Our answer to this question is: ABSOLUTELY. In fact, we believe that there is a very good chance that this process is already underway. As we see it, the impact of an inflationary monetary policy upon the overall direction of prices and on the DEGREE OF PRICE CHANGE depends upon several variables, especially where in the economic and price cycles we are when the central bank institutes and ramps up a money-printing program in an attempt to neutralize a powerful price trend. In the current instance, what we are looking at is, of course, one of the most severe credit contractions and debt deflations in history. The origins and evolution of the PRIMARY CAUSE of this intense credit collapse are, of course, as plain as day. Each and every time a central bank, or, in pre-central bank days, a government or financial institutions manufacture and distribute widely a geometric increase in money, credit, and debt, the die is cast. Initially, there is a surge in the economy, fuelled by a surge in "investment." This gives way inevitably to an explosion in speculation and a pyramiding of debt. Once the speculative bubble (or bubbles) meet their inevitable fate and burst, the asset liquidation process begins, as speculators are unable to meet their debt service once the market value of their collateral starts its steep decline. Each wave of liquidation is succeeded by the next wave, as those indebted speculators (or homeowners, or consumers) who are are able to maintain their debt levels at "x" market value of collateral can no longer support same once the initial wave of liquidation drives prices down to .9 x. The forced,or panic-driven level of liquidation at .9 x undermines the position of the next tier of hitherto "safe" speculators, who are themselves then compelled to sell into a falling market. As capital is destroyed, the quantity of money shrinks, and the purchasing power of the currency rises, as demand for goods and services falls in tandem with the decline in asset valuations. This is DEFLATION. When the central bank, or the government, enters the fray with the intention of printing money or otherwise creating credit, there are two great dangers, both of which have a greater than even chance of being realized: 1. FEAR of future inflation grows like Topsy, far outpacing the actual increase in the supply of credit. (Indeed, the creation of money and credit by the central bank CANNOT offset the destruction of capital as a severe financial, and then economic, collapse unfolds). This FEAR of inflation produces precisely the OPPOSITE RESULT the FED/GOVERNMENT seeks. It causes fearful bondholders, and would-be bondholders, to SELL, thereby driving down bond prices and RAISING INTEREST RATES along with making money and credit even scarcer. Only a central bank/government with the full confidence of the universe of creditors could hope to overcome this fear. In the current situation, the central bank/government obviously DOES NOT POSSESS EVEN A SCINTILLA of the confidence of bondholders. If it did, the credit contraction and economic submersion would be vastly less than it is (a la pre-Lehman collapse days). 2. FEAR of inflation as a consequence of new acts of monetary policy, which are inherently unpredictable, REDUCES DRASTICALLY the willingness of creditors and potential risk takers to purchase securities, either debt or equity. Investment decisions are frozen, businesses are paralyzed, by the deepening uncertainty about the future course of monetary policy, of inflation/deflation, and of government intervention in the financial markets and the economy, intervention which appears inconsistent, whimsical, dangerous in its reverberations, and politically manipulated. Instead of certainty about the value of the currency, the FED's money-printing and other proto-inflationary policies have served to intensify the paralysis of the crucial private sector, thereby further ENABLING THE INTENSE DEFLATIONARY PRESSURE TO INTENSIFY. Moneysage - copyright 2009 |
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Money Sage |
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