By: Jeffrey Lewis
November 25, 2013
Many regard the risk of inflation as low because the Fed’s money distribution or credit mechanism is limited by how the banks decide to lend. While creditworthy businesses and consumers are still de-leveraging, the transmission mechanism will eventually come. This will occur, for the most part, thanks to the Treasury.
So then how can the Fed push money into the economy?
The government has no real limit on the amount they can borrow and spend. They have a debt limit but they increase it any time they get close — so it is not a real limit.
Unfunded liabilities, without taking into account the ongoing dollar debasement, will be a giant portion of future budget deficit. This government deficit spending is financed by the central bank making new money; it is the real source of inflation.
Even though the Fed is creating lots of money, the banks are just hoarding the funds so that there is no visible inflation.
The Fed is making money and loaning it to the banks. The banks then use it to buy Treasuries or earn interest from the Fed on their excess reserves. In both of these instances, the money is out of circulation for the banks to earn interest.
And at some point, the banks will be able to earn higher interest by loaning to companies and people who will, in turn, distribute the money into general circulation. Then they will redeploy their excess reserves and the money from Treasuries as they come due.
It is estimated that the U.S. has already spent more than $37 trillion dollars over the last few years.
ZeroHedge summarized recently:
And that’s really all there is to know: The music is playing and everyone has to dance… just don’t ask what happens when the music ends.
While money velocity rates continue to fall (thanks to artificially low interest), there are at least 200 trillion reasons why the Treasury will be forced to open the flood gates.
Deflation or Hyperinflation?
Contrary to popular assumption, the Fed will get its inflation, along with every other central bank armed with an unbacked currency. But far from the inflation of flawed theory, what they will get is a stampeding heard of rhinoceros.
The establishment is blind to the issue.
Recent Nobel Prize winning economist Eugene Fama has stated on several occasions that either bubbles don’t exist or they have little impact.
“I think most bubbles are 20/20 hindsight,” Fama told Cassidy. When asked to clarify whether he thought bubbles could exist, Fama answered, “They have to be predictable phenomena.”
Incoming Federal Reserve Chairwomen Janet Yellen could not see it and the current Fed Chairman, Ben Bernanke, famously assumed the housing crash would have limited impact.
The Velocity Mechanism
Rising rates caused by the gradual or sudden exit of captive buyers for government debt will leave the Fed with very little choice but to print more and more of the deficit; thereby bidding up the prices of everything on its own.
Our monetary system of fiat money was created by a central bank. It is the same as the systems used in more than 100 cases of hyperinflation.
The current monetary system, where the currency is completely fiat, has been tried countless times and documented in more than 100 cases.
In every case, the government simply runs out of bond buyers and the central bank is captured to print the difference. For the most part, the currency is printed to worthlessness and dies.
Future obligations are real promises, regardless of the currency in which they are denominated.
As the government prints more money, the prices for these real world obligations go up. This means they have to print even more, which makes the prices go up further, etc. If the government just had debt, and no deficit for real world obligations, there would be no risk of hyperinflation.
In the end, we will find prices rising. This inevitability will not be the result of consumers bidding up prices using the very limited dollars they hold. Rather, it will be a consequence of the money printed and spent into the economy by the government.