The Money Bubble: Return of Inflation

If there is a silver lining in desperate circumstance then it is that inflation is stopped dead in it’s tracks.

Umpteen millions of Americans yet remain underemployed and workforce participation is at its lowest since women started entering the workforce back in the 1960s.

Real salaries are down.

Folks may not be getting richer, but they aren’t intrinsically losing wealth either.

That is gonna change. It has to. Logic dictates it must for two main reasons:

  1. Inflated stock values
  2. Quantitative easing

When things change… heaven help the lowly commoners.

Inflated Stocks

CNNMoney today reports “stocks edge toward new milestones” and asks this basic question:
Can the Fed and consumers keep the rally going?

The Dow is poised to cross the 16,000 barrier.

The milestone is viewed as ho-hum.

So what, the marketeers think, haven’t stocks been rising like gangbusters for years now? The holiday buying season is about to start.

What is not to like? 401K retirement plans have all more than recovered their values since 2009. Housing prices are rising again. There is plenty of money around to build a robust economy. Right?

Stock market growth is built on hope for the future, not on today’s reality.

Sure, there is more money – a lot more money – but rather than use it to create more goods and services it is mostly used to create more money.

Therein lies the rub…

Quantitative Easing

The Fed has been aggressively trying to revive the economy following the Great Recession, despite congressional and executive branch inaction and bungling.

Its last line of defense is quantitative easing. That is where The Fed buys government debt to keep it afloat and also buys corporate assets, mostly mortgage-backed securities, and turns those assets into U.S. Treasury backed bonds that the big banks and large investors can borrow against to generate economic growth.

That is the idea. To bad it isn’t working.

Right now The Fed is artificially creating $85 billion/month.

There are two flies in The Fed’s ointment:

  1. The big banks and large investors are holding on to their money instead of investing it
  2. The federal government wastes everything it gets and just wants more

For the record, “big banks” are defined as the members of the federal reserve banking system. They are the ones with direct access to QE monies.

The QE idea is to provide loans invested in businesses to generate economic activity.

The money is not being invested. It is being held onto because the paltry guaranteed interest earned on T-bills is still more than the banks can earn by taking risks. So they don’t. They aren’t stupid.

Conclusions

So where does all this leave us?

There is a giant, growing pile of money out there. The big banks have their chunk at the federal reserve and Corporate America has theirs in their coffers. It’s trillions and trillions of unspent dollars used for no other purpose than to earn more money.

It will remain that way as long as the economy is weak.

All signs point to change. The U.S. economy is slowly, but steadily, improving.

As economic recovery continues the cash logjam will finally break and an ever-increasing tsunami of dollars will flow into the marketplace.

That can lead to only one outcome… inflation… to many dollars chasing to few goods.

The Fed, of course, will raise interest rates to slow inflation. But the money pile it helped build is just to big for it to control.

Inflation will return, perhaps with a vengeance.

Worse yet, higher interest raises the borrowing costs for the federal government. If rates returned to just pre-recession levels the interest cost to service the national debt will jump from around $400 billion/year to easily over a trillion/year. The federal government only makes about $2.7 trillion a year.

Here is a future facing America’s lowly commoners…
Everything will cost more and their accumulated wealth, such as it is, will intrinsically decrease in value in reverse proportion to the rate of inflation. Taxes will go up while government services go down. And that is for those who can find decent employment.

The unemployed and underemployed are doomed.

Quit frankly, nothing can be done about it now. Outside of Divine Intervention, its gonna happen. It must.

That is where the ‘heaven help the lowly commoners’ part comes into play.

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About azleader

Learning to see life more clearly... one image at a time!

Posted on Nov 18, 2013, in Bonds, Business, capitalism, Debt crisis, economics, Economy, Government, Life, macroeconomics, news, Opinion, Politics, Stock Market, The Fed. Bookmark the permalink. 2 Comments.

  1. According to ZH (if I remember right) inflation is around 10-11% but the statistics are chosen and presented to avoid revealing that.

    • Here is a stat for you that is hard to ignore…

      So far this year interest rates on 10-year U.S. Treasury Bonds has risen a full percentage point from 1.86% to 2.88%.

      Looks like historic record low rates are becoming a thing of the past. And with The Fed buying T-bonds like hotcakes it will only drive yields upward ever faster!

      As U.S. Treasury bond yields go, so goes inflation!

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