Inflation versus Deflation
Our good friends at Incrementum AG in Liechtenstein have produced their second big chart book, which our readers can download further below.
In the aftermath of the 2008 crisis, it has become clear that markets are locked in a battle with policymakers. In an unhampered free market the crisis would have been followed by a sizable deflation of uncovered money substitutes. This is an outcome modern-day monetary bureaucracies are fighting tooth and nail. One must not forget that the Fed was founded specifically for the purpose of cartelizing the banking system. One aim was to destroy the competition the New York money center banks were increasingly subject to, the other aim was to make it possible for the banks to inflate the money supply in unison without having to fear bank runs, as they could henceforth be bailed out by a 'lender of last resort'. Vast distortions of the economic system have since then become the rule, while the purchasing power of the Fed-issued scrip has utterly collapsed over the past century.
The latest episode of 'papering over' the cracks in this increasingly unstable system is the biggest such effort yet. Since the peak of the Nasdaq bubble in 2000, the broad US money supply TMS-2 has expanded by 240%. As a result we are now experiencing the third major asset bubble since the 1990s. And yet, the 2008 crisis was in a sense profoundly different from previous crises. The private sector's appetite for piling up ever more debt has seemingly been quenched. Deleveraging by the private sector creates a deflationary undertow, which central banks are fighting with money printing on a truly phenomenal scale, at least as far as the post war period is concerned. In addition, debt growth has moved from the private to the public sector, with the result that the global debt mountain keeps growing at an astonishing rate.
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The Incrementum chart book nicely illustrates the above mentioned back and forth between the market's deflationary forces and the policy-induced inflation that is aiming to keep them in check.
From our perspective, it appears that the amplitude of the cycles induced by monetary pumping becomes ever larger. It will eventually dawn on everyone that the attempt to replace a market-chosen money with a centrally planned one was doomed to fail from day one. We fear that this discovery will be anything but painless.
Here is the download link: