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I recently posted an article for GoldMoney
showing how US True Money Supply (TMS) appeared to be growing at a hyperbolic
rate, and that
gold was also on a hyperbolic course. The difference between hyperbolic and
exponential is a hyperbola’s rate of growth increases with time, while
exponential growth does not. Hyperbolic growth in the quantity of money ends
with hyperinflation, while exponential growth can go on for
ever. Both TMS and the dollar price of gold are pointing to a
hyperinflationary outcome. This article explains why this might be so.
There are five apocalyptic
engines pushing the growth in US money supply: they are the
government’s budget deficit, its debt trap, the financial condition of
the banks, the delusion of Keynesian solutions, and lastly simple compounding
arithmetic.
1.
The US
government collects only 55c in taxes for every dollar spent. It is relying
on economic recovery to reduce welfare payments and increase tax revenue to
close the gap. This prospect is receding and establishment economists advise
against cutting government spending.
2.
The US
government’s debt trap is concealed by the exceptionally low interest
cost of funding. The only reason this cost is not higher is the Fed maintains
a zero interest rate policy. However, as surely as night follows day, price
inflation will start rising as monetary inflation feeds through, forcing the
Fed to allow interest rates to rise long before any economic recovery occurs.
The rise in interest costs will escalate the budget deficit, which will be
financed, directly or indirectly by further monetary expansion.
3.
The
banks’ balance sheets are considerably weaker than stated, because of unrealised losses on assets, loan collateral and
write-downs on their own debt. Real estate collateral write-downs alone
probably exceed bank equity of $1,400bn. On an honest analysis the US
commercial banks are collectively bankrupt. To simply survive the banks have
no alternative other than to reduce loan exposure while requiring continuing
monetary support from the Fed.
4.
Keynesian
economists, aware of the banks’ difficulties are terrified of bank
credit contraction. For this reason, the macroeconomic establishment strongly
promotes the expansion of narrow money to buy off a deflationary depression.
5.
As the
purchasing power of the dollar falls, the result of past monetary expansion,
yet more dollars have to be issued to cover increased government costs. Past
inflation becomes a compounding factor behind price rises.
Essentially, money will be
printed at an accelerating rate to buy time rather than face the three
realities of government default, an over-indebted private sector, and a
bankrupt banking system. The Keynesians are belatedly aware of the dangers
and see no alternative to printing as much money as is required to defer
these problems. The monetarists in the central banks are hesitant, torn
between Keynesian fears of outright deflation and worries about the rate of
monetary expansion so far.
However, the history of monetary
inflation confirms that once it enters a hyperbolic phase, it is almost
impossible to stop. Armchair critics have derided the stupidity of central
banks and economists in past hyperinflations, such as in Weimar Germany,
Argentina and Zimbabwe. The truth is that when hyperinflation has become
visible at the price level, it has already gone past the point of no return
at the monetary level.
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