We are now at least somewhat clear on one
central bank’s plans for the economies under control. Save a
significant reversal, the European Central Bank (ECB) is going to
‘nuclear’. That is to say the bank will engage on a program of
bond buying in the Eurozone that is unlimited in scope, duration, and
magnitude. A thoroughly anemic August jobs report has now applied even more pressure on the USFed to act when it meets next week. While
the markets will undoubtedly cheer any indication of further monetization or
a formal announcement itself with a flurry of high-frequency trading
activity, this is nothing for Mr. and Mrs. Main Street to get too excited
about. Why? The idea that money is being pumped into the economy sounds
pretty good especially if some of it lands in your lap, right? Once again,
things are not always what they seem and this is another prime example.
In truth, the federal reserve on this side of
the Atlantic, much like its ECB counterpart on the other side, has been
waging an all-out war on aggregate demand. But that is counter-intuitive,
isn’t it? Doesn’t the fed want to increase demand to promote
economic growth? Not exactly.
Hiding Inflation is Becoming Harder and Harder
One of the pillars that any fiat currency
rests upon is confidence. The economic agents that use such a currency have
to believe several things, one of which is that the currency is an adequate
store of wealth. Now in America we’ve been propagandized pretty heavily
over the past 5 or 6 decades into believing that inflation is necessary for
economic growth (a myth) and that deflation is an evil force that must be
defeated at all costs.
There are a couple of
problems with this approach and the first is that there are several
mathematical functions that describe the various aspects of a fiat monetary
cycle, most of these are parabolic in nature. For quite a long time
everything is ok, but when things start going bad, they go bad quickly and
with increasing magnitude. The US Public debt is a great example of such a situation.
Looking at the above chart, there was a very
long period of time where the public debt wasn’t an issue at all. For
those who don’t think a gold standard creates monetary discipline,
notice the arrow that indicates when America officially departed the gold standard
in 1971. Note also what happened with the public debt after that. Continuing,
it is obvious that the doublings of the public debt are on the increase while
the time to do so is on the decrease. The lame position that the debt is the
responsibility of one political group or another is nonsense, and is merely
intended to create confusion among the voting proletariat. The debt has
steadily been increasing. And don’t forget that this is only the cost
of the mistakes of the past. The mistakes of the present and future
aren’t even accounted for on this chart, yet they’re still there.
Managing this type of situation requires a lot
of inflation and ever-increasing amounts of it. Now we’re back to the
confidence factor again. If the CPI is going up by 10% a year, people are
going to quickly lose faith in the currency. Obviously the current
calculation of the CPI is a joke, but the larger the disconnect between the
government numbers and reality, the more people are falling off the wagon and
losing confidence in the currency anyway. The continuation of a fiat regime
cannot be perpetuated with misinformation and propaganda alone. Enter
Let’s assume that
the chart above represents the supply and demand for the total of all goods
produced (or imported) into the United States. The Supply is represented by S, and the initial demand is
represented by D1. A
contraction in aggregate demand in economic terms is little more than a demand shift to the left as portrayed above by D2. Note that this shift
results in both less products purchased (Q2)
at a lower overall price level (P2).
While this tactic cannot totally cover up a massive inflation, every little bit
helps and might buy the monetary regime a few extra months or even years.
A series of more
extreme economic dislocations called price controls was used in the early
1970s and was an abysmal failure. The attack on aggregate demand will, in the
end, fail to adequately cover up the massive amounts of inflation being
released into the system by global monetary authorities; however, it will
certainly delay the inevitable. This is a classic example of kicking the can
down the road.
How is this attack accomplished?
This is where it becomes intriguing, to say the least. Certainly the above
depiction of the demand shift is rather clear, but how does one go about
accomplishing this shift in an economic system where its actors are
accustomed to an ever-increasing standard of living and the subsequent
consumption activities associated with such a mentality? We’ll look at
two methods being used over the past couple of years.
Allow the Actors to Choke on Debt
There have most
assuredly been thousands if not tens of thousands of articles written
regarding the inequality of bailing out banks and multinational corporations
at the expense of Main Street. These instances have been so obscene in
several cases that employees of one large bank were issued weapons and carrying
permits because of the fear of backlash.
Meanwhile, back at the
ranch, the average American is choking on their debt. Whether it is in the
form of an underwater mortgage, student loans, credit card debt, car
payments, or some other type of debt, it seems that almost everyone has some.
There is a point certain at which even the most foolhardy of
economic actors will decide that they just can’t take on any more debt.
They’ve already used Visa to pay off the MasterCard and are now coming
to the realization that they just can’t do it anymore – or at
least not like they were before.
Let’s say for a
minute that the big Wall Street megabanks would have been allowed to fail and
that all the money wasted allowing banks to continue their existence had been
used to wipe out the debts of Main Street. The inflation created would still
be the same. However, with 300 million Americans relieved of their debt, the
shackles on consumption would have been removed. Understand I am not
advocating the bailout of folks who made poor financial decisions, but am
using this merely as an illustration. People certainly would have felt a lot
better about continuing to increase consumption if their debts were gone,
much in the same way banks had no problems continuing their risky behavior
once the American taxpayer was put on the hook for the consequences of that
This is also why the
government announced that there would be no more cash stimulus payments
directly to the public after the 2010 checks were sent. The people used the
money to pay off debts instead of spending it. The government didn’t
mind the quick bump in consumption, but improving the balance sheets of the
public (which as said before would have stimulated demand moving forward) was
not on the list. While the idea of giving money to people is kind of
contradictory to what is being presented here, remember it was like firing a
water pistol at a forest fire in terms of its total
effect and 2010 was a pretty important election cycle. Never put it past ANY
government to think of its own survival before that of its constituents.
Make-Work Jobs Erode Confidence
When the stimulus
plans were announced, it was decided that America’s infrastructure
needed an overhaul, which was and is certainly true. Our bridges and roads
desperately needed attention. So the government embraced a ‘New
Deal’ mentality and decided to borrow what ended up being several
trillion dollars to send armies of workers in helmets out across the country
and fix the bridges and roads. This activity is still going on today.
There are a couple of
problems with this approach, however. The first is that there is no savings
account from which to draw the funds to pay for all of this. The money had to
be borrowed either from foreigners, or the federal reserve, which is really
the same thing. The money was spent on these infrastructure projects, but the
projects have no way of creating cash flows with which to pay for themselves
unless the roads, etc. were tolled, which would just pull money from other areas
of the economy anyway. The second problem is that as the projects are
completed, the workers are furloughed because there isn’t enough other
work to keep them on a gang. I have talked to numerous construction workers
who have essentially had their pay cut because they work 2 weeks then are off
a week and other such arrangements. They remain employed, but they’re
not making nearly as much as they were before.
Also, when you hear
about the fact that roughly half of the jobs that are being
‘created’ pay $13/hour or less, it becomes apparent that the
public’s confidence is being eroded slowly but surely. Despite all
types of reporting methodology shenanigans, people are waking up to the
reality that we’re just muddling along, waiting for the other shoe to
Instead, consider what
would have happened had the government spent the stimulus money on factories
to employ American workers producing products that we would consume
domestically, thereby reducing our reliance on foreigners. I realize that
there are many outstanding issues surrounding this type of a
move, but just look at it from a confidence standpoint. Factories pay for
themselves, and then create profit, capital, and investment that can be
allocated to freeing up other areas of the economy.
Despite some of the
headwind associated with taking this approach such as trade restrictions and
agreements as well as China’s nuclear option regarding our consumption
of their products and their willingness to hold onto our bonds, this type of
a maneuver would have acted as a light at the end of the tunnel.
A Possible Secondary Motive
There is a potential second motive for the attack on aggregate
demand and it is a strategic one. Back in 2010, Duane Chandler and I talked
on our Spin Cycle podcast about the idea that governments and central banks
would act in concert on a global level to throttle economies due to the
realization that the world had passed the point of peak oil (or peak cheap
oil at a minimum) and were simply trying to position the well-connected, who
still have possession of reserves, to have pricing power in the coming era of
dwindling crude oil production.
Nothing has really
happened to refute this potential second motive since we did that series of
broadcasts over two years ago. Oil prices have fluctuated for sure, but
demand growth has gone negative, especially here in the US, and we’re
still nowhere near close to our pre-recession consumption levels seen in
There are those who
may believe this is the primary objective behind the attack on aggregate
demand and that hiding inflation is just a side benefit. Time will tell. What
is important for the average American to take from this piece is that you’re
on your own. The government is unwilling (and largely unable) to help.
American austerity is not far off and even a quick glimpse across the
Atlantic will show that it can be very unpleasant. The time to embrace
austerity at a personal level is now, not when it is foisted upon us by a
desperate political establishment.