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Guest Post: Government Spending, Bank Lending And Inflation
Submitted by Kletus Klump
In his latest weekly commentary, Inflation Myth and Reality, Dr. John Hussman makes the argument that changes-in federal government spending dictate the future path of inflation. As shown below, his data set covers the period from 1951 through 2008 and there appears to be a decent correlation.
Source: Hussman Funds, Inflation Myth and Reality
However, his data set is incomplete in 2 respects: 1. It does not include the Great Depression years and 2. It does not include data on bank lending. The relationship between government spending and future inflation was vastly different during the years of 1932 to 1941. The correlation between the 2 series for this time period is negative 0.25.
The factor causing this is change in mortgage-loan growth. (The mortgage data was sourced from Survey of Current Business, U.S. Commerce Department; National Income Unit, Bureau of Foreign and Domestic Commerce July 1944.)
Why is this important? Post WW2, year-on-year declines in bank lending have been virtually non-existent through 2008. Only 2 negative comparisons, which include 1975, -0.44%, and 1991, -0.09%.
Look at the same chart updated through October 2009. One year of negative loan growth is a far cry from a negative 4-year average but it is worth monitoring.
Draw your own conclusions, but as for me, fears of government-spending-induced extended inflation in terms of time and magnitude are not a concern until the lending mechanism improves.
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What are the main non-monetary causes of inflation?
1 - Population Growth (peaked in 1968)
2 - War
Both are on steady un-stoppable declines.
Major fail.
-Population continues to grow (see the Rio Grande border for more details)
-Wars continue to grow (visit Kabul and count the number of American troops)
Ahhh yes, more bigoted bullshit about the "Rio Grande border." Mexican immigration to the US was government policy in BOTH COUNTRIES, whether stated or not. It's a thing of the past. I live on the Texas-Mexico border (not the Rio Grande border, doosh) and the illegal immigrants are leaving in droves. Most of those you see in your narrow minded little world are here legally and have as much right to be here as you do, idiot.
The proper spelling is deuche I believe.
Nope
Douche
as in Douche-bag
Nope
Douche
as in Douche-bag
The population is growing because some faith enabled goons refuse to teach decent sex education or make contraceptives more widely available. Of course this works, more people borrowing and buying keeps the machine moving forward with high p/e's (except when it's in the ditch, like now).
1) Illegal immigration, legal immigration, fertility of immigrants, fertility of the underclass.
2) Afghanistan, Iraq, Yemen, "global war on terror," and probably Venezuela/Colombia before too long.
I'm not buying it.
Population growth causes deflation, not inflation.
War also causes deflation through capital destruction (i.e loss of lives, and allocation of labor and resources away from producing goods that consumers buy)
Mechanism; Jobs Program. Summer 20 10 in theatres near you!
That's going to bomb
In what respect? Creating jobs? I agree. The only new jobs will be temp jobs. However, the "job" part of the said program is not what they're after. They do not care about jobs! The reason for the program will be for one reason only. To move quickly through the purple hazey stagflation part of this hallucination that is the "functioning" "economy", and into inflation. The jobs progarm is a smokescreen for the bankers to lend at highly levered positions.
Also, they have to throw crumbs at the birds while they gorge on wine and pie. They do not want the birds to fly away just yet. There is still a little more time for them to spend on the bench and in the sun. If they do not give up crumbs, the play is over. As the sun sets, it will be over soon enough anyway.
We remind them of themselves, afterall. Carefree and wonderful. They are as easily entertained as we.
Uh, are you guys kidding? Do you actually think there is more population growth or more war than in the 1960s?
Global Pop growth peaked in late 60s at 2.2%. It is less than 1/2 that today at <1%. Developed (i.e. "rich") people are distinctly negative population growth globally. Why do you think charities grow so big? No babies to consume the inheritence.
War. See Vietnam. Iraq and Afganistan are ~10% of what Vietnam was... not to mention the U.S/Soviet Cold war. I hear we're spending alot on bombers and ICBMs. Globally... resource commitment to military spending is probably <30% of what it was in the 60s/70s.
Seen a long-term trend line on inflation? Or interest rates? So easy.
Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. ... A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society.
* The Counter-Revolution in Monetary Theory (1970)
Milton Friedman
Our money is debt. The monetary base has exploded to the point the government doesn't even keep track anymore. Our debt has exploded.
Nuff said.
Inflation isn't the question. The question is: Do we get relatively high inflation over a long period of time, debt default, or hyperinflation that necessitates the brandishing of a 12 Gauge shotgun and backup pistol on my wife's hip in the grocery store parking lot to get home safely?
Or consistently lower inflation over time... as we have actually seen... to include periods of "deflation"... check.
Friedman is great. He would clearly recognize this as deflation. Didnt he come up with the prescription of a "money-financed tax cut" for Japan? US could prob use one too.
John williams has said that high inflation of basic commodities will not be demand driven but currency driven by money printing.
john williams is going to regret being so ridiculously adamant about hyper while admitting in the same very piece(s) of sensationalistic eh that he has no idea what the next few years hold. ugh.
he is a living legend; truly so. that said: he's dead f'ing wrong here and as a quantified metric guy i simply think that his head is too deep into the #'s in just one part of the system as whole ... he's stuck in a grand swath of trees and can't see the vast majority of the forest / lay of the land, which is unabashedly deflationary before becoming hyper.
for a man of such history and analysis it really is shocking to see him go so overboard and about to be proven so, so very wrong.
only the hard right edge will prove D or In correct. just remember: a good D-fense always beat a good In-flation and right now De is about to kick the living shit out small pockets of inflation within part of the system. in a few years, when most everyone you know is completely bankrupt ... then the hyper will make it really fun and no one will have any cash (you know, those dollars 'going to zero') to actually buy gold / silver. we'll see. its gonna be pretty damn fun either way.
the real economy has peaked...we are getting deflation.
The answer to it is devaluation
thanks for highlight, Kletus.
De-flation be Hercules for many, many moons to come.
It's a function (mathematical)
LaRouche Triple Curve
http://www.schillerinstitute.org/graphics/diagrams/TripleCurve.jpg
Explain anything? He developed it 14 years ago. Best explanation out there of what's going on (and has been for alot longer than we know). Those in the know, knew this was coming a long, long time ago. This started in 1987 to avert or stop what was the 1987 market crash, the solution = derivatives, and their expanded use from virtually nothing to 1.4 quadrillion in notional derivatives. (which is what provided the credit to fuel all this debt everyone in the world now holds)
Here's a short explanation of it copied from wiki, which does a pretty good job on this particular issue of explaining it.
"The "Triple Curve", or "typical collapse function", is an economic model developed by LaRouche which purports to illustrate the growth of financial aggregates at the expense of the physical economy and how this leads to an inevitably collapsing bubble economy. According to an interview with China Youth Daily Online, LaRouche's main point is that when the real economy (production) drops while the nominal economy (money and financial instruments) goes up there will be an unavoidable economic crisis.[73](graphic)
According to this model, speculative gains in financial markets are sustained by diverting monetary flows out of the real economy, into financial markets. LaRouche writes:
It's inflation and deflation at the same time. Inflation in money, deflation in real terms. Now at the same time, there will obviously be deflationary pressures as if the spigot is turned off, then our direction is changed, and the triple curve no longer applies. However if this were to happen, the 1.4 quadrillion would implode, thus why it still can overall be inflation or deflation.....even though it's really both at the same time in real terms until we decide at some future critical moment when kicking the can down the road isn't an option. Then it's either hyperinflation hell, or turning off the spigot and ending in a deflation spiral.
That's why there is no way to get out of this without major changes. The 'system' is broken. It's not a crisis within the system, it is a crisis OF the system. That's why there will be no recovery. People talk about understanding a soverign debt spiral crisis, but don't see the monetary derivative spiral crisis we're ALREADY deep in that is driving this whole situation.
One begets the other which begets the other. Unless you fix THAT, nothing is fixed. There is no way to fix it, not now. This pushed the sectors now/continuing to fail (MBS, sub-prime, CMBS, fannie/freddie, etc., etc.)
All of these problems are the result of the preceeding one. So what started the first one that started the tumble? Simple, THE SYSTEM. More specifically, the role of derivatives, in THE SYSTEM.
Nice brief summary there. I agree 100%. The question I'm trying to answer is how to position myself among this scenario.
Is this real government spending? Because unless you deflate this number, of course you're going to have a correlation. -ts