Where Will Inflation Come From?
QE plus Keynesian spending, that's where. Get ready for debt monetization...
I PUT the odds that we're already in the early stages of a recession at about 76%, claims Jim Rickards in Addison Wiggin's Daily Reckoning.
All the signs from the US economy are negative.
Current behavior in the stock market is exactly what I've expected to see at the beginning of a recession, too. Stock markets are leading indicators of recession. They typically go down about six months before recessions begin.
Mainstream economists are late to realize this. A year from now they'll say "January or early February 2016 is when the recession started." At that point, it won't be useful information. But you can see around the corner if you're looking at the right information.
There's been no real wage growth for example. Other leading indicators such as declining world trade, declining manufacturing, inventory-to-sales ratios and auto sales also suggest that we're heading into a recession.
Deflationary forces are still strong, making the Fed's goal of producing inflation even more urgent. Every quarter that goes by brings forward the day of reckoning for the global elites. They need inflation because that's the only way out the sovereign debt problem.
Yet central banks haven't be able to generate the inflation they think they need to restore growth to the global economy. Here in the US, the Fed has failed to produce inflation for seven years through QE1, QE2 and QE3. The European Central Bank has also failed, and China is currently failing.
The question for the global elites is: Where will inflation come from?
A lot of people assume that all that's required to produce inflation is just print money. That's what Milton Friedman said. But it's not true. Printing money by itself does not cause inflation. People must do something with the money. They need borrow, spend or invest it. Banks need to lend it or put it into projects. The new money can't just sit idle.
Printing money is only half of what's necessary to produce inflation. The other half is lending that new money...having people go out and spend it...have banks leverage that money through credit creation and so on. That has not happened.
It's not happening because corporate and banking decision makers are still licking their wounds from the meltdown of 2008. Everyday people have been saving money and paying down their debt. That's why we're still going through a debt leveraging cycle. That's also why quantitative easing has failed. The money hasn't gone out into the real economy. It's been tied up in the banking sector.
Any bank with excess reserves at the Federal Reserve could take them and use it as a base to lend money. But they're not, so the whole scheme isn't working. What's called the "monetary transmission mechanism" is broken.
First, helicopter money amounts to direct government spending to stimulate the economy. The idea is to force spending since the private sector isn't doing enough right now.
Who does that spending? The government.
This policy will take us back to the Great Depression and John Maynard Keynes. He argued that government spending could lift the economy out of depression. It's Keynesism 101.
The idea is simple. When the government spends, the economy starts moving again. According to the prescription, it doesn't even matter what they spend the money on. A lot of elites believe that that's true.
Of course, the government is excellent at spending money. Democrats will probably spend on community organizers and teacher's unions. Republicans will probably spend on defense contractors. Everybody's got their favorite wishlist.
This is what Speaker Paul Ryan did in December when he pushed the budget reconciliation bill through the House of Representatives. The Senate passed it and naturally Obama signed it.
Everyone came together in Washington. Politicians love spending money in an election year.
But consider the consequence. Now the deficit will go up even more. How does Congress cover the shortfall? The Treasury will borrow the money.
Who's going to lend the Treasury the money? Simple. The Fed will print the money and buy the bonds. That brings us back to money printing.
But here's the difference between helicopter money and quantitative easing: In QE, the Fed prints the money and uses it to buy existing bonds from the banks. Then the money usually sits there in the banks. I've explained how that policy has failed.
With helicopter money, though, Congress spends the money. It covers its deficit with more borrowing, and the Fed prints the money to cover the borrowing. It's essentially monetizing the debt. The difference is that in the case of QE, there's no extra spending. In the case of helicopter money, there is because Congress spends all the money.
That means, in the final analysis, helicopter money is the recipe for inflation. This policy is coming sooner than you may think.