels of 3.10% that were seen between 1913 and 2017?
Consumer Versus Asset Price Inflation
The primary reason is: when you execute extraordinary amounts of printing of paper money via QE, i.e. buying government debt, and other assets, such as mortgages, the cash created “out of thin air” goes only to the very few investors who own those assets in large quantities.
No consumer inflation occurs, as those investors don’t spend that money, but rather invest it in assets such as equities, real estate, other debt, and art. Prices for these assets rose to historic levels as a consequence. This is called “wealth creation” instead of inflation.
On the other hand, we witnessed a decline in capital expenditures which resulted in a major decline in productivity. Since rising productivity is the main driver for rising wages, median incomes have been stagnant over the last 20 years. And this analysis doesn’t even take into account the decline of 19.8 million manufacturing jobs to decline 11 million since NAFTA was enacted. Because new money and debt was issued but doesn’t get spent very often—only invested—the velocity (or turnover) of money (via M2) to decline to the lowest level in 60 years, or 1.4 times.
Since 2008, consumers have suffered from “financial repression” with interest rates below the already low rate of inflation. This is why stocks go up but no major actual inflation occurs. In effect, it is a method of government theft of individual savings; inflation is a stealth tax.
So, people hoard more as they earn less and their savings decline. For example, the 90-day Treasury Bill yield at the end of March was 1.71%, while the CPI was +2.36% year over year. This makes government and corporate borrowing virtually free, where consumers pay up to 30 percent on their credit cards.
If the “Universal Basic Income” (UBI) scheme that the likes of Facebook CEO Mark Zuckerberg are proposing were to become reality, it would then almost definitely lead to not just inflation but hyperinflation. If families were to receive the estimated $36,000 a year they would certainly spend it and the price of consumer goods and services would skyrocket.
This welfare bonanza, funded with government debt would not be sustainable and is an existential threat to our Constitutional Republic’s political structure. Normally a nation with a printing press never defaults by bankruptcy, but rather by hyperinflation. Hyperinflation in turn historically has led to authoritarian dictatorships like Napoleonic France, Nazi Germany, and Chavez’ Venezuela.
If President Trump wants to avoid this scenario after his term ends, he needs to reign in welfare spending and continue his campaign of deregulation to generate real economic growth.
Victor Sperandeo is a member of the Trader Magazine Trader Hall of Fame and the author of “Trader Vic: Methods of a Wall Street Master”
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.