Watch the free-flowing-easy money from FED and central-bankers

After the 1^st month of the new year has concluded and as we head deeper into 2021, there is a massive and incessantly hyped consensus that the massive monetary interventions seen in 2020 will lead to an explosion of economic growth, (let us not talk about higher inflation, and higher interest rates). I suspect that the outcome of more and more deficit-debt-driven spending will lead to a massive disappointment in growth and disinflation instead. Please reflect upon the infamous words of Milton Friedman: “Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.” And in my opinion, there is little disputing that the FED is “printing cyber money” without any hesitation or reservation.

 

That massive spike in M2 is basically from the Government’s massive, gigantic monetary fiscal response to combat the pandemic-related economic shutdowns that they created. In mu analysis, the end game for the FED’s twin asset bubbles in stocks and bonds will led toward unwarranted real-life inflation. Of course, if the massive monetary infusions create an economic boom, then a surge in inflation and interest rates will not be an issue they incessantly state? There are several reasons why so-called great expectations of significant growth may fall significantly short of reality. For the past 12-years, the new-year refrain from hyping economists has been “this year is the year of economic growth and inflation.” Each year the manipulative data has been a serious disappointment. While in theory, “printing cyber money” should logically lead to a significant increase in economic activity and inflation, but this has not been the case. A better way to look at this premise is through the “veil of money” theory. If money is a commodity, more of it should lead to less purchasing power, resulting in inflation (seems logical right). This is where monetary velocity becomes essential, “Monetary Velocity” is a premise that the Federal Reserve has failed to grasp that their lame monetary policies are “deflationary” when the creation of more and more “debt” is required to fund it. The velocity of money is important for measuring the rate at which money in circulation is used for purchasing goods and services. Velocity is useful in gauging the health and vitality of the economy. Please reflet back on your econ-101 days, as high money velocity is usually associated with a healthy, expanding economy; and conversely low money velocity is usually associated with recessions and contractions. With each monetary policy intervention (FED) Q/E’s the velocity of money has slowed along with the breadth and strength of real economic activity. However, it is not just the expansion of the FED’s manipulative balance sheet, which undermines the real strength of the economy. It is also the massive continuing suppression of real interest rates in their lame attempt to stimulate economic activity. We saw in 2000, the FED found “unfortunately” that lowering interest rates did not stimulate economic activity. Instead, the “debt burden” detracted from it.  Despite persistent hopes and prayers that economic growth and inflation would arise from historic lower interest rates, more and more government spending, and increased so called “very accommodative policies,” each reiteration has led to weaker outcomes (wow a definition of insanity). This not and should not be a surprise, as real monetary velocity increases when deficits revert back to a surplus. Financial surpluses allow said revenues to move into productive investments rather than debt service. Since I left the active Army way back in 1979, there has been a shift in the economy’s fiscal makeup from productive to non-productive investments. Currently government spending has shifted away from productive investments. Instead of things like the Hoover Dam, which created decent jobs (infrastructure and positive real development), spending shifted to social welfare, defense, and debt service, which have a negative rate of return (simple economics). According to the Center On Budget & Policy Priorities, nearly 75% of every tax dollar goes to non-productive spending, and awful trend and one that could derail our society!  In 2020 debt “deficits” increased by over $6.2 trillion a staggering number.  This is why “monetary velocity” began to decline as total debt passed the point of being “productive” to becoming “destructive.” The FED’s main massive contagion now is that due to the massive levels of debt, interest rates MUST remain at/near historic lows. Any uptick in rates promptly slows economic activity, forcing the FED to lower rates and support it (how much lower can rates go?) the current deficit path’s deflationary pressure will continue to erode economic activity even if the FED manages to see a spark of “BS” inflation, which should push interest rates higher, the debt burden will lead to an economic recession and deflationary pressures.

The deficit/debt problem remains a massive risk of monetary to fiscal policies. If rates rise, the negative impact on a massively indebted economy quickly dampens real activity the decline in monetary velocity clearly shows that deflation is also a real and persistent threat. It is hard to overstate the degree to which psychology drives an economy’s shift to deflation. When the prevailing economic mood in a nation changes from significant undying optimism to pessimism, participants change. Creditors, debtors, investors, producers, and consumers all change their primary orientation from expansion to conservation. Such behaviors reduce the velocity of money, which puts downward pressure on prices. Money velocity has already been slowing for years, a classic warning sign that deflation is looming. 

There are no serious real-life decent options for the FED unless they are willing to allow the system to painfully reset. The FED and the Biden Administration will have to face hard choices to extricate the economy from the massive current “liquidity trap” and history has repeatedly demonstrated that political leadership never makes hard choices until those choices get forced upon them. Most telling is the current inability, of those who job it is to maintain our monetary and fiscal policies, to realize the problem of trying to “cure a debt problem with more debt” is insanity at its core!