Official inflation is over 4 percent in the UK, so how printing more money is going to help meet a 2 percent inflation target is a bit difficult to grasp, but let us not quibble over such details. What counts is that the Bank of England is the undisputed champ of QE. After the next round of money printing, the BoE will have created new money to the tune of 20 percent of GDP, and will fund more than a quarter of all outstanding government debt via the printing press.

£275 billion of QE so far have not solved the crisis — the economy last year grew by less than 1 percent — but have lifted inflation and thus squeezed real incomes. At the same time, this policy has kept the government’s borrowing costs low and the banks from shrinking and in certain cases from collapsing. As with any policy of monetary debasement, the direct beneficiaries are the state and the banks.

This has tradition behind it. The Bank of England was founded in 1694 for the specific purpose of financing the Crown, which at the time was in low standing with its creditors. From its inception the Bank of England enjoyed numerous legal privileges that cemented its dominant position in the nascent but growing British banking system. Among them was the privilege to issue money against obligations of the Crown — a form of early ‘debt monetization’. Of course, the gold standard was a hindrance to unlimited money creation, so whenever the state needed more funds, usually at times of war, the Bank of England was conveniently absolved of any of its contractual agreements to redeem in specie, and kindly asked to fund the state through the creation of new money.

Gentlemen, start your printing presses!

But only after the gold standard was abandoned and the dollar’s gold window finally shut in 1971, the party could really begin. From 1965 to 2007, the year the present crisis started and UK banks began to collapse, the pound has lost more than 90 percent of its purchasing power! Two generations of British savers have been locked in a desperate struggle to sustain the real value of their savings. But hey, why save? Just borrow!

Such persistent monetary debasement has created a freak economy, in which every high street is littered with the cheap-looking branches of retail banks and in which property speculation is a national pastime. The English seem to live in the smallest and oldest houses of all of Europe but thanks to money-induced housing booms consider themselves to be wealthy, on paper at least, as long as they managed to get onto the housing ladder early enough. Why bother with engineering, once the hallmark of British industrial superiority, when you can flip a few semi-derelict terraced houses with borrowed money?

On a GDP-per-capita basis, 19 countries in the world now generate more income than the UK, but the UK is still world leader when it comes to leverage. According to a study by McKinsey, private and public debt combined stand at 5 times GDP, only Japan comes close.

But when the bubbles finally burst, the overstretched banks teeter on the brink of collapse, and the credit edifice wobbles, the central bankers counter with the only tool at hand: more money printing at an ever increasing rate. The central bankers are the arsonists of this crisis who now pose as fire fighters quickly labelling further monetary debasement ‘stimulus’. (In June 2011, Mervin King, the governor of the Bank of England, was knighted for his efforts during the financial crisis.)

This is the BoE’s strategy: to fight a hangover by opening another bottle of booze. “There is not a credit boom that a few trillion pounds cannot extend for a few more years.” That seems to be the modus operandi.

Or, will the public debt situation be better? Will the economy have deleveraged and rid itself of an unsustainable debt load? And will the economy then grow without the burden of the accumulated debris from previous cheap-money booms? –No, and no again! Deleveraging is verboten! Credit contraction is verboten! Bringing the economy back to anything that resembles a stable and sustainable structure is verboten! QE is designed specifically to stop the cleansing of the economy’s imbalances.

“Quantitative easing” has one objective: to generate headline growth through more money debasement, more credit creation, more balance sheet extension, and more debt! More money, more credit, more debt! If that sounds familiar, it is because that was the growth model of the past twenty years, the growth model that has set us up for the crisis.

The central bankers and their supporters among financial market economists have no other model. More money, more credit, more debt — that is the motto of the fiat money economy, and ever since the last link between state money and gold was severed, all central banks have constantly expanded their balance sheets, constantly bought government debt and created new bank reserves, constantly encouraged bank credit creation and borrowing.

In a fiat money economy, central banks are designed to be “quantitative easers”. That is what they do. The only thing that has changed recently is that the disastrous consequences of such a policy are now palpable and that the private sector is reluctant to participate any longer. The drastic acceleration in money printing that is now called “quantitative easing” simply marks the desperate attempt to outrun the system’s desire to shrink.

No, I am sorry, dear experts, but the idea that any of this will stop at £400 billion, £600 billion, or £1,600 billion is silly. You obviously failed to grasp the very essence of a paper money economy. We removed the golden shackles so that there will NEVER be an end to credit expansion and monetary debasement.

Well, actually there will be an end. But that will come not through a calm measured decision by the MPC, the monetary policy committee that is digging itself an ever deeper hole. It will come when the public begins to lose faith in this charade. But whether that point is reached at £600 billion or at £325 billion, nobody can say.

Regards,

Detlev Schlichter

Paper Money Collapse

Parting Shot:

(From Mac Slavo of SHTFPlan…)

“Proponents of Gold Standard May Be Violent Extremists; Report ALL Suspicious Activity To the FBI”

If you support returning the United States monetary system to sound money backed by the gold standard and believe that our country is bankrupt as a consequence of out-of-control spending and fiat money printing, then you may soon receive a visit from your local DHS/FBI office.

This morning your family, friends and neighbors were alerted by representatives of the Federal Bureau of Investigation that you and those who share similar ideas as you are potentially dangerous extremists that could threaten the national security of the United States:

“Anti-government extremists opposed to taxes and regulations pose a growing threat to local law enforcement officers in the United States, the FBI warned on Monday.

These extremists, sometimes known as “sovereign citizens,” believe they can live outside any type of government authority, FBI agents said at a news conference.

“The extremists may refuse to pay taxes, defy government environmental regulations and believe the United States went bankrupt by going off the gold standard.

Source: Reuters

Whether you like it or not, if you promote the ownership of gold, reject the notion that forced taxation is your patriotic duty and prefer to live in a country with limited government interference, you have now been stereotyped and grouped in with the handful of criminals who have recently turned violent against law enforcement officials. And, chances are that those close to you, who may not necessarily share your views, have now been alerted to your volatile nature and potential for violence against local law enforcement officials and the free people of the United States.

“Routine encounters with police can turn violent “at the drop of a hat,” said Stuart McArthur, deputy assistant director in the FBI’s counterterrorism division.

“‘We thought it was important to increase the visibility of the threat with state and local law enforcement,’ he said.

“In May 2010, two West Memphis, Arkansas, police officers were shot and killed in an argument that developed after they pulled over a “sovereign citizen” in traffic.

Last year, an extremist in Texas opened fire on a police officer during a traffic stop. The officer was not hit.”

The narrative is clear: If you share the same ideas as someone who has made a personal choice to turn to violence in the past, then you too must be an equal threat. Furthermore, the FBI is actively instructing businesses in your local area to be on the look-out for suspicious activity which may be precursors to anti-government activities. In a related story from Infowars, Paul Watson reports that FBI advisory aimed at Internet Cafe owners instructs businesses to report people who regularly use cash to pay for their coffee as potential terrorists.

“The flyer, issued under the FBI’s Communities Against Terrorism (CAT) program, lists examples of “suspicious activity” and then encourages businesses to gather information about individuals and report them to the authorities.

…

“Indeed, the flyer aimed at Internet Cafe owners characterizes customers who “always pay cash” as potential terrorists.

“Of course, the vast majority of people who visit Internet Cafes use cash to pay their bill. Who uses a credit card to buy a $2 dollar cup of coffee? A lot of smaller establishments don’t even accept credit cards for amounts less than $10 dollars.

“Other examples of suspicious behavior include using a “residential based Internet provider” such as AOL or Comcast, the use of “anonymizers, portals, or other means to shield IP address” (these are routinely used by mobile web users to bypass public Internet filters), “Suspicious communications using VOIP,” and “Preoccupation with press coverage of terrorist attack” (this would apply to the vast majority of people who work in the news or political blogging industry).”

Source: Info Wars

Also See: FBI CAT – Potential Indicators of Terrorist Activities Related to Internet Café [pdf]

In a coincidental stroke of good luck and timing for the national security apparatus of the United States, the recently passed National Defense Authorization Act (NDAA) allows for the rounding up and detainment of of these potential extremists without charge or trial, because the last thing we need is for courts, juries, and evidence to be involved in ensuring the security of American citizens.

Be warned fellow Americans. No one will be immune to the violative laws, policies and regulations of the police state which is quickly and forcefully embedding itself into all aspects of American life and culture.

In the new America, every man, woman and child is a suspect, person-of-interest and potential terrorist.

–Mac Slavo,

SHTFPlan.com

There Will Be No End to Quantitative Easing was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

“The U.S. recession is sure to send inflation to zero — just as it didn’t in four of the last five recessions.”

WORRIED ABOUT INFLATION? Oh, stop your carping and set an extra place at dinner for the fast-looming recession instead.

See, your cost of living can’t possibly keep rising now that Europe and the United States are plunging into a credit-led slowdown. Inflation is dead, killed by the slump. The value of money is going to stop sliding, even as interest rates fall.

Says who? Says just about everyone.

“A U.S. recession is now an even bet as job losses and the housing contraction jeopardize the longest-ever expansion in consumer spending,” says Bloomberg, reporting its latest survey of professional number crunchers.

“The world’s largest economy will grow at a 0.5% annual rate from January-March, capping the weakest six months since the last economic slump in 2001, according to the median estimate of 62 economists polled from Jan. 30-Feb. 7.”

And your cost of living can NEVER go up during a recession, right?

Oh, sure, inflation in U.S. consumer prices accelerated by one-half during the recession of 1973-75. It then hit an all-time peak during the short recession of 1980.

Inflation went on to beat its previous 30-year average during every month of the 1981-82 recession. (Don’t misread that “fall” from 10% to 5% year on year; the dollar’s buying power still shrank by almost one-tenth inside 16 months.) And the cost of living then spiked higher again when recession next struck, in 1991.

But this time, well…this time it’s just going to be different, OK? Think 2001, rather than the four previous U.S. recessions. And not just in the United States, either.

“The eurozone economy is now clearly slowing down,” says Michael Hennigan, founder and editor of Finfacts, the leading financial news site in Ireland. “Oil prices are also off their peak, [so] combined, these factors should act to dampen inflationary pressures in the economy. In particular, it should help prevent excessive wage increases that could endanger price stability.”

Here in the United Kingdom — the world’s fourth or fifth largest economy, depending on how you count China’s boom — growth just slid to 0.5% in the three months ending January, says the National Institute of Economic and Social Research. And that slowdown, the worst rate of growth since 2005, gives the Bank of England “room for further cautious reductions in interest rates,” reckons Martin Weale, the NIESR’s director in London.

“I don’t see the risk of inflation being a constraint.”

Back across the Atlantic, “The economy is rapidly slowing on all fronts, Wal-Mart [is] slashing prices again, and rising unemployment and delinquencies are going to further restrict bank lending,” says Mike Shedlock in his Global Economic Trend Analysis blog.

Hands down, inflation — properly defined as an increase in the money supply — continues to rise. Growth in the M2 measure “is running at almost a 6% year on year,” admits David Rosenberg at Merrill Lynch. But “Of course it is,” he then spits.

“Most of [this new money] is situated in nontransaction savings accounts, and these are up almost 8% from a year ago. So transaction balances are falling and precautionary balances are rising — what does that tell you about consumer spending and saving behavior?

“This is all, from our lens, very deflationary. Not the other way around.”

Big picture, even the euro-crats of the European Central Bank agree: Slower growth will result in lower inflation — even if the ECB did sit on the eurozone’s 4% interest rates once more on Thursday. Pressured to repeat the magic words “vigilant on inflation” at the press conference that followed, Jean-Claude Trichet managed instead to send the euro plunging to a near three-week low by hinting at cheaper money to come.

“Some of the menace behind [his] anti-inflation comments in previous months seems to have been softened,” as David Brown at Bear Stearns noted to Thomson Finance, “and there appears to be greater stress on the downside risks to growth.”

Put another way, lower growth — if not recession — will take the heat of prices. Because lower growth means falling demand. And only rising demand can ever push prices higher. Or so everyone says. Which is odd, given the facts.

“Few empirical regularities in economics are so well documented as the comovement of money [supply] and inflation,” as Mervyn King, now governor at the Bank of England in London, said in a late 2001 speech.

And the world’s supply of money is surging right now, even as “deflation” hits U.S. housing and stocks:

“Over the 30 year horizon 1968-98,” King went on back in 2001, “the correlation coefficient between the growth rates of both narrow and broad money, on the one hand, and inflation, on the other, was 0.99.”

Narrow money means cash in circulation, but as King said, the relationship with cost-price inflation holds just the same for “broad money” (shown above) — meaning all notes and coins; cash on deposit; and short-term bills, notes and bonds.

0.99 is as near perfect as you’ll find in any pair of data. An absolute 1.00 only ever exists for the very same thing measured against itself — say, the cost of living mapped onto the cost of living, or gold prices correlated with gold prices, for example.

Yet if we now race back to the present, and reappoint Mervyn King for his second term running U.K. monetary policy, “The disruption to global financial markets has continued,” explained the Bank of England — with King at the helm — when it cut U.K. rates on Thursday.

“Credit conditions for households and businesses are tightening,” the BoE explained. “Consumer spending growth appears to have eased…Output growth has moderated to around its historical average rate, and business surveys suggest that further slowing is in prospect.”

In sum, “These developments pose downside risks to the outlook for inflation.”

Phew! And to think that five- and 10-year bond yields had finally shot higher just before the credit crunch bit in summer 2007 because inflation — whether in prices or the money supply — had finally became the No.1 worry for fixed-income investors.

“Underscoring inflation concerns, the benchmark 10-year U.S. Treasury note last week had its biggest decline in price in more than two years, as investors abandoned projections the Fed would need to lower rates by year-end to stimulate growth,” reported Bloomberg on June 11.

“Mounting concerns about U.S. inflation levels have sent short-term bond yields in Australia to their highest level since mid-2002,” said The Australian Financial Review on June 20.

“The global economy in 2007 is still expected to register close to 5% growth for the fourth year in a row,” added Fidelity Investments on July 20. “In response to this rapid growth, central banks around the world have continued to tighten their monetary policies, with the eurozone, United Kingdom, Japan, China, and India all raising short-term rates.”

You might wonder whether that sudden surge in bond yields sparked the banking crisis of August. But either way, here in Feb. ‘08, “Persistent fears over a possible U.S.-led global slowdown [have] fueled further profit taking in crude oil,” as one London analyst told Agence France-Presse at the start of this week.

And here starts the chain of logic linking the housing slump to falling inflation and bypassing the impact of monetary inflation altogether.

“Between January 2003-January 2008 alone,” as the Financial Times quotes Goldman Sachs, “the world price of metals rose by 180% and of energy by 170%…in good part because of China’s demand.” That demand in turn came thanks to America’s credit-led bubble in consumer spending, but now the U.S. consumer’s tapped out — and his house keys are back with the lender.

So China can’t grow, because the U.S. can’t shop. Therefore, oil prices and base metals will sink and inflation worldwide will now vanish.

Who knows? Things might just pan out that way. But ignoring the flood of money — first created as credit and now stacked up in Treasury bonds across the emerging economies — would mean ignoring the connection between growth in the money supply and inflation in prices.

• The People’s Bank of China is rumored to want money supply growth of 15% per year, down from the current 18% plus
• India’s broad M3 money supply is rising 22.4% per year
• Singapore’s money supply increased by 14% in 2007
• Britain’s broad M4 measure of money has expanded by 12.3% since Jan. ‘07
• Western Europe is “enjoying” monetary inflation of 11.5% per year, three times the central bank’s target
• Last year saw 16% money supply growth in Australia, 13% in Canada and 22% in Saudi Arabia
• The U.S. money supply — if the Fed still reported M3 — is now guesstimated to be showing 15% annual expansion.

Remember, that near-perfect connection between money supply growth and consumer-price inflation is one of the few clearly established facts in economics. Over a 30-year horizon, they match each other almost exactly. Which is to say they won’t necessarily move together this week or next.

Similarly, the last time runaway inflation hit, the cost of living for Western consumers raced ahead AFTER raw commodity prices had begun to slow down:

During the inflationary ‘70s, the price of commodities — as measured by the Reuters/CRB continuous index — peaked out in November 1980. For the next 21 years, it was then downhill all the way.

Adjusted for inflation, however, the price of raw materials had, in fact, been falling since February 1974. That was when the rate of U.S. consumer-price inflation overtook growth in the CRB index, surging on the previous commodity price hikes and feeding into service prices and wage demands. Inflation in the cost of living finally peaked out in April 1980, hitting an all-time record high of 14.7% year on year.

How did consumer-price inflation keep soaring for more than five years after commodity-price inflation began slowing? No doubt things really are different today, starting with the fact that the current bull market in commodity prices — beginning in 2002 — represents the only real secular bull run for raw materials since the Reuters/CRB index began in 1956.

The 1973 doubling of commodity prices came thanks to the first OPEC oil shock. Might the Federal Reserve be taking things a little too coolly — not least with the value of dollars — by saying it “expects inflation to moderate in coming quarters” as it cuts the returns paid to dollar holders?

“The OPEC [oil cartel] would trim output if oil prices slip to $80 per barrel,” according to a Bloomberg report. It cites one unnamed OPEC delegate for the price target; two other members told the newswire that $70 would be “unacceptable.”

Says Johannes Benigni of JBC Energy in Vienna, “It wasn’t OPEC’s fault it moved above $80, but now it’s there, they justify keeping it.”

And then there’s the pile of dollars stashed away by the central bank in Beijing…up from $156 billion at the start of 2000 to more than $1.5 trillion at last count. If the sorry demise of the U.S. consumer really does dent the buying power of China, might the Chinese government not step in — and bid for crude oil, copper, soybeans and grain — to keep the fastest growing economy growing just as fast as it can?

Conjecture and guesswork are no substitutes for an answer, of course. And for as long as gold prices keep screaming that somewhere something is amiss between inflation and bond yields, that dumb lump of metal might just keep finding a bid.

Gold has now risen in 18 of the last 24 weeks. On Friday alone, it hit new record highs against both pounds sterling and euros.

Still, nothing to worry about. The U.S. recession is sure to send inflation to zero — just as it didn’t in four of the last five recessions.

Regards,
Adrian Ash
BullionVault
February 13, 2008

Inflation During Recession was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.