Last August, the US Fed stopped creating new currency out of thin air and
dumping it into the banking system. Which is another way of saying the US
money supply stopped growing. Here's the adjusted monetary base -- a proxy
for the amount of new currency the Fed is creating -- over the past eight
months:
Then a whole bunch of other things started happening. First, the dollar
soared, becoming by far the world's strongest currency. And Americans started
buying less stuff:
And then US factories started making less stuff:
The latest batch of economic reports now implies zero growth for the
entire first half of 2015. What conclusions should we draw from this?
1.
Beyond a certain point, an over-indebted society can't function
without continued infusions of new cash. Turn off the spigot and you grind to
a halt. The world, in other words, is one big Ponzi scheme.
2.
With a US presidential election in full swing, everyone from Fed
governors who hope to be reappointed (or hired by thriving Wall Street banks)
to congressmen in uncertain districts to Treasury officials who like their
jobs are concluding that austerity of any kind is a very bad idea. The June interest
rate increase is now being walked back to September. And with nothing on the
horizon to reverse today's negative growth trends, the September increase
will shortly be walked back to December and then replaced by hints of renewed
QE in 2016.
3.
Generally, central banks like to raise interest rates during a
recovery to create ammo (in the form of high interest rates that can be
lowered) for the next go-round. But the coming easing will begin with rates
at record low, in some cases negative, levels. So rates will have to go not
just lower but seriously negative in order to make a difference. And the war
on cash will officially begin.
