In the aftermath of the onset of the Great Recession of A.D. 2008, the Federal Reserve gave trillions of dollars to major (“too big to fail”) banks and set interest rates at nearly zero. It was presumed that the banks would lend those trillions of “free” fiat dollars to the public at low, low interest rates. It was presumed that all of the free currency given the banks would thereby “trickle down” to the great unwashed.
It was also presumed that the public would borrow the enormous sums of “free” dollars at fantastically low interest rates to invest in businesses or just buy stuff. All the resulting public investment and purchasing was expected to stimulate the economy, and—ta-da!—America would almost see an almost instant “Recovery” from the Great Recession.
Historically, this “Trickle-Down Theory” was based on the unstated presumption that “money” still has a physical reality that prevents it from moving easily to another “jurisdiction” —especially if that jurisdiction is on the other side of the Atlantic or Pacific oceans. I.e., so long as “money” was made of gold or silver, it couldn’t easily move to another country.
Money’s former physical nature caused it to be “trapped” in the U.S.. As a result, creditors who had money to lend were generally compelled to accept whatever interest rate is imposed by the Federal Reserve and/or the federal government.
The presumption that money couldn’t easily move to another country was absolutely valid so long as the “money” was made of gold and silver. But once our “money” became a fiat currency composed of electronic digits, the presumption failed. Fiat, digital currency, isn’t trapped anywhere and can flow at the speed of light over the internet to whatever foreign market pays the highest rates of interest.
In the aftermath of the onset of the Great Recession of A.D. 2008, the Federal Reserve “printed” and gave trillions of fiat dollars to major (“too big to fail”) banks and set interest rates at nearly zero.
It was supposed that, because the major financial institutions had received trillions of “free” dollars, they’d then generously lend those trillions to the public at fantastically low (near zero percent) interest rates. However, the banks essentially said, “Screw that. We’re not running a charity. We’re not lending ‘our’ money (even though we got it for free from the Fed) to anyone for artificially low interest rates. Therefore, we’ll either keep our trillions of “free” dollars in our vaults or we’ll lend them out at high interest rates to foreign borrowers to make a good return on our investments.
It was supposed that the American public would borrow enormous sums of “free” dollars at fantastically low interest rates to invest in businesses or just buy stuff and thereby “stimulate” the economy back to health. However, the “crash” of 2007-2008 had scared the public so badly that they weren’t about to borrow anything and go even deeper into debt—regardless of how low the interest rates were.
Because the banks weren’t lending at artificially low interest rates to Americans, and Americans weren’t borrowing at any interest rate, not much of the Fed’s “free money” was loaned into our domestic economy. Therefore, not much was spent, and the Trickle-Down Theory—that by giving free trillions to the banks and imposing low interest rates, the banks would generously lend, the public would greedily borrow and spend, and the Great Recession would be thereby quickly quashed—failed.
Very little of the trillions of fiat dollars given to major banks actually “trickled down” to the great unwashed.
Result? The Great Recession of A.D. 2008 lingers still and the “Recovery” remains almost as mythical as unicorns.
Why, this result? Because digital dollars are no longer “trapped” by a physical nature within the borders of the U.S..
Today, paper, and especially digital, currency can flee from any country that pays low interest rates and go to any country that pays high interest rates.
As a result, low interest rates—which historically helped stimulate an economy by encouraging people to borrow and forcing lenders to accept low interest rates—may now have the opposite effect. Today, low interest rates drive currency out of the local economy in search of other economies that pay high interest rates. Low interest rates thereby cause the local currency supply to shrink and thereby contribute to deflation.
If this hypothesis is roughly correct, then the Federal Reserve’s policy of imposing artificially-low interest rates (which are justified as a means to encourage inflation and economic stimulation) may, in fact, contribute to deflation, recession or even economic depression.
• According to Bloomberg (“IMF Cuts Global Outlook as ‘Frothy’ Stocks Raise Correction Risk”):
“‘In advanced economies, the legacies of the pre-crisis boom and the subsequent crisis, including high private and public debt, still cast a shadow on the recovery,’ the IMF said in its latest World Economic Outlook. . . . IMF Managing Director Christine Lagarde warned that officials need to act to prevent a prolonged period of sluggish growth, a trend she called the ‘New Mediocre.’ Raising growth in emerging and advanced economies ‘must remain a priority’.”
How will the Powers That Be (central banks and/or their owners) “raise growth” on a global level without inflating one or most of the world’s fiat currencies?
Since Quantitative Easing (the Fed buying US bonds with freshly-printed fiat dollars) has ended, the domestic supply of fiat dollars is no longer increasing and the currency is not inflating to the same degree as was formerly true. Judging from the US Dollar Index (US$X) and the currently falling price of gold, the dollar may actually be deflating.
This is not to say that deflation is currently predominant. In any economic scenario, there are elements of both inflation (some prices, like food and stocks, go up) and deflation (some prices, like gold and gasoline, go down). These indications of inflation and deflation co-exist at the same time. We say that we’re in a period of inflation when the vast majority of prices are rising. We say that we’re in a period of deflation when the vast majority of prices are falling.
It may well be that we are still, primarily, in a period of inflation. But it’s also true that evidence of deflation is growing at a surprising rate. Deflation that seemed inconceivable a year ago now seems possible. After two or three generations (40 years) of persistent inflation, we’re now left to ponder whether deflation could soon become predominant.
• Three things happen in conjunction with deflation:
- The value of the currency rises. If you could buy a pound of steak for, say, $5 last year, after some significant deflation, you might buy an identical portion of steak this year for just $3. Although most people suppose the steak is cheaper, the truth is that the dollar has gained purchasing power and is more valuable. Whenever a currency increases its purchasing power, we have deflation.
- The burden of existing debt grows because debtors are forced to repay their debts with more expensive dollars. Deflation is absolutely ruinous to debtors, to governments that have enormous national debts, and to nations that have debt-based monetary systems.
- Deflation is at least a characteristic, and perhaps a cause, of economic depression.
If the dollar is allowed (or caused) to deflate, the national debt will grow in terms of purchasing power and become increasingly difficult for the U.S. gov-co to repay. Sooner or later, persistent deflation will not only make it impossible to pay the principal on the national debt but also make it impossible to pay the interest on that debt and render the bonds non-performing. Once the government openly defaults on parts of the National Debt, the value of the remaining US bonds should fall and the US dollar might be replaced or at least revalued in some sort of “reset” that will cause prices to rise (inflation) rather than fall (deflation).
If the dollar is allowed (or caused) to deflate, the US economy should slow and perhaps slide into an overt economic depression.
Unless the government wants the national debt to be openly repudiated—i.e., unless the government wants a national depression—the government should do whatever it can to increase the forces of inflation.
Strangely, the Fed seems to be currently allowing (or even encouraging) deflation. I don’t know if this current phenomenon is accidental or intentional.
But I do know that:
- Since the dollar became a pure fiat currency in A.D. 1971, inflation has reduced the purchasing power of the dollar by about 97%. This established, 43-year trend is evidence that government wants Unless government has decided to intentionally reverse this 43-year old trend, I presume that government still wants and needs inflation.
- Deflation is absolutely contrary to the government’s self-interest in reducing the size (purchasing power) of the national debt;
- A prolonged period of deflation risks a national depression comparable to the Great Depression;
- During a period of deflation, American products become more expensive and less competitive in foreign trade. With deflation, we’ll export fewer U.S. products overseas and have less jobs here at home.
- Global free trade compels a multi-national currency war wherein each nation fights to prove that its currency is worth less than the other currencies, so its exports are therefore perceived to be “cheaper” and the best buys on the global market. Insofar as global free trade encourages currency wars, global free trade encourages inflation.
- The fiat dollar can survive inflation for quite a while, but will quickly collapse under the weight of deflation.
1) The government has simply lost control of the economy and has no means to prevent the current deflation; or
2) The government wants an economic depression—
it should follow that the current evidence of deflation (and falling gold prices) should be of short duration.
Although I’m convinced that our government has been seized by a pack of treasonous whores who are actively working to diminish the power and prosperity of the USA, I nevertheless presume that our government is not yet ready to “pull the plug” intentionally collapse our economy. I know our leaders are a bunch of lying villains, but I presume that that they’re not yet sufficiently villainous to intentionally collapse our economy and plunge the nation into chaos.
My presumptions may be mistaken. Perhaps government is already acting to intentionally collapse out economy. If so, you’d better have lots of food, water, guns, bullets and gold stored up because God only knows where we’re heading.
• But assuming my presumption (that government is not yet ready to intentionally collapse the economy) is correct, the government needs to restore inflation. What can government do to increase inflation?
Most people vaguely understand that printing more fiat dollars should contribute to inflation. If government wants inflation, it should restore the Quantitative Easing that it recently terminated and start pumping more billions of fiat dollars into the economy. As the domestic money supply grows, each fiat dollar should lose purchasing power and become less valuable. That’s the essence of inflation.
Most people do not understand that raising interest rates should also contribute to inflation.
I.e., as interest rates fall in the US, creditors don’t want to lend into the US because they can’t make a profit. Therefore, both foreign and domestic creditors lend to foreign borrowers that pay higher interest rates.
While low interest rates were supposed to encourage ordinary Americans to take out loans to buy cars or new homes, the actual effect may have been to drive fiat dollars overseas where they sparked the recent economic boom in “Emerging Economies”.
As low interest rates drove currency out of the US, the net effect of low interest rates was to reduce the money supply that was actually available within the U.S.. As the domestic money supply was reduced, dollars became increasingly scarce and increasingly valuable. A rising value/purchasing-power of a currency is the essence of deflation. Thus, imposing low interest rates should contribute to deflation, a slowing economy, and perhaps even a national economic depression.
The Fed prints trillions of fiat dollars for the apparent purpose of increasing the domestic money supply since, by increasing the domestic money supply, the Fed makes each dollar worth less, and thereby causes inflation which they believe will stimulate the economy.
But, when the Fed suppresses interest rates, it drives currency out of the domestic economy in search of higher returns in foreign markets and thereby reduces the domestic money supply. Reducing the domestic money supply should make each fiat dollar more valuable and thereby contribute to deflation—which most believe will slow the economy and perhaps precipitate a “Greater Depression”.
Which leaves me to wonder, What the helck is the Fed really up to?
Given that the Fed prints fiat dollars to increase the domestic money supply and thereby cause inflation, but also lowers the interest rates to decrease the domestic money supply and cause deflation, has the Fed become schizophrenic? What does the Fed really want? Inflation (economic stimulation) or deflation (economic depression)?
The Fed has repeatedly claimed that it’s determined to restore 2% inflation in the U.S. economy. I’m beginning to wonder if that claim is a lie.
But, assuming the Fed’s claim is true, and assuming that the hypothesis I’m advancing in this article is roughly correct, it should follow that the Fed will not demonstrate a real commitment to causing inflation and thereby stimulating the economy until it raises interest rates.
I understand that conclusion is controversial and so contrary to conventional wisdom that it may strike most readers as absurd.
Still, some fundamental facts remain to support that conclusion:
- Digital currency is no longer trapped within any nation or economy.
- Creditors will naturally seek the highest interest rates they can find for whatever funds they have to lend.
- By lowering domestic interest rates, the Fed should cause creditors to lend their currency into foreign markets that pay higher interest rates.
- As lenders move their currency from the US economy to foreign markets, the domestic currency supply should be reduced.
- A reduction in the domestic money supply should contribute to deflation.
For me, the implications of those five facts support the conclusion that low interest rates contribute to deflation.
If would seem to follow that, if and when the Federal Reserve decides to start raising US interest rates, creditors should be more inclined to lend into the US markets, dollars should flow from the “Emerging Economies” back into the US, the supply of currency actually available within the US should rise and therefore contribute to inflation that, in theory, should “stimulate” the economy and also raise the price for gold.
On the other hand, so long as the Fed does not raise interest rates, I’ll be increasingly inclined to embrace the seemingly irrational possibility that the Fed is actually working to cause deflation and perhaps even an economic depression.
I know who crazy this sounds. But the logic of the “facts” I’ve listed push me to this conclusion.
• The US national debt has nearly doubled during the Obama administration. This doubling is evidence of the government’s unsuccessful attempts to print trillions of fiat dollars and inject them into the economy to provide inflation and economic “stimulation”. That attempted “stimulus” succeeded only in providing economic stagnation. The economy didn’t collapse, but it didn’t recover, either.
Although price inflation (at the grocery store, for example) is much higher than government admits, we haven’t yet seen the magnitude of inflation many expected after the Fed injected trillions of dollars into the major banks or after the economic stimulation government had predicted would flow from printing all those trillions of “extra” fiat dollars.
Instead, much of the newly-created dollars flowed overseas to escape low U.S. interest rates.
Result? After all of the Federal Reserve’s heroic printing, our fiat dollars were inflated somewhat (but much less than many expected)—and the US economy remained stagnant and unstimulated.
We didn’t get much inflationary bang for our trillions of freshly-printed bucks.
Why all those trillions of freshly-printed fiat dollars didn’t cause more inflation has remained a mystery.
I suspect that the explanation for the minimal inflation achieved over the past six years was the Fed’s simultaneous determination to impose near-zero interest rates. Strangely, the Fed has been stepping on the “gas” to cause more inflation by printing more fiat dollars at the same time it’s been stepping on the “brake” by suppressing interest rates, causing an outflow of domestic dollars and a reduction in the domestic currency supply and thereby contributing to deflation.
If my conjecture is roughly correct, it implies that either the Fed is either too dumb to understand that reducing interest rates drives money out of the country and thereby contributes to deflation—or, that they’ve only been pretending to cause inflation (by printing) when they really wanted deflation (by holding interest rates down).
Both explanations are scary.
Either the people running this economy are too dumb to have the job, or the people running this economy never wanted the Recession of A.D. 2008 to end, never really wanted us to inflate our way out of the Recession, but are currently working to cause deflation and an overt economic depression.