QUESTION:
Dear Martin,
First of all, thanks for making the sense of the world for all the readers. Without you, as you yourself know well, 99.99% of us are lost !!!
When you say-
That is when inflation will appear when this become obvious we have a runaway train and central banks can do NOTHING.
Are you saying that inflation will appear as interest rates rise !? I believe they raise interest rates to control inflation not realizing that they themselves are stoking inflation!
If this is correct , how can increase in government debt, increase inflation to a tangible extent ? (I mean- what about the lack of liquidity and poor money velocity- reasons for the deflation).
Once again, thanks for all the knowledge. Without you, the worlds looks like an unsolvable puzzle !
KG
ANSWER: All these theories of inflation are wrong for several aspects. We have run correlations with the money supply and inflation and they do NOT hold up. Just look at QE1-3 and the lack of inflation. Gold has dropped nearly by 50% despite all the hype. We either face the truth or watch our personal wealth evaporate into nonsense.
The key is CONFIDENCE. When the MAJORITY of people BELIEVE that government is out of control, then they will panic and rush to buy private assets. This is actually the same mechanism that is behind a hyperinflation. Even during debasement in Rome, the money supply shrank for people hoarded the old coinage. As that contraction unfolds, it becomes crazy for government cannot meet its expenses and then has to increase the debasement to create more coins to compensate for what has disappeared from the money supply.
This is why Roosevelt also confiscated gold to stop the hoarding. We see hundreds of cities issuing their own money because of hoarding. This creates the DEFLATION. The money supply collapses rapidly. So QE1-3 did not produce inflation BECAUSE the contraction was greater than any increase and the dollar being the reserve currency was absorbed globally as $7 trillion in emerging market debt was issued post-2007.
Interest rates will rise when the DEFLATION flips into INFLATION and that will be driven by CONFIDENCE. What is opposite of all theories today is that government is the biggest borrower in the system Then you have countries by law commanding pension funds must have even 80% in government bonds. Today, a rate increase to try to STOP inflation will fuel inflation because it will increase the demand from government and as demand rises people will move in the other direction. That is when inflation in private assets will appear. Central Banks have lost control and are INCAPABLE of stopping inflation. If they raise rates here in the States to fight a capital inflow they will read as inflation, they will spark even more inflation from the government spending side, but we must be concerned for they will FIRST raise taxes dramatically. If a Democrat wins, look out. Tax increases wil become the agenda and even Republicans like Boehner will agree,
The increase in government debt will have to be monetized – bought by the central banks because of no bid (i.e. Mainz). This is already appearing on and off including in Germany. The maturity will also shorten increasing the velocity of the debt as they will be unable to sell long-term. The private assets will rise only when people lose CONFIDENCE in government’s fiscal management.
While most people reading this will say come on, who trusts them now? The answer is still the majority. The velocity of money will then flip as people try to buy private assets.
It is NOT the banks who will control interest rates in this environment, this is how the free market will respond. The Fed can control only short-term rates up to a point. QE1-3 was all about trying to influence the long-term buying in bonds etc. That failed and only made our debt more responsive to short-term changes in rates. So it will now escalate far more rapidly that before. The marketplace will set even the short-term rates and that will be the NO BID.
