Saturday, October 29, 2011

Federal Reserve poised to stave off "nightmare" deflation scenario with QE3

This article originally appeared at The Silver Underground.

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Before we dive in to the latest news and commentary regarding the machinations of the Federal Reserve, let’s take a moment to examine the graph above. While an alarmist mainstream media has popularized Mann’s Hockey Stick in the minds of the chattering classes as a harbinger of global climate catastrophe, one hockey stick that no one seems to be aware of (save for the manic Glenn Beck), yet which spells out the mathematically inevitable collapse of our monetary and economic system, is that of the Adjusted Monetary Base for the U.S. Dollar.

Pictured above, the Adjusted Monetary Base is measured and published by the research arm of the Federal Reserve system, which is based at the Federal Reserve Bank of St. Louis. The simple definition of this measure, according to the St. Louis Fed is “the sum of currency (including coin) in circulation.” So the graph you see above shows the amount of money there is out there, the amount of U.S. dollars that exist and circulate in the economy. In the span of a single year, you can see that the growth rate in the supply of money went from steadily upward sloping, but nearly horizontal to suddenly and dramatically vertical, and that in just a few short years the entire supply of money would not only double, but triple!

Now just what can we expect to happen to the value of money if its supply increases so dramatically? According to basic, uncontroversial, textbook economics, we would expect its value to decrease. You would need more and more units of such a vastly increasing money supply to buy the same goods and services. That’s called inflation. I’m sure those of you reading this understand that easily enough, but if anyone you know needs it spelled out in the most simple and easy-to-grasp way, here’s a very short explanation I gave at an End the Fed march in Nashville last year.

But the “geniuses” at the central bank and in the punditry are all worried this week about deflation coming to America, not just deflation, but a “nightmare” deflation scenario. According to Joshua Dennerlein, an economist at Bank of America Merrill Lynch in New York: “You run the models and that all points to deflation. Without some kind of monetary policy help you would definitely get deflation.” Gosh. It’s too bad Dennerlein can’t use all of his brilliant predictive powers to help Bank of America to turn a profit without bleeding its customers dry in fees or avoid “stupendously dumb” investment decisions. Or maybe Reuters should consult with more credible experts before reporting on the economic outlook.

Despite the radical, unprecedented number of dollars in circulation, the banking establishment is worried about deflation and considering its stimulus options i.e. the best way to spend and start circulating even more newly-created dollars. Look at the graph above again. Just how could deflation be their worry? Because the Keynesians in charge of economic institutions (and all economic “thought,” it would seem) do not deal in reality. They deal in long-discredited economic models that hold it as an article of faith that inflation and economic downturns do not happen together: Inflation happens during economic growth, while deflation happens during recessions.

Instead of evaluating the value of money on the basis of its supply relative to other goods and services, the policy wonks are looking at the economy and seeing it slow to a crawl, signaling to them and their Keynesian models the imminent “nightmare” of deflation unless the Fed gets involved and creates some more money to throw around. Their method isn’t scientific. It isn’t empirical. It is based in faith, faith in a belief that was discredited by the stagflation of the 1970s. And THAT is your REAL nightmare scenario: stagflation in the United States– rising prices during an economic contraction, fewer jobs, decreasing opportunities, less production, and higher costs of living for the struggling masses.


Wes Messamore,
Editor in Chief, THL
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