Is This The Chart Of A Broken Inflation Transmission Mechanism?
Sean Corrigan presents an interesting chart for everyone who still believes that, contrary to millennia of evidence otherwise, money is not fungible. Such as the Lerry Meyers of the world, who in a CNBC interview earlier said the following: "I’m sorry, I’m sorry, you think he doesn't have the right model of inflation, he would allow hyperinflation. Not a prayer. Not a prayer. If you wanted to forecast inflation three or four years out and you don't have it close to 2%, I don't know why. Balance sheet, no impact. Level of reserves, no impact, so you have a different model of inflation, hey, you like the hawk on the committee, you got good company." (coupled with a stunning pronouncement by Steve Liesman: "I think the Fed is going to be dead wrong on inflation. I think inflation is going up." - yes, quite curious for a man who for the longest time has been arguing just the opposite: 5 minutes into the clip). Because despite what monetary theorists say, monetary practitioners know that money always finds a way to go from point A (even, or especially if, said point is defined as "excess reserves" which in a stationary phase generate a ridiculously low cash yield) to point B, where point B are risk assets that generate the highest returns. Such as high beta stocks (and of course crude and other hard commodities). And the following chart of Inside vs Outside Money from Sean Corrigan shows precisely how this is accomplished.
Despite a certain embarrassment along the way with rising prices last year, other people’s tightening efforts (notably in the emerging market engines of recovery) have spared Ben much difficult decisionmaking. Fortuitously, too, a goodly portion of the inflationary injection has stuck anomalously to the fingers of a corporate sector saddled with an unusual degree of certainty about its members’ individual prospects as well as about those relating to the fiscal and regulatory environment at large.
Thus, in devoting 85% of retained earnings—or 20% of ex-dividend, after-tax cash flow—to accumulating a $630 billion mountain of money (cash plus demand deposits) over the past 2 1/2 years, these most unlikely of ’hoarders’ have helped retard the incendiary effects of the Fed’s actions— for now.
This—together with the collapse in the ratio between the monetary base and the money supply itself—has fooled the more mechanistic of the quantity theorists into believing the machinery of debasement has been broken. Meanwhile, the cranks who comprise the MMT mob are crowing that the gold bugs and associated survivalists who inhabit the wilder fringes of the hard moneyworld (whom they insist on conflating with us REAL Austrians) have again been horribly awry in uttering their cries of ’Wolf! Wolf!’
In truth, none of this is so hard to explain. Taking money creation itself, the LEH-AIG-EUR disruption has radically altered the normal generation of money, but has not caused its suspension. In fact, given the speed of its operation since the Crisis, we could even say its efficiency has been greatly enhanced!
Before that watershed, the Fed typically gave rise to around one quarter of the nation’s money (OUTSIDE the commercial banks, in the form of currency and reserve balances) while the remaining three?quarters used to be originated INSIDE the banks (by their grant of loans or their purchase of securities against the recording of a credit balance on the relevant demand deposit account in their books).
Since then, however, the position has been largely inverted, so that the banks themselves are now responsible for something barely in excess of two-fifths of the total, with the Fed supplying the other three?fifths through its various ’emergency’ programmes.
No?one should be under the illusion that just because the monetary base (the Fed’s particular contribution) has swollen dramatically in relation to the sum of the banks’ discretionary additions to it, this makes the whole any less spendable or any less assured in its provision—quite the contrary, given Mr Bernanke’s inflationary bent and the lack of restraint which attaches to the monstrous institution whose awful power he arbitrarily wields.
Not yet convinced? Tomorrow we will demonstrate how in Q4, 2011 the US Shadow Banking system experienced its 15th consecutive quarterly contraction, from an all time high of $20.9 trillion to just $15.1 trillion (advance teaser chart here), not even offset by the liability creation in the traditional financial system, even as US consumers finally relevered for the first time in years, as eager suckers maxing out their credit cards. All this goes to show that the Fed never had an alternative to pouring money into the system, and indeed has done so endlessly since late 2008, only taking a break in late 2011 when the baton was passed to every other central bank in the world. Now their time is over, and the baton will have to be handed back to the Fed.
Because when it comes to secular market moves, today's little bout of JPM-related euphoria will be truly transitory if not accompanied by much more printing. After all the chart below is exponential and demands a sacrifice soon: perhaps the PBoC will step in briefly, although unlike the other central banks, China's money tends to stick within its own system. As such a far bigger calf will be required.
Which means that far all its hawkish bluster, today's move by the Fed is to be faded, although not before the market will permit sticky energy asset prices to collapse: meaning more outside money injections are coming. Yes, stocks may go even higher briefly, but for all intents and purposes unless accompanied by even more liquidity, the latest peak in stocks will be just like that in April of 2011: short-lived (and yes, we do find it curious how 2012 still continues to play out just like a carbon copy of 2011 YTD).
The end result of the exponential surge in outside money is, sadly we must admit, one which will make Liesman correct. For once. Because, as our earlier anecdote on Weimar showed, this is all precisely just as the Fed has intended from the beginning.
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