According to Alasdair Macleod, we are not that way from a hyperinflationary collapse of fiat currencies. From Macleod at goldmoney.com:
Note: all references to inflation are of the quantity of money and not to the effect on prices unless otherwise indicated.
In last week’s article I showed why empirical evidence of fiat money collapses are relevant to monetary conditions today. In this article I explain why the purchasing power of the dollar is hostage to foreign sellers, and that if the Fed continues with current monetary policies the dollar will follow the same fate as John Law’s livre in 1720. As always in these situations, there is little public understanding of money and the realisation that monetary policy is designed to tax people for the benefit of their government will come as an unpleasant shock. The speed at which state money then collapses in its utility will be swift. This article concentrates on the US dollar, central to other fiat currencies, and where the monetary and financial imbalances are greatest.
In last week’s Goldmoney Insight, Lessons on inflation from the past, I described how there were certain characteristics of Germany’s 1914-23 inflation that collapsed the paper mark which are relevant to our current situation. I drew a parallel between John Law’s inflation and his Mississippi bubble in 1715-20 and the Federal Reserve’s policy of inflating the money supply to sustain a bubble in financial assets today. Law’s bubble popped and resulted in the destruction of his currency and the Fed is pursuing the same policies on the grandest of scales. The contemporary inflations of all the major state-issued currencies will similarly risk a collapse in their purchasing powers, and rapidly at that.
The purpose of monetary inflation is always stated by central banks as being to support the economy consistent with maximum employment and a price inflation target of two per cent. The real purpose is to fund government deficits, which are rising partly due to higher future welfare liabilities becoming current and partly due to the political class finding new reasons to spend money. Underlying this profligacy has been unsustainable tax burdens on underperforming economies. And finally, the coup de grace has been administered by the covid-19 shutdowns.
This article is a little denser than usual, but like everything Alasdair Macleod writes, is well worth plowing through. From Macleod at goldmoney.com:
This article debunks the misconception that GDP represents economic health. It explains how monetary flows have led to markets in financial assets inflating while non-financials in the GDP bucket are in deep distress. And why, at a time of rapid monetary expansion, all attempts to quantify the effects of monetary policy on the real economy become even more meaningless.
Financial markets are acting like an inflation reservoir. And when the dam bursts bond yields will rise substantially, undermining values of other financial assets. The non-financial GDP economy will then face the full force of monetary depreciation, with calamitous consequences for ordinary people: the unemployed (of which there will be many), the low-paid and retirees living on meagre pensions and savings.
Macroeconomics have led state planners in all high-welfare economies headlong into policies of monetary and economic destruction from which there is no politically acceptable means of escape.
Only those with a lack of perception are unaware that their nation’s economy is in deep trouble. It is far worse than just a pandemic-induced disruption in our lives which in a little time will return to normal. Lest we forget, liquidity strains had already appeared in the US repo market and forced the Fed to reverse its policy of reducing its balance sheet before the coronavirus even existed. And before that, the trade tariff war between the US and China had led to international trade grinding towards a halt.
The global central bank and government fiat debt expansion free should spell the end of such fiat debt. From Alasdair Macleod at goldmoney.com:
“In short, the Fed is committed to rescue businesses from the greatest economic catastrophe since the great depression and probably even greater than that, to fund the US Government’s rocketing budget deficits, fund the maintenance of domestic consumption directly or indirectly through the US Treasury, while pumping up financial markets to achieve these objectives and preserve the illusion of national wealth.
“Clearly, we stand on the threshold of an unprecedented monetary expansion.”
President Reagan memorably said that the nine words you don’t want to hear are “I’m from the government and I’m here to help.” Governments in all the major jurisdictions are now making good on that unwanted promise and are taking responsibility for everything from our shoulders.
Those receiving subsidies and loan guarantees are no doubt grateful, though they probably see it as the government’s duty and their right. But someone has to pay for it. In the past, by the redistribution of wealth through taxes it meant that the haves were taxed to give financial support to the have-nots, at least that was the story. Today, through monetary debasement nearly everyone benefits from monetary redistribution.
This is not a costless exercise. Governments are no longer robbing Peter to pay Paul, they are robbing Peter to pay Peter as well. You would think this is widely understood, but the Peters are so distracted by the apparent benefits they might or might not get that they don’t see the cost. They fail to appreciate that printing money is not just the marginal source of finance for excess government spending, but it has now become mainstream.