Guest Post: The Fed Must Inflate

Tyler Durden's picture

Submitted by Chris Martenson via The Ludwig von Mises Institute,

The Fed is busy doing everything in its considerable power to get credit (that is, debt) growing again so that we can get back to what it considers to be “normal.”

But the problem is that the recent past was not normal. You may have already seen this next chart. It shows total debt in the U.S. as a percent of GDP:


Somewhere right around 1980, things really changed, and debt began climbing far faster than GDP. And that, right there, is the long and the short of why any attempt to continue the behavior that got us to this point is certain to fail.

It is simply not possible to grow your debts faster than your income forever. However, that’s been the practice since 1980, and current politicians and Federal Reserve officials developed their opinions about “how the world works” during the 33-year period between 1980 and 2013.

Put bluntly, they want to get us back on that same track, and as soon as possible. The reason? Because every major power center, be that in D.C. or on Wall Street, tuned their thinking, systems, and sense of entitlement, during that period. And, frankly, a huge number of financial firms and political careers will melt away if and when that credit expansion finally stops. And stop it will; that’s just a mathematical certainty.

Total Credit Market Debt (TCMD) is a measure of all the various forms of debt in the U.S. That includes corporate, state, federal, and household borrowing. So student loans are in there, as are auto loans, mortgages, and municipal and federal debt. It’s pretty much everything debt-related. What it does not include, though, are any unfunded obligations, entitlements, or other types of liabilities. So the Social Security shortfalls are not in there, nor are the underfunded pensions at the state or corporate levels. TCMD is just debt, plain and simple.

As you can see in this next chart, since 1970, TCMD has been growing almost exponentially.

That tiny little wiggle happened in 2008-2009, and it apparently nearly brought down the entire global financial system. That little deviation was practically too much all on its own for the markets to handle.

Now debts are climbing again at a quite nice pace. That’s mainly due to the Fed monetizing U.S. federal debt just to keep things patched together. As an aside, based on this chart, we’d expect the Fed to not end their QE efforts until and unless households and corporations once more engage in robust borrowing. The system apparently needs borrowing to keep growing exponentially, or it risks collapse.

One could ask why credit can’t just keep growing. But there are many reasons to believe that the future will not resemble the past. Let’s start in 1980, when credit growth really took off. This period also happens to be the happy time that the Fed is trying (desperately) to recreate. Between 1980 and 2013, total credit grew by an astonishing 8 percent per year, compounded. I say “astonishing” because anything growing by 8 percent per year will fully double every 9 years. So let’s run the math experiment and ask what will happen if the Fed is successful and total credit grows for the next 30 years at exactly the same rate it did over the prior 30. That’s all. This is nothing fancy, and it is simply the same rate of growth that everybody got accustomed to while they were figuring out “how the world works.”

What happens to the current $57 trillion in TCMD as it advances by 8 percent per year for 30 years? It mushrooms into a silly number: $573 trillion. That is, an 8 percent growth paradigm gives us a 10-fold increase in total credit in just 30 years:

For perspective, the GDP of the entire globe was just $85 trillion in 2012. Even if we advance global GDP by some hefty number, like 4 percent per year for the next 30 years, under an 8 percent growth regime, U.S. credit would be twice as large as global GDP in 2043.

If that comparison didn’t do it for you, then just ask yourself: Why, exactly, would U.S. corporations, households, and government borrow more than $500 trillion over the next 30 years?

The total mortgage market is currently $10 trillion, so might the plan include developing an additional 50 more U.S. residential real estate markets?

So perhaps the situation moderates a bit, and instead of growing at 8 percent, credit market debt grows at just half that rate. So what happens if credit just grows by 4 percent per year? That gets us to $185 trillion, or another $128 trillion higher than today — a more than 3x increase. Again: for what will we borrow (only) $128 trillion for, over the next 30 years?

When I run these numbers, I am entirely confident that the rate of growth in debt between 1980 and 2013 will not be recreated between 2013 and 2043. But, I’ve been assuming that dollars remain valuable. If dollars were to lose 90 percent or more of their value (say, perhaps due to our central bank creating too many of them), then it’s entirely possible to achieve any sorts of fantastical numbers one wishes to see.

For the Fed to achieve anything even close to the historical rate of credit growth, the dollar will have to lose a lot of value. This may in fact be the Fed’s grand plan, and it’s entirely about keeping the financial system primed with sufficient new credit to prevent it from imploding.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
infinity8's picture

Pull it already.

gmrpeabody's picture

Quit pounding on gold..., problem solved.

Buckaroo Banzai's picture

The problem of our times, for people who actually have dollars: What to do with all these fucking worthless dollars.

fonestar's picture

Dollars, gold, silver, Bitcoin.  Hyperinflating and hyperdeflating?  Depends which side of the future you're on.

Seasmoke's picture

I have all 4. Still they don't make me feel any better. 

fonestar's picture

If you think this is crazy just wait for the rise of the anarcho-librarians! 

The dewey decimal system is doomed!

Colonel Klink's picture

Reversion to the mean is going to be a real bitch, BITCHEZ!

Winston Churchill's picture

Makes the BTC/USD chart look tame.

itchy166's picture

It IS the BTC/USD but most don't realize it yet. 

max2205's picture

Bitcoin already out ran that chart in 4 weeks....fuck a me blu

StandardDeviant's picture

Misleading, this chart is.  Should have used a log scale.

css1971's picture

No the chart is quite accurate, and the linear scale helps you understand the magnitude of what is coming. Log scales are misleading when it comes to money and debt.

StychoKiller's picture

Most Ignorati think that a "logarithm" is a vibrating, musical tree stump!

StychoKiller's picture

Simple solution:  jump into a new Petri dish! :>D

Polonius's picture

Quit pounding and start, that is.

There, helped it.

Uncle Sugar's picture

When the Fed runs out of debt to buy, what's stopping them from buying equities outright.  Eventually, they could own the Fortune 500 and all the happy sheople who work for them.

That would goose the S&P.  Screw Dow 30K, think S&P 30K.

AldousHuxley's picture

Not just the Fed....Japan, ECB, China

THe whole world is in this now.


so then what is the other side of this battle?


future generations....

Winston Churchill's picture

Not so.

Only one of your list has aquired hard ,and productive assets

with their debt.Its also the country that invented fiat and has

the most experience starting over.

They must be laughing in private.

spinone's picture

No matter how the fed devalues dollars, if people and businesses don't borrow there will be no economic  growth. 

fockewulf190's picture

This is all going to end up badly.  The writing on the wall is being written in thick, black, magic marker.  Unlike times before past crisises were economic  information was available to the privledged few, it is now available to almost everyone today. Some call the warnings "Doom Porn", but the stats are just so blaringly obvious, you have to be a blooming idiot not to recognize we are heading for eventual disaster.  

No one knows how much time is left before control is lost and the Great Reset commences, so take every advantage of each passing day.  Prepare and stack your phyzz...especially at the currently surpressed prices.  If by some miracle all this currency printing somehow saves the economies of the world and nothing bad happens, at the very least, you are still going to be the owner of hard assets...and you will still sleep well.

css1971's picture

You realise this is a tautology under our current monetary system.

all-priced-in's picture

Just change the definition of GDP -



mrdenis's picture

Call  it GDP equality ...right ?

DavidC's picture

They've already started that with including R&D as part of GDP.


kaiserhoff's picture

Yes, but GDP has no meaning if you include Government spending and transfer payments.

That horse left the barn a long time ago.  The revisions are not hard to make, but they would scare the shit out of people.

DavidC's picture

Spot on. Lay EVERYBODY off, send Government spending to the moon, lo and behold GDP will go up, everything's OK!


falak pema's picture

the debt is the bonfire of vanities and so to them its all assets...we are not vain we are not Saudis, Chinese and Iranians...We are the USA! 

That CANT be debt. We are the USA not Argentina. So...go talk to Mrs Kirchner if you want to talk austerity.

Here we talk of growth fed on asset ramp up...our WS assets that everybody envies us!

Our greenback that everybody wants to choke on!

Our consumer mania that everybody wants to produce for...

How can you dare say that all these goodies are fueled by Debt?

Thats all ASSET for the world. Without us they would all be DEAD. 

Yen Cross's picture

   This has nothing to do with $ value. We don't have a strong dollar right now, and nothing is growing. This has to do with the destruction of our manufacturing base and offshoring of all our skilled labor to peon 3rd world countries. China is allowing the yuan to strengthen because they see the writing on the wall. The yuan is at 6 year highs against the dollar. China is turning to an internal consumption based model.(want a stronger yuan for imports, to keep inflation down) Who ever wrote this article is a retard!

DavidC's picture

I wouldn't exactly call Chris Martenson a retard.


Yen Cross's picture

   The article was only submitted by Chris Martenson >retard.

Professorlocknload's picture

Looks to me like Chris wrote it...

Here nor there, because this Fed created false paradigm remains folly, if any semblance of Liberty is to survive.

In their minds, war IS the answer, after the duct tape fails.

Yen Cross's picture

  Whatever! You're like a 3 year old... Who cares! It was poorly written.

   Are denying that all our good jobs haven't been farmed overseas? Are you saying that more printing will solve anything? The Fed. isn't going to be the direct cause of any market meltdown. No amount of printing is going to compensate for decades of dismantling manufacturing and job offshoring through horrible fiscal policy.

Professorlocknload's picture

"Are denying that all our good jobs haven't been farmed overseas?"

 That's where the Fed sent 'em.

"Are you saying that more printing will solve anything?"

 Could that be what got us here in the first place?

"The Fed. isn't going to be the direct cause of any market meltdown"

 Direct/indirect, the Fed blew the entire bubble in the first place. In that light, it is certainly going to be the cause of the final collapse.

Policies have consequences. Go down with it or step aside and let it go. Just don't be fucking up the messenger.




skipjack's picture

And how much again has China printed in the last 5 years ? 15 trillion or so ? And become the cesspit of the world environmentally. Yeah, that'll end well.

css1971's picture

How does what you said in any way contradict the article?

Stronger Renminbi = greater demand for Renminbi (=new world reserve currency) vs alternatives = USD plummetting.

Offshoring production = fewer American products being chased by increasing numbers of USD = USD plummetting.

For the last 20 years, USD has been the same as Renminbi.movements in one means the equivalent movement in the other. That is starting to change. The Chinese are jettisoning the dollar peg the way a mult stage rocket might jettison the heavy lifting first stage.

Yen Cross's picture

  First of all the yuan "midrate" is set by the PBoC everyday, and has nothing to do with demand yet! (yuan isn't floated freely)

 China will eventually float the Yuan, and it will rise some against the usd. The PBoC has no other choice as inflation in China is out of control.

  The plumeting dollar has to do with the Fed. injecting $85 billion of them into the system every month, not your fewer products more cash chasing meme. The US trade balance has been coming in since January of 2013.

  The author of the article somehow implies that printing more money will stimulate inflation, and jobs growth. It won't, and it hasn't. that's the relevance of my post to the article.


Polonius's picture

He's not prescirbing money printing as a solution, but rather the most likely response by the present power structure.

DavidC's picture

Yes, but there's no bubble, correct?


disabledvet's picture might want to check the ledger vis a vis your years. our debt to GDP ratio during world war II was GINORMOUS. there was inflation...but it was managed through price controls and wage constraints. believe'll never see production on that scale ever again...all done via "fiat currency" i might add. ZERO gold standard...with almost ZERO price appreciation in gold. Obviously that isn't possible now...but you still could get a gold standard. that's an asset inflation that you see not a goods inflation. cash deals for real estate are at an all time high...which means the amount of savings in the banks is going through the roof. now we have bitcoin? really? there's no inflation here. this is DEFLATIONARY. i don't think the Fed could inflate even if it wanted to now. And is has said it wanted to btw.

Professorlocknload's picture

" believe'll never see production on that scale ever again"


ebworthen's picture

Hey look, more debt as % of GDP than 1932!

Surely, this will end well.

Bernanke = Genius.

(in HELL)

Son of Loki's picture
Funding withdrawal wipes $1.6 billion off UK housebuilders



DOGGONE's picture

Here is history to date -- look for "normal".

"Normal" is F___ the People!
Democracy is "Vote for me & you're as smart as you need to be!"

kchrisc's picture

All just a great big lying, cheating and stealing house of cards.


Guillotine maintenance tip#4: Blade guide-channels should be inspected monthly for potential obstructions. Insects, especially hornets, like to make home in the blade guide-channels. This can cause uneven or slow blade fall that can prevent a rapid decapitation.

Hedgetard55's picture

Partial decap will work also.

Kirk2NCC1701's picture

To most of us here, this article is not "News"*.  But it may be a good reminder to some, or a North Star to those poor souls who get confused or distracted too easily.  Or to those gullible ppl who are prone to the Fed's head-fakes, that they will ease off on their FRN/Dollar debt-creation (aka 'Tapering'). 

This system -- their system of massive wealth transfer from the many to the few -- is inherently designed so that it MUST grow or will die (implode).  Like any and all Ponzi schemes.

I'm about as likely to fall for the Fed's head fakes as I am for OJ Simpson's.  "A critter does what as a critter is." is an apt motto in regards to the ethics and tactics of the Fed.

* Ever since I watched and bought Chris's "Crash Course" DVDs last year, I've been a huge fan of his and his website.  He's not so much a "prophet of doom", as he is a "prophet of the unsustainable".  As such, he is a voice of Reason, in a sea of quasi-religious Doomdayers (for whom The End is Here happens every year, like the Black Friday specials). 

For 'normal' people (within +/- 2 sigma of Normal), Doomsday-fatigue gets VERY tiring after a while.  But preparing for greater self-reliance and overall resiliency makes absolute sense to those of us who are not fanatics, zealots or cultist nutjobs.  I suspect that most people will eventually drop the Purveyors of "Addictive and chronic Anger and Fear", and opt for Purveyors of "Happy, Resilient Living".  Having had my fill of the former, I now resume my course for the latter:  "Steady as she goes, helmsman.  Steady as she goes."

Dre4dwolf's picture

Looks normal its just noise in the chart.

Working as intended.