This article was originally published by Charles Hugh Smith at PeakProsperity.com. You can view more of his analysis at Of Two Minds.
I’ve long held that if a problem can be solved by creating $1 trillion out of thin air and buying a raft of assets with that $1 trillion, then central banks will solve the problem by creating the $1 trillion out of thin air—nothing could be easier.
This is the lesson of the past eight years: if a problem can be solved by creating new money and buying assets, then central banks will solve that problem.
Problem: stock market is declining. Solution: create new money and buy, buy, buy stock index funds. Problem solved! Market stops falling and quickly rebounds as “central banks have our backs.”
Problem: interest rates are inhibiting lending and growth. Solution: create a few trillion units of currency and buy enough sovereign bonds to drop interest rates to near-zero.
Problem: nobody’s left who can afford to buy the new nosebleed-priced flats that underpin China’s miracle-grow economy. Solution: create new currency, lend it to local government agencies who then buy the empty flats.
Problem: stagnant employment and deflation. Solution: create a trillion in new currency, buy a trillion in new government bonds that then fund infrastructure projects, i.e. bridges to nowhere.
And so on. Any problem that can be solved by creating a few trillion out of thin air and buying assets will be solved. The mechanism to solve these problems—creating currency out of nothing—is like a perpetual motion machine: there are no intrinsic limits on the amount of new money that can created at near-zero interest, as the interest payments can be funded by new money.
Even better, the central bank (the Federal Reserve) buys Treasury bonds with the new currency that generate income, which is then returned to the Treasury: a perpetual-motion money machine!
The policy of creating trillions in new currency and buying trillions in assets has inflated an everything bubble, a bubble in all the asset classes being supported or purchased by central banks and their proxies.
Many observers wonder what, if anything, could pop the everything bubble.
This leads to an interesting question: what problems can’t be solved by creating another trillion and buying assets?
What Problems Can’t Be Solved by Creating Another Trillion and Buying Assets?
The past eight years have created the comforting illusion that essentially all problems in the modern era of globalized, centralized, debt-based, state-cartel capitalism in all its flavors (Chinese, Japanese, European, American, etc.) can be solved by creating as many trillions as are needed (whatever it takes) and buying assets or issuing guaranteed lines of credit with the new currency.
But there are some structural problems that can’t be solved by this mechanism. Some are primarily economic, some are primarily political-social, but all of them affect the entire system, not just the financial realm.
We’re told that inflation—the loss of purchasing power of a currency—is near death and this greatly saddens the globe’s central bankers, who desperately need inflation to push wages higher and reduce the burden on debtors.
So let’s say, just as a thought experiment, that central banks get their much-desired inflation, but it runs hotter than their 2% annual target. Once inflation is embedded in expectations and the supply chain, printing another trillion and using it to buy stocks, bonds, empty flats, etc. won’t make inflation go away. Rather, the inflation in asset valuations generated by endless central bank buying if assets ends up feeding real-world inflation as all this new currency doesn’t actually produce more goods and services; it simply expands the supply of currency sloshing around the world looking for speculative yield.
The chorus of voices advocating for Universal Basic Income (UBI) is growing, and central banks will increasingly be pressured to issue new currency to fund UBI and its equivalents—what’s known as helicopter money, as the central bank issues currency that then funds deficit spending, i.e. the government dropping cash into the real economy.
Helicopter money comes in a variety of forms: debt forgiveness, negative tax rates (i.e. tax rebates to those who owe no income taxes), and cash stipends such as UBI. In every case, this helicopter money doesn’t expand the supply of goods and services; all it does is expand the funds available for consumption.
While China may be able to export deflation in goods that are tradable, that is, commoditized goods that can be made anywhere and shipped to markets elsewhere, nontradable goods and services such as local government services, housing, groceries, fast food, most healthcare services, haircuts, education, etc.—the bulk of the real economy—soar in price as the supply of money expands faster than the supply of these goods and services.
This is why inflation is already running extremely hot in nontradable sectors (which are often dominated, funded or controlled by the public sector/government), while deflation is still visible in tradable goods such as TVs, software, etc. I covered real-world inflation rates in The Burrito Index: Consumer Prices Have Soared 160% Since 2001 (August 1, 2016))
Much of the real-world inflation in sectors such as healthcare is invisible to protected classes because it’s being absorbed by employers and the government, a topic I covered in Inflation Isn’t Evenly Distributed: The Protected Are Fine, the Unprotected Are Impoverished Debt-Serfs (May 25, 2017)
Real-world inflation is also distorted by hedonics and substitution, tricks that lower the official rate of inflation but don’t change the reality that the average prices paid for vehicles have risen substantially, despite the official claim that vehicle prices have been flatlined for years, a topic I addressed in About Those “Hedonic Adjustments” to Inflation: Ignoring the Systemic Decline in Quality, Utility, Durability and Service(October 11, 2017)
Be Careful What You Wish For: Inflation Is Much Higher Than Advertised (October 5, 2017)
As political pressure on central banks mounts to fund QE for the people, QE for Main Street, etc., that is, helicopter money in one form or another, the introduction of new currency into the real economy has the potential to make real-world inflation undeniable.
Once inflation is undeniably in the 5% to 7% range, who will be willing to buy a negative-interest rate bond, or a bond paying 1%?
Another potential engine of inflation that’s widely discounted is global shortages of key commodities such as oil, grain, fresh water, etc. The global economy has come to view cheap, abundant commodities as the natural and permanent state of affairs, but history tells us that abundance and low prices are not permanent. Since essential commodities are integral to the global supply chain, any price increases due to scarcity or supply disruption quickly feed inflation into the entire supply chain.
Inflation is a problem that creating another trillion won’t solve; creating and distributing another trillion or two will actually make the problem worse.
Rising Social Disorder Due to Soaring Wealth-Income Inequality
Famed financer Ray Dalio recently penned a commentary labeling the divergence of the wealthy elite from the bottom 90% The Most Important Economic, Political And Social Issue Of Our Time.
This is a topic many alt-financial bloggers have covered for years; I’ve penned dozens of essays on the topic, most recently The Fading Scent of the American Dream (October 16, 2017)
This chart depicts the inconvenient reality: central bank currency-creation-asset-buying has enriched the top of the wealth-power pyramid, with limited trickledown to the top 10% and negative effects on the bottom 90%.
The consequences of this outcome of central bank stimulus-for-the-already-wealthy can manifest in all sorts of ways.
Political pressure on central banks may grow, forcing policy changes or even limiting the scope of central bank largesse to banks and financiers.
Social movements demanding UBI and other income-distribution policies may become mainstream, a dynamic that as described above will add to the inflationary pressures building in the real world.
Once again, creating another trillion and buying more assets held by the wealthy won’t fix this problem—it will only make it worse.
Fragmentation of the Elites
As I have often noted, historian Michael Grant identified profound political disunity in the ruling class as a key cause of the dissolution of the Roman Empire. Grant described this dynamic in his excellent account The Fall of the Roman Empire, a book I have been recommending since 2009.
The chapter titles of the book provide a precis of the dynamics Grant identifies:
The Gulfs Between the Classes
The Credibility Gap
The Partnerships That Failed
The Groups That Opted Out
The Undermining of Effort
I’ve discussed profound political disunity in dozens of essays since 2009, for example, When Did Our Elites Become Self-Serving Parasites? (October 4, 2016)
The Real Trouble Begins When Rising Inequality Splinters the Elites (October 22, 2015)
There are a number of manifestations of profound political disunity we can discern:
— The splintering of the technocrat class as soaring wealth and income inequality narrows opportunities for financial security for the class that considered security and wealth a birthright.
— The fragmenting of the Deep State, the unelected, permanent leadership of the Establishment, a subject I’ve addressed since 2014: The Age of Disintegration: Political Disunity and Elites At War.(November 21, 2016)
— The fragmentation of the two political parties into warring camps that have little common ground in a struggle for control of the rising tide of populism.
— The splintering of the social order into conflicting classes of Haves and Have-Nots, a topic I covered in America’s Nine Classes (April 13, 2015).
Once again, creating another trillion and buying assets—a policy that enriches the financial elites at the expense of every other class and elite—doesn’t solve the problem, it only makes it worse.
Popping the Everything Bubble Created by Central Bank Currency Creation-Asset Buying
As central bank creation of currency and asset purchases fail to solve the problems outlined above, these dynamics will undermine the status quo rather than prop it up. As central bank policies are increasingly fingered by the mainstream as the source of soaring wealth-income inequality, central bank policies supporting credit/asset bubbles will either be limited or cut off, and at that point all the credit/asset bubbles will pop.
In Part 2: What To Invest In When The Everything Bubble Bursts, we lay out our how to best prepare for the social discord, political disorder and financial upheaval that will result when the central banks inevitably lose control of the system.
As today’s bubble-drunk asset prices start plummeting, what investment opportunities will offer the best returns?
To find out, click here to read Part 2 of this report (free executive summary, enrollment required for full access)
I don’t think I believe the chart that shows new cars have zero inflation over the last 10 years.
A new minivan costs more then I paid for my first house.
I just now quickly checked prices on new ones. Yikes! Way more than the cost of my first house. Almost half of what I paid for my current residence that I just paid off last year.
More horseshit for the masses.
The dollar has lost 98% of its value since 1913 and the Federal Reserve initiation. We scrap over the remaining 2% by habit. I once bought a 1950 Fargo pickup with the dealers bill of sale when new found in the glove box. New price tax in was $1836.00. It seems the pace of theft has picked up somewhat over the second 50 years of central bank rule. I miss them old flatheads. There is a lot I miss about the way we were. The way we were supposed to be back when honesty, integrity and fairness were virtues. A lot more smiling and back slappin back then. Now we’ve got the knock out game.
I forgot to add that my own grandfather purchased a Ford model A brand new for $450. Sure it took him 3 years to pay for it but it gives a sense of timing for the greatest theft known to mankind. $450 to $65,000 in three generations.
You can’t honestly say this hasn’t been well earned. People had a choice to side with their ancestors or side with the likes of Leary and Alinsky.
This reminds me of that Star Trek TNG episode where all the great grandkids of the original inhabitants of some particular planet… had no idea how to make… ANYTHING. The computer and its automated factories did everything for them and then one day it broke.
Except this is worse because it’s like if they’d been actively taking pitchforks to the computer and thumbing their nose at it in some misguided sense of superiority.
Ugh the hubris is off the charts now.
My generation already started down that path, certainly nowhere near as deserving of a good life as yours was… so I suppose my having to live the tail end of my life dealing with this mess is merely karma. Also well earned.
Wish I didn’t have to but karma will not be mocked. This is what you get. This is what you get. This is what you get, when you mess with us…
same with my story 3 bedroom mobile home new fully furnished cost less than a new van today 40 years ago
same with my story 3 bedroom mobile home new fully furnished cost less than a new van today 40 years ago
How about this. Are they trying ti collapse it faster?
“But very quietly behind the scenes there’s been an extremely rapid uptick in the US national debt.
In the month of October alone, the US national debt has soared by nearly a quarter of a trillion dollars.”
They probably don’t care and are going for maximum wealth extraction before the whole casino caves in.
The current global system of usury and fiat money created by the elite is not sustainable.
The current global banking system was designed to cause constant wars, unemployment, recessions, debt, bank failures, and unsustainable cost of living.
For years taxes have secretly increased through inflation.
Cost of living is now extremely high in many places.
There is only so much money you can take from people until there’s no one else to take it from.
The current elitist global banking system was designed to steal as much money from people as possible before the system collapses.
The elite are simply buying time right now and making billions every year until they have everything set as planned.
When the system collapses the elite will have exactly what they’ve been waiting for.
A chance to implement their cashless society ruled by a One World Government totally controlled by the banking elite.
Won’t take much and it’s already baked into the cake.
Must see, Anti racist Hitler . Video.
A pussy fart could make everything pop. They’ll blame it on Trump.
it will be a COLOSSAL prick, no doubt.
Collossal..another name for Hillary….
I really expected this to happen five years ago. We cannot continue to go on like this forever. When the next 2008 collapse happens I wonder how bad it will get. We in my opinion have never recovered from it in the first place.
Tic Toc Tic Toc
I think what will prick the bubble will be a commodity problem. If there is a crop failure, the banks can’t just print more.
There is little to no reserve of essential grains. Since some of these are used for feeding animals, animals that can’t be fed will be sold as soon as possible and not replaced. After the initial glut of animal goods (meat, eggs, milk, etc), prices will go up. The grains intended for human consumption will also get more expensive. When food becomes very expensive and people have to seriously choose whether that new gadget, textbook, or whatever is more important than eating.
Why do I think it’s a commodity that will be the trigger? I’ve been reading (online) about climate change. There are actually more solid arguments for global cooling than there is for global warming. Either way, there are normal cycles for cooling (think Little Ice Age in 16th-19th century) or warming (early medieval times were warmer than now per research of tree rings and ice core samples, etc). In fact, there are numerous cycles that directly affect the climate we experience in our lifetimes. Some cycles are long or really long (don’t know their names as I’m not an astrophysicist). When there are changes, the normally expected weather for growing can be very disruptive with crazy weather; think late/early damaging frosts or sudden violent weather that damages crops. Some think it will be barely survivable above 33 degrees latitude in the Northern hemisphere with dreadful interruptions to global society and some think it will be a lot colder with a year or so of no summer. (it’s happened before with direconsequences.)
Less crops is less food and then it goes back to what I wrote in the second paragraph. Things don’t reverse until warming returns.
One thing all the reading has done is make me look much more seriously at my preps and how much more there is to do. (Okay, there’s always something more to do.)
What I’ve read so far (not everything in these links but a lot):
* Oilseedcrops.org — under global cooling tab, many resources and survival info (for any time)
* notrickszone.com — also has links to numerous paper pro and con for climate change
* globalweatheroscillations.com — (David Dilley, CEO) mostly a subscription site but a good number of nuggets with some digging
* assorted videos on YouTube. Most are long at 60+ minutes but the scientists present many charts and explain their logic.
Fasten your seat belts. No telling if social unrest will get things rolling before Mother Nature does. We live in interesting times.
Now back to finding a job for me.
Check out “Dark Winter” by John Casey
Thanks, Tanto. I will do that.
History shows that fiat currency fails sooner or later. The US Petrodollar will be no different.
Bear with me all…. where I live there is an old trick used to disperse oil as a sheen on the surface of water. Especially useful if the USCG pops a surprise inspection of a commercial dock. A couple of drops of dishsoap spritzed right onto the sheen. Poof!!! all gone. Both the oil and the soap just ‘disappear’ (actually, sink rapidly). So? To get rid of a (soap) bubble or an oil bubble – either/or will do the trick. What’s going to pop the stock market bubble? I’d bet …… on oil. A rapid change to a different default currency or a sudden spike – say to $90+/barrel.
Back in 1968 we bought a new pontiac GTO with a 427(?) engine straight from factory
for a devastating price of $2700. Racing gear / auto shift and all the bells and whistles.
You could buy a lovely three bedroom house, 1200 sq. ft. for $18,000. on a 200×155 foot
lot in a country setting 3 miles from town. Average pay for a John Deere shop worker was
$400-700 a month. A side of beef was $80-95.
If UBI is pushed for by anyone like my ex…