Tuesday, September 18, 2012

QE 1, 2, 3, infinity

"Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed."   Ludwig von Mises

With QE1 there was talk of an "exit strategy" and "unwinding" or "withdrawing the liquidity".   This was claimed to be a temporary injection of money to deal with a liquidity crisis.   When QE2 came with more liquidity instead of an exit, people should have begun to wonder if the extra money was in fact temporary.   But now with QE3 of unlimited amounts, nobody should still be expecting any exit strategy.  As this really sinks in, people will start to flee US bonds.   This will cause the Fed to buy even more bonds, printing even more money.  This will cause even more people to flee US bonds, the Fed to buy more,  etc.  The positive feedback loop or death spiral will start.  The velocity of money will increase.  The quantity of money will increase.  The real economy will be hurt.  Hyperinflation seems unavoidable.


  1. Maybe i see things backwards.

    There is approximately over 95% credit or debt in our system. A small % is actual currency.

    In other words, the amount of debt dwarfs the amount of actual money, or debt free money, if you will.

    If you dont understand the difference between debt and money you will fail to understand the issue. Me having 100 bucks to spend in my pockets, is not the same as me borrowing the money to spend. That 100 that i borrowed has to repaid with interest, and will reduce spending from somewhere else in the future.

    Money in my pocket is spent without impacting future expenditures.

    This is the difference between debt (our issue) and creating debt free money out of thin air. It is not the same.

    If you can see this difference, issuing more debt only makes matters worst as it further destroys capital.

    Do not count on the fed to create hyperinflation. Congress, oh congress, can and will most likely be the cause for hyperinflation. When the gov can no longer pay its dues, it will most likely pass laws to 'pay' for them.

    1. The thing you are missing is that when governments don't really pay down their debt, then there is no real difference between "debt based money" and "debt free money". Also, when the Treasury pays interest to the Fed, they get it back since they get the Fed's profits. So it is not like a real debt. The only way the government pays off debt is by first selling more bonds. When the central bank is the only buyer of bonds, then the way the government pays off a bond the central bank has is by first selling another bond to the central bank. So really they are just printing and spending money.

    2. Your statement is more deflationary than anything. Re-read your statement again.

      Not sure why you prefer to use the word 'sell' instead of borrow, but its the same. And no, the government does not 'have' to borrow more, it can pay the debt by collecting taxes. The government has been spending more than it can tax.

      Your theory is reverse, the high inflation via the creation of unbacked credit has already taken place. We've reached a peak in debt, in 2007, and debt wont ever reach that level again in our livetimes.

      The fed and gov have been trying to fill a gapping hole. We are in a deflationary period, and will continue to be there until 1) debt is written off or 2) the congress (not fed) prints unbacked dollars to pay down the debt.

      There is no other way..

    3. The US debt has gone from something like $9 trillion to $16 trillion in the last 4 years. We have not reached peak debt. The levels will go much higher. They will print like crazy to fund this deficit and debt. There is no other way.

      Hyperinflation is about government debt and deficit getting out of control. Large or small private debt does not enter into it.

  2. Btw,

    Hyperinflation, in all cases, has been caused by a political event. Loss of faith doesnt just happen.

    First, the government has to decide that they can just print as much as they want to pay for things they need.

    This is what Mish refers to when he talks about a political event.

    1. I don't think there is ever a decision to hyperinflate. Would you say the US government has "decided that they can just print as much as they want to pay for things they need"? It is what they are doing really, but did they decide that?

  3. So the US doesnt owe China and other bondholders anything?

    Is that what you are saying?

    Why do banks own the biggest towers in town?

    The fed does pay the gov its profit, but what good is profit, when it is the banks that decide when money gets created. Thats what you are missing.

    When tax revenues collapse, you think the fed will print to keep the party going?

  4. The US will pay off bonds it sold to China by selling other bonds, probably to the US central bank.

    When the central bank loans money to other banks at 0.25% per year and they loan it to credit card holders at 20% per year, the banks can make a profit.

    The Fed only seems to have independence. If they did not buy government debt like crazy, things would be changed till they did. This could be people at the Fed or laws. But the government needs them to buy government bonds.

    The spending is far beyond the taxes. This is only possible because they are printing so much money. They are already keeping the party going. The punch bowl will not be taken away.

    1. So do you think that a collapse in the stock market and short term deflation will occur before hyperinflation?

      Or will the temperature slowly rise and boil us to death?

      The way I see it, we are basically entering a world where government employees (military, bureaucrats, public unions, public sector,etc) will be the only ones spending money and the private sector will be destroyed as they race to the bottom trying to seek out the few customers they can find.

      Then, according to what I've read from you, rather than that being deflationary as one would normally expect, it will be inflationary because the government will have to expand and spend more money to take care of those people.

      That's the most logical explanation I've heard yet why economic trends that we normally expect to be deflationary could actually be inflationary.

      However, I'd still like to see some discussion of how a collapse in the credit market could be bailed out by the Fed. Will they just print money and give it to people to pay off their debts? Or will the chain-reaction of defaults be too much for the system to handle and cause deflation? Can the central bank act quickly enough to provide liquidity (print money) in such a scenario?

      I think the devil is in the details and this is where you and Mish find some disagreements.

    2. I expect that when inflation starts to pick up the bond market and stock market will both crash. The value of bonds goes down with higher inflation and interest rates. The P/E ratio depends on the interest rate, so if rates are going up the P/E ratio people will pay for stocks goes down.

      Things like houses that are bought with loans will initially drop in price as interest rates go up. But I don't expect the prices for the necessities of life (food, electricity, gas) to go down.

  5. The printing will continue until morale improves.


Looking for polite debate on ideas. Never attack a person. Be nice.