The Floodgates Begin To Open: Inflation then a Mess Are Coming

The Floodgates Begin To Open: Inflation then a Mess Are Coming, by John Rubino.

It’s now clear that what governments did to counter the Great Recession may have delayed systemic collapse, but did not resurrect the old normal. Growth around the world is anemic – which is to say debt continues to increase faster than the productive capacity to service it – and inflation (the other way to shrink a debt burden) remains below target.

Now “anemic” is becoming “non-existent.” In the US, mini-credit-bubbles like auto loans, home mortgages and student loans are sputtering, leading economists to dial back their rosy scenarios for 2016. he Atlanta Fed’s GDPNow forecast for Q3 growth, for instance, was a robust 3.8% in August but is now less than 2% — and still falling.

Not surprisingly, everyone is starting to panic.

In the UK, central bank governor Mark Carney says they will tolerate higher inflation for the sake of growth — 3% would be ok, greater than the official 2% target. Got to keep that bubble growing, but it just doesn’t seem to work any more.

In the US the central bank chair Janet Yellen says the Fed “may need to run a ‘high-pressure economy’ to reverse damage from the 2008-2009 crisis that depressed output, sidelined workers, and risks becoming a permanent scar.”

Strip out the buzzwords and focus-grouped phrasing and we’re left with a bunch of economists whose models have stopped working and who see no alternative (since their life’s work is the tending of such models) to cranking the knob up to 11 and seeing what happens.

Individual countries have in the past tried “temporarily higher rates of inflation,” and the result has always and everywhere been a kind of runaway train that either jumps the tracks or slams into some stationary object with ugly results. In other words, the higher consumption and investment that might initially be generated by rising inflation are more than offset by the greater instability that such a policy guarantees.

But never before has the whole world entered monetary panic mode at the same time, which implies that little about what’s coming can be said with certainty. It’s at least probable that a combination of massive deficit spending and effectively unlimited money creation will indeed generate “growth” of some kind. But it’s also probable that once started this process will spin quickly out of control, as everyone realizes that in a world where governments are actively generating inflation (that is, actively devaluing their currencies) it makes sense to borrow as much as possible and spend the proceeds on whatever real things are available, at whatever price. Whether the result is called a crack-up boom or runaway demand-pull inflation or some new term economists coin to shift the blame, it will be an epic mess.

The graph that best tells the big story:

Money manufacture in the US 1870 - 2015, by David Evans

We must eventually get the debt level back to normal, but letting people pay it back normally just results in monetary contraction and deep depression because the debt has to be paid back with interest — there just isn’t enough money available so it’s not mathematically possible, like a game of musical chairs. Many businesses and banks would go bust. Therefore, reluctantly, the central banks are being forced to inflate away the debt. The old money, gold, will benefit.