Here are some excerpts from a recent speech by Bob Hoye of Institutional Advisors to the Committee for Monetary Research & Education. I thought he made a great historical case for the limits of monetary expansion. I've only lightly edited the speech to make a few things clearer, and all emphasis is mine. You can read the entire speech here.
"Recently, most governments, including the US, have broadcast their intentions to continue to depreciate their currencies. Although the concept is ancient, the honesty is refreshingly new.
"The question is – if central bankers will not surrender the privilege of currency depreciation, how will our one hundred years of deliberate inflation be halted?
"Market forces combined with a change in the general public's submission to the will of the state will do the trick.
"It is important to understand that the Fed needs speculators' leverage to get the money out the door. In the 1930s it was called "pushing on a string". In so many words, at the end of a bubble the power shifts from the Fed to the margin clerk.
"With considerable energy the Street has been focused upon two kinds of inflation. One is forced credit/currency by the Fed. The other is just straight running the printing presses as in Germany in the early 1920s, or more recently in Zimbabwe.
"In many eyes the Fed is guilty of both and hyperinflation of all prices is in the system and inevitable.
"The extraordinary financial manias that climaxed in 1720 provide useful instruction. The leading companies in London and Paris were quasi-government entities, enjoying full and continuous support – right to the end of the mania – but with different features.
"Soon to become the senior currency, British sterling was backed by a metal standard, but even a gold standard has never impaired a great financial mania. Speculators, reckless banks and soaring ambition will always create more credit than any economy can handle.
"Despite magnificent efforts by government to keep the party going, the South Sea Bubble blew out in June 1720 and the economy collapsed into a lengthy contraction that can be called the first Great Depression.
"Throughout business history, rising prices have occurred with prosperity and falling prices with hard times. So the pattern of the recession starting with the end of commodity speculation, as in 1980, 1973, 1929 or 1921 is nothing new. All occurred during the Fed's mandate to prevent bad things from happening.
"On the bigger picture, the 2008 stock market crash replicated that of 1929 including the start of that recession. It is only at the end of a classic bubble that the recession starts with the bear and that is one of the signatures of the advent of a long contraction.
"The business recovery out of the panic that ended in March 2009 accomplished measurably outstanding speculation in commodities. The recent hit to commodities is indicating the start of the second recession within a lengthy post-bubble contraction. This will likely assist another popular reformation of ambitious government.
"My own conclusions are that the financial markets are in an immense ending action that will shut the door on the Fed. Natural forces of credit contraction are working to end a hundred years of experimental depreciation.
"On the political side, the administration's immense and brutal ambition to turn the US into another socialist country seems to also be a form of ending action. The opposition to big government is real and pending default by most levels of government is the catalyst for the people to get control of government affairs and expenditures."
The point here is that booms and busts end on their own accord. And while they are exacerbated by government and central banks, they cannot be controlled short of eliminating central banking entirely and reverting to a stable money supply.
Hoye rightly points out "in many eyes the Fed is guilty of both and hyperinflation of all prices is in the system and inevitable." But perception is not reality.
People fear inflation because they remember it. People have no concept of deflation, nor its mechanics, and are thus unaware of its occurrence.
However, as is now being made abundantly clear by recent mid-term elections in the US, and the events in the Middle East and now throughout Europe, the sudden public aversion to the after-effects of government meddling and central banking is both natural and expected. It is also highly deflationary.
The social zeitgeist is slowly but surely rejecting continued fiscal and monetary expansion, whether individuals realize it or not.
Ben Bernanke is absolutely correct when he says inflation is likely to be transitory. He should know. His deepest, darkest fear is deflation. And he knows it's happening now.
This is not to deny that price inflation is occurring. It is occurring. But monetary expansion is not. There's a big difference. And since we live in a world built on a perpetual credit and debt expansion model, price inflation cannot last in the face of credit contraction.
Deflation is what follows.
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