To see the result of all this money printing just look at stock prices. Hyper-inflation is already here, it’s just in paper assets instead of the in goods and the real economy. Why is the inflation relegated to stocks and bonds rather than hard assets? I believe it is because of the massive income inequality or wealth gap which persists in the global economy.
Since we all know that the wealthy spend a much lower percentage of their total income than the poor, and conversely save a much greater percentage of this same income, a large wealth gap tends to produce over-investment and speculation, thus hyper-inflating financial assets, while at the same time weakening demand for the actual products of created by this over-investment. This is what creates the global deflationary forces, since, when supply exceeds demand prices must fall.
This situation is highly unstable and can only persist for a short while before profit destruction occurs and the bubble pops. It is this over-investment, and the resulting demand gap that has created the Asian financial crisis and will ultimately pop the US stock market bubble ushering in the next global great depression. Japan is printing money at an incredible rate but prices still fall. It is the old pushing on a string effect.
Demand is weak and will stay weak as long as income and wealth distributions stay lopsided. From this perspective the IMF bail-outs have made the situation worse, since fat-cats were subsidized by tax dollars from the working class. Talk about a reverse Robin Hood!
At the same time these bail-outs and plunge protections just serve to embolden risky investments and over-speculation as fat-cats and cronies are convinced that the will not be allowed to lose. With all these bail-outs and money printing, the Central Bankers are trying to avert a financial collapse which is admirable. And they hope that markets will just trade sideways for a few years until all the excesses of the past are wrung out in a relatively painless soft-landing type scenario.
Problem is the markets won’t just trade sideways, if you make it obvious that there is no risk of loss speculation will get more out of hand. If you flood markets with liquidity they will use it to pursue more and more risky and unprofitable ventures, and will create grossly over-inflated asset values. This is the moral hazzard implicit in being the lender of last resort. The central banks need to bite the bullet and let the bubble pop or it will just keep keep on growing. It is not possible to deflate it slowly. Speculators don’t learn caution and sobriety with a series of 10% drops shortly followed by 30% gains. They learn caution and sobriety from real pain and serious loss. It is this cathartic action that creates the conservative, cautious environment that makes the next healthy growth phase possible.
If anyone is looking for an explanation of why the plateau phase is so unusually long and drawn out this time look no further than the recent money growth statistics and other central bank antics trying to repeal economic cycles, but really just postponing the inevitable.
Will Greenspan, Rubin, and Clinton go down in history as the geniuses who defeated the Longwave, or as goats whose hubris got the better of them and made the eventual bubble popping far worse than it would have been without their tinkering?
Greenspan, Rubin and Clinton? Yep, that’s right. Bill Shepler wrote this estimable analysis on the Longwaves List on 4 May 1998 (12:58 pm).
Bill remains absolutely correct that the longer our reserve banks prop up paper assets, at an enormous cost to the real economy, the more calamitous must this economic depression be.