austrian economics, Bernanke and inflation, collapse of the United States, Graph of the bubbles, How the U.S. might collapse, Income disparity, Maya and the future of the U.S., Maya apocalypse, Mayan Calender Finacial Collapse, monetarism, Money Mayhem, Stagnant wages, The next great economic disaster, Top 1%, Wages falling, Why is there not more inflation
There has been much written about the coming end of the Mayan calendar; a calender thought by some to mark the end of time. For experts on Mayan culture the calender shows cycles that the Maya believed marked the end of one era and the beginning of another. Historically the cycles seem to correspond with world changing events or at least events that forever altered their world. Thus the end of a cycle was a time associated with chaotic change.
Although the Maya intellectual elite that created the calender have long ceased to exist their calender and its cycles is only just about to end. For the U.S. any events that correspond to this calender’s end is probably just coincidence. That said there is one scenario of apocalyptic proportions that does seem to be developing before people’s eyes. Although there are many experts warning of this coming disaster you will not find it talked about in most of the nations newspapers or even mentioned on a evening news cast. In fact you are more likely to hear about fanciful theories of a unforeseen meteor hitting the earth or fanatical people heading to a special mountain to avoid some coming cataclysm than this nearly inevitable disaster that is fast approaching.
The source of this ill wind is the Federal Reserve monetary policy. A policy that helped create two massive bubbles in the space of a decade and is poised to create another. The money that went to fund these financial disasters came directly from the vaults and offices of the Federal Reserve.
As the chart above shows, the massive increases in the top 1% wealth over the past thirty years has followed the Federal Reserves increase in the money supply almost step for step. In fact if it was not for the bursting of the Tech and Housing Bubbles the correspondence would be perfect. This would seem to show a smoking gun of financial disaster held firmly in he hand of the Federal Reserve. Despite this the Fed has not only continued the reckless expansion it has accelerated it!
Expansion of the money supply is natural and necessary in a growing economy. As long as it is balanced to the growth it is beneficial to all. What the Federal Reserve has done is use money as a drug, a stimulant to offset its and the governments economic failures. It has done so by creating much more money than the market needs, a sort of adrenalin rush for the Marketplace. Just like in the human body, this false burst of energy for the economy is followed by a crash.
The fact is there are three possibilities that can happen when the money supply expands beyond what is essential to match natural economic growth.
- It can enter into general circulation in which case it causes inflation.
- It is concentrated into the hands of the wealthy who, lacking enough opportunities to properly invest it, sink it in select areas causing a kind of localized inflation. An action that causes an investment frenzy (a bubble) which eventually collapses.
- The last possibility is is that the money does not move at all but just sits in the bank. Such a situation is temporary until the reason for it not moving is removed, after that either one or both of the previous two happens.
Historically the first scenario has been the most common. It is what most economists look for to show the expansion of the money supply has gotten out of hand. The fact is the U.S. has seen inflation over the last thirty years but not excessive by historical standards. What has been seen is a rapid expansion of the dollar wealth of the top 1% and two rapidly following market bubbles. Events that show just as conclusively as inflation that the money supply has risen far too much. Just as alarming the bottom 50% have seen stagnating wages since about 2000 with virtually no increases for the last six. In real terms their wages have actually fallen as inflation continues to eat away at their purchasing power.
Today, in an ironic twist, the incompetence of the present administration occupying the White House is giving the world a respite. The Obama administration’s combination of runaway regulations, ObamaCare and Dodd-Frank has caused such uncertainty that much of the money that would normally be either feeding the next great bubble or inflationary Armageddon is setting in bank vaults and corporate coffers. A situation that will not last forever.
Today as the world’s great movers and shakers are alternately licking their wounds and licking their chops, the next great melt down is being staged. The present expansions of the money supply has not been seen in any industrialized power since the Weimar Republic, for students of history this alone should be an alarming trend. The fact that this trend is now being accelerated under the auspices of expanding employment is something even more troubling.
Just as the real estate bubble was far more disastrous than the Tech bubble, the next one will even be worse. That is because each one builds on the last. A cycle sure to continue as long as we have a Fed dedicated to propping up its failures by printing money. The Chief Economist from Yale calls the situation a ticking time bomb. In the minefield of possible disasters facing the U.S including the massive debt and out of control entitlement spending this threatens to dwarf them all. Whether it is death by the financial deep freeze that accompanies massive financial collapse or the scorching fires of inflationary hell, the possibility of an economic apocalypse likes of which the Mayas could of scarcely imagined is being set.
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For a those seeking to further their understanding of the effects of monetary policy on the economy “Money Mischief”(can be purchased here) by Milton Friedman will go a long way towards opening up this world to you.
Technology Bubble Myth
It is quite common for Austrian Economists and others to suggest that the Federal Reserve created a Technology Bubble (dot-com bubble). If by a technology bubble they mean that real wealth was not created in the 90s this is nonsense. First of all the price of gold fell from 1998 until around 2001. The price of gold is one of the best indicators of inflationary policies. Second, the Fed started raising interest rates in June of 1999 from a Fed Fund Rate of 4.5% to 4.75%. This persisted until January of 2001, when the Fed Fund Rate stood at 6.5%. This is hardly an accommodative monetary policy. Third, industrial production grew by about 42% from the end of the recession in the early 1990s to the end of the recession in 2001. Fourth, median household income increased by 34% in the 1990s. Fifth, the stock market had real gains even after the bust of 2000. In the 00s, industrial production actually fell from the end of the recession in 2001 to the end of the recession in 2009, median household income declined, the price of gold soared, the Fed lowered interest rates to zero, the stock market did not grow at all. To lump the 1900s with the housing bubble of the 2000s is wrong and misleading.
The facts just do not support the Bubble myth of the 90s. Real wealth was created in the 1990s. The stock market had probably gotten ahead of itself, but the Fed’s attempt to engineer a soft landing just made the correction worse. This caused Congress to get involved and pass Sarbanes Oxley that destroyed the IPO market. They also made changes to the patent laws – weakening them, changed the accounting rules on stock options – requiring a phantom expense, eliminated pooling of interests accounting for mergers – making it less attractive for technology startups to merge. But for these stupid policy changes, the technology market and economy would have started growing again. In any large group of people, the only way to increase the per capita income/wealth is to increase the level of technology. US policies since 2000 have stifled technological innovation.
The so-call Dot-Com bubble is a myth.
A Conservative Mind said:
I have been out of town with minimal internet time or I would of responded quicker. There was a couple things in your comment that I wanted to address. The first thing is the common misconception that gold is a harbinger of inflation. Back before the 1970’s using gold as a inflation hedge would drive its price up when inflation was a concern. Today gold is used more for a safe-haven investment for both long term and the short term. The fact is the success rate of gold hawkers on TV and radio is more of a factor in the price of gold than anything else. As the graph below illustrates gold has showed itself to be a very poor indicator of inflation since 1980 with it seeming only following the inflation curve in 1986 and the period of 2004-2006. Not a great track record.
Another problem is in the connection between inflation and monetary supply, it is not a given as most think it is. The M in the MV part of Friedman’s famous inflation equation refers to money that is in circulation chasing products. Increasing money supply does not automatically increase the amount of money in circulation. If money is setting in banks (like today) or goes straight into investments it never gets a chance to cause inflation. That is why inflation has not occurred like many people think it should have.
Finally, to say there is a bubble does not mean there is no wealth creation. Amazon, ebay and google can attest to that. Even in the midst of the housing bubble there were good solid investments; shopping centers that are full and apartments that do not lack tenants (not to mention new home owners that did not default). In the midst of any economic storm there are winners, unfortunately that does not mean an overall improvement in the economic situation. For every Amazon there was heaps of those whose .com dream was mere fantasy. The proof of that is in the collapse that followed the euphoria. (A massive correction is by definition a result of a bubble) There is also the opportunity costs that can never be fully tabulated. Good projects never funded because the once the .com craze got going in created a vacuum that sucked up funds from other investments (just ask any investment adviser who live through it).
I actually tried to find something that corresponded to the bubbles and found only money did. A correspondence that was striking. The fact that the financial storms were creating a side effect of sucking money out of good investments is also showed by the stagnation of worker wages. The bubbles were real as is the chaos created by the Fed and its out of control money policy. Just another reason why the Fed is and always has been a bad idea.
Can you post a link to graph, it did not show up.
A Conservative Mind said:
look again, if you can’t still see it I will put in a link later
I would disagree with your analysis of gold as an inflation indicator – yes it is a flight to safety, but it is also a good inflation indicator. Inflation is not an increase in the price of goods, it is an increase in the amount of money. The chart is not that helpful, because the US government has changed the way it calculates inflation. If inflation were calculated like it was in the 1970s we would have about 8% inflation today and the way it was calculated in the 1990s we would have inflation of around 6% (see Shadow government statistics). Unless the chart is using a consistent measure of inflation, then it is impossible to tell if there is a strong correlation. However, there is no doubt that a basket of commodities is the best indicator of inflation. Either way the idea that the Fed was easing in 1999, 2000 does not add up. They were increasing the interest rates. Any short term increase in liquidity provided for the millenium could not have resulted in the boom, crash.
The 00s did not result in meaningful wealth being created – see industrial production, median household income, etc. Placing the stock market crash of 2000 in the same category as the housing bubble of 2008 is incorrect and leads to the wrong policy conclusions. Much as people want to blame the depression on the economic growth of the 1920s. These are myths used to justify government regulation.
A Conservative Mind said:
I would say we might have to agree to disagree on gold. To me a fair weather bellwether is no bellwether at all. As a factor among many to look at maybe but as a barometer for inflation it is woefully lacking. A basket of commodities that cross sectors might be useful as an indicator depending on how they are weighted and averaged.
As far as CPI being an inadequate measure of inflation, yes it is but the criticism of CPI is not in its inability to predict price direction but that, as you suggest, it lowballs its estimates. As far as inflation itself, it is by definition a general rise in prices that correspondingly signals a decrease in the value of the currency. The Chicago School/monetarist view is that this due to an increase in the amount of money in relation to GDP. Keynes believed it was related to the availability of labor thus the Keynesian astonishment at the appearance of stagflation. Austrians for their part hold a similar view to the Chicago school on this one.
As far as the Fed and interest rates, it is not just the absolute interest rate but the rate relative to what it would be if not being manipulated that counts. Rates have been historically low for a long time. A policy that has hurt savings and increased dependence on the government for loan capital. That of course is just part of the ongoing distortion happening in the economy do to the Fed.
I would agree with you also in a way on the housing and tech bubbles. The two are different but only in scope and damage. The tech bubble may of distorted investment scenarios and resulted in lost revenue and opportunities but it also helped jump start a new industry and revitalize a slightly older one. I firmly believe that one of the reasons inflation has not appeared like it normally would of in the decade before the housing bubble was due to increased tech products. Money was chasing more things. This still does not mean there was not a bubble. A price correction covers a single product or line of products, the bubble burst relates to a whole sector which is what happened. A bubble that needed extra cash from the Fed to power it. It is clear people would of invested in tech and .com companies at that time anyway but without Fed cash it would of been muted and directed, not a frenzy.
As far as the 2000’s being much worse, no argument. The tech bubble was a catagory 1 but the housing bubble was a cat 4 BubbleCain. One that was so much worse for a variety of reasons not the least of which is subprimes which got their start with Fannie and Freddie. Just like in any bubble the housing bubble once it got going sucked not only Fed cash but sold investment capital out of the system as well. Mixed in with the subprime component things got real nasty.
All of this infers not a need for more regulations (even though that is the politicians quick fix to everything) but a real need to look at what the Fed is doing. The graph showing the vast increase in the money supply (that being just M2, haven’t graphed M3 but I assume it is much much worse or will be once things bust loose) that is mostly setting in corporate coffers and on bank balance sheets is something we should all be worrying about. The statement regarding either “death by the financial deep freeze that accompanies massive financial collapse or the scorching fires of inflationary hell” is about the two obvious results of this tidal wave of cash waiting to be unleashed.
To me the Tech bubble is a distraction, a small step that led to a larger one. It could of even been seen as painful but not so damaging if the Fed would of backed off the money train and let interest rates float. Of course that would not of helped Bush or been politically palatable in world of quick fixes. The real worry is the fact if there is a next one it will be a Cat 5 and than some, if not, than all that cash will start a rapid rise in inflation once the dam breaks. Either one not good
Good points. I just want to add that I believe the Fed balance sheet is more important than measures such as M2. It is the best indicator of how much money is being printed – although the correlations is not exact.
Inflation: There are couple of reasons why the supposed inflation rate is low. One is that the method of measuring inflation is inaccurate. Second is that in a hyper-inflation (mass printing/creating of money) destroys the value real estate, capital equipment, and companies. The present way the US calculates inflation it includes the price of housing. But hyper-inflation is consistent with falling home prices.