Inflation is not Always Caused by Change in Money Supply – Deflation is Engulfing Europe
COMMENT: Marty; I have to say this was the best conference you have done since 2011. It was the most organized and the live demo of talking to the website was unbelievable. The film clip you showed on cycles was amazing illustrating the hidden order within the nature of all things. However, I do not think even you appreciate just how far advanced your groundbreaking technology and concepts really are. As you know, I work for one of the big money center banks, …., and the simple statement you just so casually write is truly revolutionary.
“Inflation will erupt even when the supply of money does NOT increase – it depends upon DEMAND. If the people decide to hoard toilet paper because of a coming storm, the price will rise with demand.”
It has caused a discussion in the bank that you seem to have hit the nail on the head. The topic inside is the deep concern for deflation engulfing Europe as you warned at the conference. If there was ever any question between influence and discovery this settled it. Your statement explained why gold failed and everyone has been so confused about QE1-3. It is becoming painstakingly obvious people just do not understand how markets and the economy move. China’s confirmation that they use your capital flow analysis confirmed much and whenever you say something they immediately follow. You stated they should buy directly from the Treasury and in less than a month that is precisely what they did. This fuels the argument about your influence I must say because there are still those who cling to their old theories like a life-preserver as the Titanic sank.
You were the only one to say the Fed’s monetization would fail and Europe would go into a deflationary debt spiral raising the cost of their national debts. You pointed out the debts of Greece and southern Europe actually rose in real terms destroying their economies thanks to the euro. The classic assumption that increasing the money supply causes an increase in the general price level on some direct basis is obviously wrong. Your ideas are being discussed at high levels. Your observation that taxes offset and are deflationary negating any gain whatsoever in purchasing power is smashingly brilliant. Your talent for observation and explanation are truly unmatched. You really need to get this out in a book. You are the next mover and shaker.
Thanks so much for everything you do. You have shown that economists need to first be traders. Experience is the key.
Good on ya
KM
REPLY: Thank you so much. Sometimes it is hard to remember how different our clients are from the herd, I am glad the organization came off better for the conference. At first I assumed it would be a one-time thing and I would go off into the sunset. Even a guy at Bloomberg News asked me how did I come back so strong? He said nobody has ever come back. I can only attribute this to our clients who are also in search of the truth – not opinions.
Breaking the conference into three parts with a day between each allowed everyone to network better than ever before, but it limited my ability to mingle. It was good to see so many from Asia, Australia, Europe, Mid East, South America, and USA. These events are what taught me and I am glad everyone has found it an enlightening experience meeting people from around the globe. The global diversity opened my eyes over the years and I saw the capital flows right then and there. This is the only such gathering on a global scale at this level.
Yes, you are probably right. Sometimes I do not appreciate that the way I have discovered things was by observation that is maybe unique and so different from the general view. I was never concerned about creating a theory to bash someone else over the head with. This was always just trying to trade. There are people who just disagree stating their opinion but offer no evidence to support what they want to believe. As you say, they are indeed just clinging to old theories desperately refusing to consider they might be wrong and try to argue their belief with opinion – not fact.
The austerity tax increases in Europe are putting the Eurozone at total risk of a deflationary massive depression after 2015.75 far worse than what followed 2007. Funding costs for Eurozone countries haven’t been this cheap in years, but this is part of the deflationary spiral where the fixed income collapses. Prices in Europe have been falling at an alarming rate of 5.6% in Italy, 4.7% in Spain, 4% in Portugal and 2% in Holland since September alone. The rise of the euro against the dollar, yen, and yuan, accounts for some of this as the rise in the currency reduces the cost of imports. Nonetheless, demand is also declining not rising thanks to the rise in taxation. The Eurozone’s trade-weighted index has risen 6% in a year reflecting the deflationary crisis engulfing the EU.
What Lagarde is saying about “lowflation” is correct, but increasing the supply of money will fail by itself because there is a decline in DEMAND she does not understand. The rise in the euro is also causing the deflationary trend that results in the debt ratios jumping as in France by 10% to 105% of GDP. Italy has seen a 15% rise to 148% of GDP and Spain suffered a 24% jump to 118% of GDP. What they think they are achieving through austerity is actually being overshadowed by the destructive force of Debt-Deflation. The higher the currency rises, this actually make all previous debt more expensive to redeem costing them national wealth. Debt-Deflation is the opposite side of the coin that people assume where Debt-Inflation reflects what you get back at redemption has less purchasing power. The actual burden of the debt is rising in real international terms under Debt-Deflation that is the opposite assumption with Debt-Inflation, which results from just printing money. Anyone cashing in euro bonds from overseas is making more today in international terms thanks to the rise in the euro.
The debt burden in Debt-Deflation actually rises faster than nominal GDP engulfing the private sector as well reducing the ability of European industry to compete and pay their previous debts lacking the ability to just create money. This is reaching chronic levels in Spain, Portugal as well as Ireland not to forget Greece and Italy. These nations did not benefit from joining the euro for their previous debts stopped being automatically depreciated in real terms by inflation. Instead, their debts rose in real international terms and that became unbearable in Greece as will be the case throughout Europe. This is what happened to the USA during the Great Depression for the dollar rose in value increasing the Debt-Deflation, that also bankrupted companies.
Consequently, this so-called “lowflation” only increases the concerns among “smart” money that we have a classic debt crisis in Europe calling into question the overall sustainability of debt and WHEN will the euro sink – not IF. This is impacting the municipal level that cannot simply print euros (inflate) as private debt and Lagarde’s call to increase the money supply will do nothing to little to avert this debt crisis. This tightening of the debt-vice on government and industry is also impacting the consumer with fixed-rate debts and eroding bank assets. The combination of low growth and low inflation has significant implications for all sectors of the economy, no less sustaining the high unemployment over 60% among the youth with zero hope of job creation. There is no traditional classic way out of this mess. The only solution lies outside the box.
I have written about the overlooked printing of local money by municipal governments in the USA during the Great Depression. This was further evidenced of the Debt-Deflation spiral, yet it also demonstrates that an increase in money supply when DEMAND is collapsing due to the lack of CONFIDENCE will have no appreciable influence upon inflation. You cannot simply print your way out of a Debt-Deflation.
I published these drawings back in 1985 to explain the end of deflation and the beginning of inflation with the shift in PUBLIC to PRIVATE in the ECM. These flat-world ideas of one-dimensional relationships have got to stop. This is how the gold promoters ruined so many people buying into this idea of hyperinflation all based on the flat-world one-dimensional concepts of an increase in the money supply MUST cause inflation that they have been waiting for since 1980. They will still argue I am wrong yet offer not a single study to demonstrate their proposition – because they cannot.
Silver declined from 1919 into 1932 during a huge inflationary boom. So where is the beef? I deal in facts – not opinions. Prove to me there is some one-to-one relationship between the supply of money and inflation – PLEASE!. There is no such relationship and I have the largest database in the world tracking money supply even into ancient Roman times.
The truth always remains a there is a complex societal economic system with numerous variables all interacting and therefore, some relationship will appear and then vanish the next time because this is complexity.OPINION is not going to save the day. Where is the correlation?
These flat-world ideas of one-dimensional relationships always also ignore complexity. Taxes are a key factor because government only CONSUMES the national wealth – they do not create it. Taxes that are raised outright, changing definitions of the rich (progress rising tax rates not tied to inflation), or currently hunting the rich around the globe that causes money to contract and hoard, offset any growth in the supply of money.
The velocity of money peaked with the 1998.20 peak in the Economic Confidence Model. As taxes have been rising, tax enforcement has risen, and the insane changes to capital gains taxation where you pay now on gains, but losses you can only write off $3,000. The greed of government has all combined to reduce long-term investment. Then add the 2011 hunt for American worldwide and you have a classic trend of collapsing velocity in money that negates inflation and increases cash as liquidity declines further. Corporate cash is at a record high $1.64 trillion demonstrating how the velocity of money is also critical. If the velocity increases yet the supply of money remains unchanged, this will be inflationary. However, increase the money supply, as the Fed has done, but raise taxes, tax enforcement, and the collapse in the velocity of money will offset any increase.
You cannot make statements that inflation will rise if money supply rises. That is so old school it is unbelievable. The people harping on this concept have NOT investigated anything and remain blind to the complexity of the global societal economic system. There is a lot more to this entire issue than most people ever think about.
The 1987 Crash was the anticipation of a 40% decline in the value of the dollar. The capital flight and the drop in the dollar created Currency Inflation where the supply of money does not increase but the drop in purchasing value of the currency results in the rise in the price of imports. Yes, the G5 in theory lowered the cost of American goods, but it increase the cost of everything imported including oil. They increased the cost of production that relied upon energy and foreign components. You cannot isolate just one aspect within the economy.
Raise taxes on the “rich” to help the poor, sends capital fleeing from an economy and all you have left are the poor. Just look at Detroit and fast-forward to all the cities. There is no such thing as creating “social justice” through taxation. It is no different from saying everyone in school will be given the same grade so there is “educational justice”. The smart will stop studying (producing) because they will get nothing in return for their effort.
We are only equal in rights – not ability or talent. I have no dreams of being a rock star because I cannot sing. Nor did I dream of being a football player or a movie star, and certainly not President of the United States even though I too shook hands with JFK as did Bill Clinton.
We all have our talents and that is David Ricardo’s theory of Comparative Advantage that he saw among nations where they should not try to grow lettuce in a desert that will cost $100 a head when you can buy it from another country for 50 cents. People are no different from nations. Individuals also have their comparative advantages just as women can give birth and men are typically stronger to take out the trash.
Just as the debate about guns. This 106 year-old woman in Armenia had a right to defend herself in the middle of civil unrest. Guns do not kill – people do. Outlawing guns will only arm the criminals. If you really want to stop the violence, legalize drugs, tax them, and regulate them as they did with booze. That defunded the Mafia more than anything and the gun battles in Chicago ceased (like the song the night Chicago Died). As long as there is a tax-free profit to be made, you will never stop the violence. Do the correlation and you will see – opinions do not matter.
The computer design you saw at the conference speaking to me and how to create your own portfolio that it correlates to the world is reality. Everything is connected. It is never this one-dimensional cause and effect. You are right. But being a trader is only one aspect of what I learned. The other blends with being into computer science that forced me into analyzing how to think, reason, and analyze. Understanding how to program AI requires you to break down every tiny aspect of how to think and reason in order to recreate the thinking process of humankind.
So I believe the programming taught me that every single aspect must be investigated and plugged-in because the global economy is like the gears of a watch. Turn one, and everything moves, some to the left and others to the right. This is why you cannot forecast anything in isolation. It is all connected. This is why there is no relationship that is ever constant i.e. silver/gold ratio (never constant).
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