In recent weeks some hyperinflationists have succumbed to the reality that QE2 isn’t really adding net new financial assets to the private sector – it is indeed just an asset swap.  But this hasn’t stopped them from claiming that QE2 directly results in an exploding money supply.  This convoluted thinking claims that QE is directly funding government spending (as if the US government would have stopped spending money and folded up shop without QE2).  So now the theory is that QE is really resulting in excess of $1.5T in new money in the form of deficit spending. This is flawed for reasons I have previously explained, but let’s not theorize about the money supply – let’s allow the facts to speak for themselves.

Over the years many have been quick to cite the monetary base as the direct transmission mechanism that would lead to the great hyperinflation.  We all know the story – the Fed’s balance sheet explodes, the monetary base shoots higher and money starts flowing out of bank vaults like a volcanic overflow.  But regular readers are all too aware that the monetary base has no correlation with the broader money supply.  The reasoning is simple – the money multiplier is a myth.  So, it doesn’t matter how many apples (reserves) the Fed puts on the shelves.  It doesn’t result in more apple sales (loans).  Banks are never reserve constrained.  The explosion in reserves and continuing decline in loans makes this crystal clear.  The Fed can continue to stuff banks with reserves and unless we see a substantive increase in lending the expansion of the monetary base will continue to be insignificant.

But what about M2?  Isn’t it also exploding higher now?  Not really.  In a recent article Erwan Mahe, an asset allocation and options strategist with OTCexgroup, posted this excellent chart comparing M2 growth across the big three economies.  He said:

“As you can see in this graph, China literally allowed its money supply to skyrocket, compared to that of the U.S. or the eurozone, with annual growth averaging +17.4% between 1996 and 2008, which compares to +7.1% in the eurozone and +6.3% in the United States.

Above all, since the beginning of 2009, this divergence has actually widened, despite the Fed’s QEs and 0% interest rates, since Chinese M2 has been growing at 26.6% per annum (!), versus +3.5% in the U.S. and +2.3% in the eurozone.

So, I wonder, is Bernanke truly responsible for the hike in world commodity prices and the ensuing popular upheavals?”

The story here couldn’t be more self explanatory.  The US M2 money supply is simply not expanding anywhere close to its historical rate.  The only country where the M2 money supply is seeing any sort of substantive growth is in China.  And so it’s not surprising to see the combination of commodity hungry China and enormous money supply growth result in higher commodity prices.  While I don’t think it’s incorrect to blame some speculative aspect of this rally on the Fed it is entirely incorrect to blame the Fed for the commodity rally due to their “money printing”.  The fact is, the USA is not expanding the money supply at an alarming rate.  China controls their own money supply.  If they desire to print money in order to maintain their flawed currency peg then that’s a policy only they can control.  Blaming the Fed for China’s flawed monetary policy is not even remotely fair.

Although the USA stopped issuing M3 we can still measure M3 through various independent sources.  Hyperinflationists are often quick to point out Shadow Stats when anyone cites the CPI.  Ironically, according to their data the M3 money supply is still shrinking at an annualized rate:

So yes, the US government is running a massive $1.5T deficit, however, by any metric of money supply we can see that this is barely offsetting the continued de-leveraging that is occurring across the US economy.  We are certain to see higher rates of inflation in 2011 (especially if oil prices surge higher), however, it is not an accurate portrayal of reality to conclude that the USA is “printing money” uncontrollably and flooding the world with dollars that will lead to hyperinflation. That is simply not the case and the data speaks for itself.  At best, we are barely printing enough to offset the destruction of de-leveraging….

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Excellent post, thank you for articulating what I had been thinking that China has over-expanded with excessive money supply growth, which could lead to a crash after a boom.
    The dollar has declined by 30% since 1973. However it has moved around in various trendlines and could move back to the higher part of it’s trading range if other nations try a competitive devaluation or if fears of a Euro crash or China crash or an OPEC country revolution come true.
    The 30% drop in the dollar is only 0.8% a year, less than the long run rate of inflation.

    • The dollar is down 30% as oppose to what ? Other currencies that have lost buying power.

      At the end of the day money can only be a claim on goods and on that basis its down 82% since 1970.

          • But how much do you need to work to get the same 18 cents dollar?

            Of course productivity and wages has compensated for the increase.
            Compensate = Advantages in exchange for a disadvantage.

            If you have 20 pounds on your back but you get is such good shape that you can run even faster do you think the the 20 pounds are as been benefit to you ?

            • In most case we are far more productive. I like the washing machine example. Yeah, a washing machine costs a hell of a lot more than it costs to walk down to the river and clean my clothes, but think of all he stuff we get done while the washing machine cleans our clothes for us! You can’t put a price tag on all that time saved….

              Same goes for hedonic adjustments. Many people have huge issues with hedonic adjustments, but why would you ever compare a computer in 1990 to a computer in 2011? The current computer is faster, more efficient, has better programming, etc. In short, it’s more efficient and allows us to be more productive. This idea that the USD has lost 90% of its value implies that our standard of living is collapsing. That is simply not true.

              • You can’t do that with food can you ?
                Washing machine are part of the technologies that compensate for inflation. That does not justify or make inflation good.
                With out inflation your W machine would cost you even less.

                Thank God those washing machine are made in China or Mexico some may have to walk down to the river and clean there clothe.

                • Let me ask you a different question then – if food is getting so expensive in America then why does this country have an obesity epidemic? The truth is, Americans are so wealthy that they over eat. Based on your inflation theory we’d all be running out of money to buy food. But the exact opposite is happening here. So where’s the disconnect in your logic?

                • The way I see it, you need moderate inflation because you need a buffer above 0 inflation lest you cross into deflation. Deflation is more pernicious than inflation since once it kicks in, the lack of demand sends the economy straight into a recession. Probably wouldn’t be a big deal if the government automatically stepped in and filled the gap, but with the amount of ignorance out there it is hard politically.
                  So, to not accidentally cross into the negative territory it is good to operate at modest levels of inflation.
                  And I really want to know who really suffers from moderate inflation.

                  • @ Peter

                    This deflation fear is Bernanke’s dogma and complete BS. Inflation is all about a hidden tax, incone redistribution or redistribution of society’s productivity gains. With higher productivity products should get cheaper, but this means the mass consumer gets to share the benefit of productivity. By inflating the prices more of the productivity gains flow to the producer. That is all.

                    By your deflation logic PC producers must be all broke and nobody would buy the next iShit because it is always cheaper in a few months.


                    • It’s amazing how many people see deflation as this harmless thing and inflation as so evil. The problem with deflation is that outside of some theoretical explosion in productivity it’s caused by falling or flagging demand. This leads to rising unemployment and falling wages. Because our debts are fixed in nominal amounts falling wages means falling disposable income which further cuts into demand and you get a self reinforcing contraction in the economy.

                      Between the end of WWII and the early 1970’s we saw multiple decades of positive inflation and growing real wages. The redistribution of wealth that has occurred since the 1980’s has been in the years following the Reagan Revolution and governments abandoning their commitment to full employment after poor policy responses to inflation driven by a supply shock in the 1970’s.

                    • It’s a political argument. People filter their economic thinking thru their political filer first. The result is that we get all sorts of backwards theoretical approaches that are not based on sound economics, but meant to drive a political theory. In the case of inflation it is always reported as govt theft. Naturally, that works well within a Republican, supply side, austrian perspective. I’m a Republican. But I never filter economics thru my political filter. I hate big govt, but I also understand economics well enough to know that you can’t eliminate govt. And I certainly don’t create arguments that help me arrive at a political destination. This is the error most people make….

                    • In the current political environment, for a conscientious person to identify either as a Republican or as a Democrat becomes pretty much untenable. I guess you could still identify as a liberal or conservative.

  2. True M2 hasn’t been exploding, but the eur+us+china M2 growth has not slowed down at all, about the same as before. Ben is just flooding the rest of the dollar zone.

  3. One question that is off the point, but on the web site, a recent blog showed CBO projections of the total debt to be about 350% of GDP, according to current projections, in 2086.
    I know a lot can change in 75 years, but if that did come to fruition, would MMT say that is sustainable or unsustainable?
    The CBO says is is unsustainable, but does not explain why.
    Don Levit

    • It’s hard to take such projections seriously. If I weigh 600 pounds in 10 year what will happen to me? I don’t know and I can’t really tell you because it will never happen.

    • My feeling is that anybody telling you what debt-to-GDP will in 20, not 75, years, is not worth even talking to. All these projections are based on questionable assumptions, faulty models and extrapolations which are likely not to hold.
      But regardless, suppose indeed debt-to-GDP is 350%. What is the problem with that? Is it interest you pay on debt? As long as this interest is less than the real rate of growth of your economy, it is sustainable. When the opposite is the case, one would need to run primary surpluses (meaning, one could still run deficits if the deficit part is only coming from debt service), but interest rate is a policy choice in MMT paradigm. See Scott Fullwiler’s paper “Interest Rates and Fiscal Sustainability” for discussion.
      Even then, one needs to explain why there is even a situation where our debt-to-GDP grows so much. If it is healthcare costs, then I really don’t believe we’ll continue paying as much as their projections show. Something will have to give. As James Galbraith quipped:

      … if health care does get that expensive, and we’re paying 30 percent of GDP while everyone else is paying 12 percent, we could buy Paris and all the doctors and just move our elderly there.

  4. Whether or not we have hyperinflation, clearly we do have substantial amounts of inflation and it is never going away. As someone above aluded to, who cares if it technically is hyperinflation or if it is merely a disturbing amount of regular inflation. The purchasing power of the dollar is declining. Today, Fed policy forced people to speculate on commods and stocks just to attempt to preserve their purchasing power. In the not so distant past, it was easy to get 5% simply from putting money in a relatively short term bank CD, and now, even if you went out 5 years you might not even get more than 2.5%. That isn’t keeping up with inflation. The Fed just wants to blow bubbles and prop up insolvent banks. Inflation is happening and it isn’t going away.

      • This is not a valid indicator of Inflation

        It is used by the Govrnment to control Entitlement cost (Social Security and other cost of living increse.

        Link below is from the Dallas Fed

        Note: Number of Falling-Price Components Declines Again, Significantly
        Finally, January saw a third straight decline in the number of PCE components registering price declines: 54 of the 178 components that potentially go into the trimmed mean fell in price, or about 30 percent of the basket.

        The point:

        The govrnment uses ” Aggregate Pricing” for the Inflation indicator
        when somebody say my cost are going up food/gas etc they are using “Standard of Living Pricing”

        The validity of your argument is that Central Banks across the globe are printing money which is leading to commodity inflation

        It does not matter whether “Bubbly Ben” is leading the pack.

        • So, I’ll ask you the usual question. Incomes and CPI have a near 1:1 correlation. Are you telling me that the govt is telling us we’re poor so they can lie about inflation? That’s their great conspiracy to keep us all happy? Because that makes ZERO sense. There’s an an obvious flaw in this conspiracy that the govt lies about CPI….It’s not perfect, but it’s irresponsible to call it a fraud.

          • TPC You are jumping to conclusions:

            I’m saying the calculations for cpi are flawed and understate Inflation

            From 1980 to the present adjustments to the CPI calculations have been made–that is a fact! Kudlow had a couple of economist on the other night both agreed the cpi understated Inflation==both agreed the calculations were wonky

            I’m asking you to read the info from the Dallas Fed as to calculation of the ” trimmed mean PCE,items counted and not counted and weights by item –this data is provided.

            The Dallas Fed economist is aware of a change in prices and the change in categories with increasing prices—

            But to your point:
            The “wealth of a nation” is measured against poverty

            In the USA in 2007 we had 26 million people on Food Stamps
            In the USA in 2010 we have 46 million people on Food Stamps

            So are we richer or poorer as a nation?

  5. Does that chart factor in the cost of medical insurance, medical care, food and fuel prices?

      • When are these people who see single commodity/product/sector inflationary bubbles going to realize that that’s not an indicator of the ENTIRE economy? Its getting beyond frustrating. When is the “my gas/food/clothing” (not that those aren’t important personal budgetary points) price going up = inflation argument going to realize its without credit when confronted with real data?

        I make $40K a year, before taxes and my contributions to benefits. I see escalating prices in some things I have to buy, THAT DOES NOT EQUAL NET INFLATION ACROSS THE ECONOMY.

        It means the middle class is getting squeezed. Trust me I feel it too, but it does not equal a good counter argument to what TPC is saying. Keep reading him, friends.

  6. One point that I’d like to add to Cullen’s (and Erwan’s) work here is that we must also take into account GDP growth.

    If an economy is experiencing real GDP growth, then money supply must grow accordingly. As I have previously discussed, mild currency depreciation (inflation) is essential to maintain velocity. Taken together, money supply must grow more than GDP growth in an expanding economy.

    Given that China’s economy has been experiencing rapid growth as it develops, compared to the more matured European and American economies, it follows that it makes sense for Chinese M2 to be growing faster than American and Europen M2. However, what needs to be done is to compare the relative growth of US and Chinese GDP against money supply (looking at M2 here). For example:

    What matters here is the spread (in 2009 the gap was > 10%). Now let’s assume that both nations want to maintain a similar rate of inflation, aiming for a band between 2-4%. Accepting that assumption means that the effect of inflation can be factored out of the relative M2 graphs. Said another way, the spread in the M2 plots can be directly compared to the spread in real GDP growth with any difference being indicative of an inability (one way or the other) of a central bank to hit its inflation target (high or low).

    Prior to 2009 we were looking at a difference of about 11% in M2 growth. Contrasting this against relative GDP growth, it’s apparent that China has been running too hot relative to America during several extended time periods. Perhaps this was justifiable when future growth estimates were themselves growing (accelerating GDP growth), however, post 2009, the M2 spread has now blown out to > 20%. A number that, given the “roads to nowhere” projects being constructed in China, is even harder to justify.

    Chinese money supply has grown far too much, not only relative to its own GDP growth, but relative to the US and Europe. By maintaining this harmful currency peg, the Chinese government has backed itself into a corner and caused commodity price inflation. To eliminate the peg now would likely cause a major economic correction within the Chinese economy, manifesting as falling GDP growth. This would exacerbate the local effects of an overly expanded money supply leading to a major Chinese economic crisis. (It’s hard to say whether the RMB would rise or fall). Meanwhile, maintenance of the peg forces Chinese hot money to blow up bubbles particularly in equities and real estate. Attempts by the Chinese government to dampen stock market and real estate speculation merely pushes that money elsewhere (as we have seen, into commodities).

    Nobody forced China to maintain that peg. It was a political decision that, for a while, benefitted China greatly as it imported industrial activity from the rest of the world (particularly America). Although the peg has been relaxed slightly, revaluation has occurred far too slowly due to politically sourced fear of triggering an economic correction. As Bernanke has correctly inferred in repeated statements, maintenance of that peg is a primary source of global instability.

    Finally, as with all things, it always pays to take a look at the big picture to keep things in perspective.

    While China is a major (in my opinion *the* major) contributor to commodity inflation, there are also other actors on the stage. Note that the current scenario has entered a new phase as political instability in Middle East and Northern Africa changes everything. When oil prices are effected, a crisis has legs of its own.

    • “If an economy is experiencing real GDP growth, then money supply must grow accordingly. As I have previously discussed, mild currency depreciation (inflation) is essential to maintain velocity. Taken together, money supply must grow more than GDP growth in an expanding economy.”

      This is complete dogma. Where do you get that from?

      In the 1800s there were long periods of deflation with great GDP growth and innovation.


      • The 1800′s had a banking crisis, depression or panic every 20 years. Where do people get this insane notion that the 1800′s were some period of great prosperity? There were FIVE depressions in the 1800′s….1819, 1837, 1857, 1873, 1893….Do you really want to live thru that gain?

        • I do not understand your fear of depressions – is it better that failed things do not change, that there is no Schumpeterian destruction? The latter is what keeps capitalism going.

          Plus nowadays depressions are merely called recessions.


          • I don’t see the need for depressions (recessions and some level of business cycle is necessary). If you implement the proper safeguards they shouldn’t happen in the first place. Depressions occur when people are allowed to get out of control. It’s like eating well and working out. If you don’t do it your body will suffer serious trauma over the years. It’s not necessary.

            I’m going back to the 20% down rule. If that law had been in place we never would have had this crisis. We might have shaved a few points off of GDP on the way, but you know what? We’d have millions more jobs than we do today. I’ll take 3% steady growth over 5% volatile growth any day. It’s a lot like running a portfolio. Risk adjusted returns really do matter because it’s the riskiest portfolios that cause the most trauma to people….

  7. Even if inflation were really below 3% (which I doubt) isn’t it funny how the Fed acts like theft of 3% of ones purchasing power every year is a good thing? Monetary inflation is legalized theft. Let’s call it what it really is: stealing. There is no reason my property taxes have to go up every year other than the theft of inflation. Am I getting added value by paying more in property taxes every single year? No. Am I getting added value by paying more for food, clothing and medical costs every year? No. My purchasing power is simply being stolen by monetary inflation.

    • The alternative is worse. In the fiat currency regime you have to either tax or have inflation, unless you have lack of AD. So, choose your poison.
      And pegged currency regimes are much worse. See this to understand why:
      And if your wages grow in line with inflation, then little harm is done.

    • That really depends. Has your standard of living declined in the last 30 years? Would you rather live in the 70s or 80s? Personally, I think it’s an awesome time to be alive. I wouldn’t trade today for the 1800′s for anything. But the people hyperventilating about inflation will have you believe that we are worse off today than we were in the 1800′s because of the “money printing”. They say inflation is always bad and that it’s always theft of our standard of living. The truth is, we’ve progressed faster than any society ever in the history of mankind. Yet we all sit around and bitch about how we don’t have it as good as we should. There are big problems in this country. Don’t get me wrong. But we’re not in the hole that many would have you believe and a little inflation on an annual basis isn’t destroying our lives.

      Is govt policy poor? Yes. Do they spend on useless stuff? Yes. Do they overtax us? Yes. So in that sense I entirely agree, but we have to be careful about painting this inflation story with such a broad brush. A small amount of inflation is going to occur in any economy. The key for us going forward is recognizing this and getting our govt to focus its efforts more efficiently so as to avoid overtaxing us all.

      • Hear hear.

        I’ll add that mild inflation is *necessary* if we want to encourage a healthy economy. A currency that holds value or worse, appreciates, actively impedes trade and promotes economic instability (as people hoard the currency).

        Stable, mild inflation is a healthy sign for a sound economy. Of course, for pointing this fact out I am regularly accused of being a victim of Stockholm Syndrome, enthralled by the bankster elites who want to rob us all via inflation.

        Personally, I’m quite happy to take a small hit to my purchasing power, caused by mild inflation, given that it helps to facilitate exchange leading to the development of a whole lot more, higher quality goods and services to purchase that, when compared by attributes to what I could acquire in the past, are vastly superior thereby actually IMPROVING my purchasing power.

      • I think many economists take credit for technological advances and this is unwarranted.

        Yes, there is overlap, but we also need to separate the two. Standard of living when viewed without technological advances has gone down. Two income families just getting by is the norm, whereas 50 years ago, it wasn’t. Thank you inflation.

        Incomes, adjusted for inflation, have barely risen for many, many people.

        I think many people look at history in a static, sterile way. They don’t recognize the macro trends. They just look at today, and confuse the causality on how we got here.

        The trend is not good. Inflation, and an easily expandable monetary supply that benefits those that get it first – the FIRE economy, creates a parasitic class, freed of the darwinistic element of capitalism, that feeds on the productive economy. And then this class of people have the gumption to take credit for technological advances and tell us, “see, you’re better off!”

        This chapter of our history in monetary experimentation is far from over. It will end badly. The trend is the destruction of the middle class in the western world. The trend involves a new feudal system. Yes, the new slaves may have ipods… but they are once again working harder than ever to keep from financially drowning.

        And the global debt and trade imbalances caused by this funny money will come crashing down one day. Not just in economic terms, but this correction will manifest itself in military conflict as well. We are witnessing a replay of the 1930s when currency manipulation was rampant.

        The world globalized overnight because we have a monetary system that can mushroom overnight, and take advantage of eastern slave labor to shift inflation from goods to assets. This created the FIRE economy that needs unsustainable debt to prosper. It was an illusory wealth gain.

        Cullen – the story has yet to end. The jury is still out.

        • That family has its kids in pvt schools, lives in a McMansion, drives two cars, etc. Both parents work because they are trying to provide a life for their children that was entirely unattainable 50 years ago.

          I agree with you that the Fed and FIRE industry are doing great harm to the nation. Ironically, however, their growth is due to economists and theorists who celebrate the deregulated free market approach. It’s the influence of austrian and monetarist economics that directly led to the growth of the FIRE industry and the importance of the Fed. By liberalizing these industries we directly gave them the power they never should have been able to obtain. Ironically, these same theorists now try to have it both ways by criticizing the Fed and banks while also saying that free market capitalism is the only path forward….The hypocrisies in the austrian, supply side, and monetarist schools are near sickening once you fully comprehend the monetary system….These are dogmatic approaches that get filtered thru politics first and economics second. As a result, their answers are always the same political bent….And that’s coming from a guy who really hates having the govt in my life….

          Have you taken the time to study the sectoral balances approach that I’ve discussed on many occasions? I think once you understand this you will rid yourself of this belief that all govt spending is bad. In fact, you’ll begin to understand that govt spending is in fact necessary….

          • We shouldn’t paint with a broad brush. Many Americans didn’t do the McMansion thing and are still struggling – badly. But I also believe that the better life for my children goal (at least materialistically) is a failed paradigm. I mean, taken to its absurd logical exponential conclusion, children a 100 years from now should be buying homes that are 20,000 SF! Why? Because in theory, if one generation buys a house that is merely one square foot smaller than their parent’s house they are a failure! That’s the sick twist of the better off than my parents paradigm!

            I’m not against gov’t spending and I understand double entry book keeping as it relates to domestic gov’t spending and international trade balances. I get it.

            You’re wrongfully pegging me as some sort of tea party/Teutonic Austerian. I’m neither. I just find it is easier to criticize everything, especially the existing monetary regime than to suggest some sort of solution. Why? Because 1) I’m being honest and 2) I don’t believe a real solution can be implemented. History shows us that on the macro and global level, transitions to sustainable balanced systems – whether they be environmental or monetary, are rarely implemented due to the high costs and the sacrifice required of existing competing vested interests.

            And so, ultimately systems break down, especially after all costly “solutions” at maintaining the unsustainable status quo are exhausted. And keep in mind, just the maintenance alone of the status quo in an existing lopsided, imbalanced system ultimately produces a more spectacular collapse later on.

            Whenever I bring up gold – it is to compare it to the existing system. Otherwise, there is nothing else to compare the existing system with to show its flaws. I’m not suggesting we go to a gold standard, though I’m not against it either. But that would involve a lot of belt tightening and people would blame the new standard on their loss of (illusory) wealth.

            What I am saying is that the current system will break down, and that some sort of gold standard will be begrudgingly implemented amidst the chaos and distrust that will ensue from that breakdown. Debt and fiat relies on the goodwill of their creators, right? When that system of responsible stewardship and goodwill evaporates, something will be needed to fill that vacuum.

            So gold by default, not by design.

            I’m viewing this crisis taking a macro/historical/geopolitical/human systems approach. I can’t say what the market will do six months from now. I’m looking at history as a guide and saying what will likely result years from now; the endgame.

          • Cullen,

            you are hypocritical to criticize the Austrians on their deregulation claims. They never said banks must be deregulated but bailed out. If deregulated, they must not be insured by the society. So you never had “true” deregulation, you had only regulatory capture.


            • Pardon me. So, the austrians want to let the banks get as large as possible and then allow them to crash the whole system when their self correcting mechanism causes a depression. That’s so irresponsible I can’t even take the notion seriously. Sorry, but this lax approach to regulation created this crisis or at least significantly contributed.

              What you’re saying is a lot like saying that it doesn’t matter what you eat so long as you let the body have a heart attack when it gets obese….That’s just insane….

              • All I am saying is that these were not and are still not “free markets”. Whether regulating banks makes sense or not is another question.

                But if you insure banks, then you have to REALLY and EFFECTIVELY regulate them.

                So you cannot blame Austrians on banking deregulation, if it was done only halfway (the promise of bailout remained).


                • No, the problem is not that they are insured. The problem is that they commingle their risk taking arm with their deposit taking arm. Deposit insurance is all psychological. It’s just there to give people the peace of mind that they shouldn’t take their money out of a safe bank during a crisis. And it works. What scares people though is when they know that your local bank might be buying a boatload of derivatives that could blow the bank up. And that’s what almost happened in 2008. The de-regulation led directly to the collapse of the economy.

                  • I am not talking about deposit insurance only, I am talking about the bailouts as we saw it, starting with the LatAm crisis, later LTCM, then BSC and GS, BoA, Citis etc, where the Fed acts as a lender of last resort, additional to the deposit insurance. These bailouts were relied upon. The co-mingling of IB and CB only made the case stronger.


                    • First, I wasn’t a proponent of the bailouts. I thought we should have put more banks down quietly. But we never would have gotten to this point if there had been some simple rules in place. I always use the 20% down rule. There is no way you can convince me that we would have had a crisis of this magnitude if every homeowner in this country had to put 20% down. Now, I know the standard Austrian response – “oh my god, that is socialism!!! The govt can’t dictate how much money a bank makes!!!” BS. You want a huge loan. Post some collateral. It’s the prudent regulation. Same should go for OTC derivatives. These maniacs don’t even have to post collateral. So, you get AIGs. It’s totally insane. I don’t see how more people don’t understand this basic premise….

              • Now on the question of regulation – I am not a fun of it. I think you have to make sure that the penalty for overleveraging a crashing the system is high enough. Banking regulation is a bit like regulating that airplanes do not fly into buildings before 9/11. But I am in favor of prohibiting TBTF by anti-monopoly laws. Everything else will be circumvented. Of course, if you promise bail-outs, then as I said before, regulation must be VERY strict.


      • Cullen,

        are you claiming that your standard of living has improved because of inflation or is it in spite of inflation? Or is it irrelevant, just be happy that you are better off than 100 yrs ago?


        • My talents have increased multi-fold so I have created my own version of sticky wages. People pay a hell of a lot more for my advice today than they did 10 years ago…and guess what? They’ll pay more in 10 years because I will know more, have more experience and command higher wages (this same thing is happening in different forms all over the economy as we make advancements). Therefore, my standard of living should increase because of progress. Unless the govt starts printing money in excess of my productivity then I should outpace inflation. But some level of inflation is going to occur if we continue to progress. It’s impossible to avoid. Unless, that is, you’re okay with becoming more talented and making the same amount of money very year…..I doubt you are….

          • Cullen, you are mixing thingtotally here. By “you” I mean the average citizen. As I said before, there were periods in 1800s hwere there was deflation for LONG periods of time with GDP growth and innovation going on.

            Now you have developed personally so it is hard to say to what extent your pay is higher due to your improvement and how much due to inflation.

            And yes I do not mind receiving the same pay if I can buy more with it. What I care is for purchasing power, not some nominal number.

            So I say – inflation is not necessary for progress. So your argument that people are so better off is useless. “You” are probably better off than 100 years ago IN SPITE of inflation (although in your specific case, inflation is obviously beneficial for your job in the financial industry)


            • That’s not realistic. It’s not how people think. We don’t think in real terms. We think in nominal terms. We say, “I’ve worked here for 2 years and have no raise. I think it’s time I deserve to make more money”. That same person doesn’t go, “this is great, I make the same amount of money every year, but since the price of cars dropped last year I am better off!!!”. No, we go to our employers and say “Boss man, pay me. We both know you need me more today than you did yesterday.” It’s that simple.

              • It is like this because people have been conditioned this way. I am sure it will change easily, as people are quite adaptive to new realities. So this is not an argument either.

                Plus all my other arguments remain, you have addressed only one of them.


                • I sure as hell won’t change just because the prices drop. Did people see the price of their largest asset decline and suddenly say, “gee, this is incredible. In real terms I am rich since I can afford more house”. Of course not. People always compare their nominal wage to what they produce. If they produce more they will expect a nominal wage increase. You’re assuming that the average person has this super complex inflation clock in their head and that they don’t just look at their paycheck and cash it….

                  Hate to break it to you, but the average person has no clue what the rate of inflation really is….They only see extreme changes and extrapolate out….

                  • Well,

                    sorry but you continue to mess things up. Your house is going down and you have a real loss, because you put your money in it. It is not comparable to a flat income, that actually gains in PP.

                    And a flexible trader like you will not change? Hard to believe it. If you were talking about some drunken sailor I could maybe think of considering it…


                    • So, are you telling me that if the govt stopped ever printing money, prices would drop? Or would they stay the same? And your talents would progress? And you’d be happy making the same amount of money? You are not thinking this thru in a realistic manner….

                    • Because that’s exactly what would happen. The govt stops spending money. So, the currency level in the economy is roughly the same every year. But we are all progressing. So, most likely, prices stay relatively flat, but we’re all more talented so we’re producing more and prices are staying the same every year. How are we better off in this environment? I produce more, get paid the same, and buy the same. That doesn’t sound like progress to me.

              • The most extreme example is a pro athlete. Look at the pay scale. The rookie minimum in the NFL is what – $400K or something? If that rookie makes the pro bowl next year he is going to come back to his boss and say “pay me”. It’s progress. And people deserve to be paid for what they produce. It might not be reasonable (pro athlete wages certainly aren’t), but people don’t sit around and say, “well, I made the pro bowl last year, but since house prices are down 30% since 2008 I am cool with making the same amount of money”. No, that athlete says, I produced more this year so pay me.

                Is it uneven across the economy? ABSOLUTELY. I’ve never denied that there is a growing income gap and that the poor have been disproportionately harmed by inflation. Much of this is due to the actions of the FIRE industry and as you know, I think this industry requires some serious reforms….

                • Look, you are mixing things up. The athlete deserves a higher pay because he has become better. He deserves not only a nominal raise, but a real one. Some other athlete that disappointed will get an even lower pay.


                  • So, you’re trying to convince me that Americans on the whole are not progressing? We are not more productive than we were 20 years ago? We don’t deserve real wages increases? Sure, there are lots of people out there who are freeloaders, but on the whole, most of us wake up in the morning and say “I want to be better than I was yesterday”. And they get paid for it when they do it.

                    • No I am trying to convince you that inflation has nothing to do with GDP growth or progress or being better off, consuming more or whatever.


      • What does this have to do with inflation ?

        We could have said the same in the 1800. Where people better of in the 1800 than in the 1600. Where candle better than the electric light bulb? How about the telephone, photography, the radio, distributing power, Celluloid, etc etc,

        It is correct to say that it takes less time to earn the equivalent that even an hold dollar’s could have purchased 20 or 30 years ago. That is as long as you can spend it in the present or invest it at a rate higher than the devaluation of that dollar.

        Its as if the hold dollar where not earned based on the understanding that is was a also a claim on goods against labor or goods we traded. If the currency devalues every year this agreement is no longer reliable in the future.

        If you invest this dollar at 2.5% interest for 5 years you will presently get an after inflation and after tax return of (negative return). That is not a rational transaction.

        If you are part of the population that can transform your dollars for nondepreciating or valuable assets over time that is fine but if not you the average Joe you are being screwed.

        Inflation does benefits the so called businessman that borrow in dollars using tremendous leverage creating no value other than benefiting from the assets they have against other peoples almost free and depreciating money.

        Thats not growth it sucks money off main street to the Casinos on Wall Street.

        • I said it above – inflation is all about income redistribution. So if Cullen criticizes the Fed for this, he should see that inflation is the same. Fed’s only purpose of existence is inflation or supporting the parasitic functions (that coexist next to the productive functions) within banks.


          • I’ve never said I approve of the Fed’s actions and yes, this transfer of wealth to bankers is not good for America. But that just proves the set-up of our system is bad. It doesn’t mean the whole system is bad….

            • Cullen

              On this (and most things) you are absolutely correct.Over all in the US if a person was imaginative and ambitious it was by far the best place to live. It was also one the least bureaucratic and pro business country.People that immigrated to the US all had one thing in common they did come knowing there was risk and no guaranties. That created the most resourceful,inventive and dynamic society in the world’s history.

              Lets hope that the real unique entrepreneurial spirit of America is not replace by a new so called progressive spirit of equality and dependency. There are risk in living and that include failures. If risk are no longer risk and failure are to continue to be bailed out in coming years it would be nothing less than utopia to think it can go on this way. Commonsense rules need to benefit people not be in relation to political contributions and lobbying.

              • Okay, now we’re finding some middle ground. I don’t disagree that we have veered off course. Especially with the actions of the Fed and the banks. But that doesn’t mean I have lost hope or believe the system is broken. As you said, this system worked great for a long time. Is it broken down right now? Sure. But that doesn’t mean we can’t get it back on track.

                I think too many people are quick to paint this with a broad brush. The answer is not “big govt is always bad” or “small govt is always bad”. It depends. And in the case of the banks small govt has helped ruin a great country. That doesn’t mean big govt is the answer or that govt spending is the answer. Not even close. But there is a middle ground, no? Can we not implement rational safeguards that keep us all from the brink of disaster while also allowing for growth?

                • “there is a middle ground, no?”

                  Yes,of course Cullen after all, it is called “Pragmatic” Capitalist.

          • Income redistribution happens anytime and in every system. Taxation is income redistribution. Inflation is a back-door taxation – a penalty for not taxing enough. Saving should come with its own costs since saving removes money from economy and starves it of its fuel. Economy exists because of consumption. If everybody decided to save there would not be any economy at all.

              • Investment precedes saving. You can envision a system where every $ either goes into consumption or is invested each period with no saving. You cannot envision a system where every $ is saved.

              • “Peter, you just killed capitalism. FYI capital comes from saving.”

                No he didn’t and no it doesn’t. For you to say capital comes from saving is the same as saying “saving creates capital”. It doesn’t.

                Saving merely hoards capital that already exists, preventing it from being applied to the creation of further capital elsewhere. Hoarding is what kills an economy, particularly when the entity being hoarded is the entity most required to lubricate trade: its currency. That’s because trade underpins resource flows and without resource flows, economic development is constrained. The Austrian “dream” is a nightmare, leading to reduced liquidity, an appreciating currency (deflation), a collapsing economy and severe economic repression all the way down to the bottom. Why spend money chasing gains in a collapsing, high risk, economy when money is gaining value just sitting idle? “Hey, I’ve got my stash, let the economy burn baby! (and all the people in it) They should have saved like me!”.

                This, alone, is enough of a reason to maintain a positive rate of inflation at all times because once an economy sinks into deflation, it can be very difficult to recover in a timely manner without severe political and social consequences.

                So Peter is quite correct when he says that investment precedes saving because investment precedes capital formation and without capital formation, there is nothing to save!

                Austrians argue that capital must precede investment, that to allow credit to precede investment leads inevitably to catastrophic collapse. GARBAGE! As Cullen said above, with appropriate regulation, credit-fueled investment does not
                *have* to lead to collapse. Proper credit extension promotes optimal economic development. There is absolutely no way that we could have experienced the explosion in trade that underpinned rapid technological development and economic growth that we’ve had without credit/debt.

                What is needed is a return to the kind of appropriate regulation we saw following the Great Depression, that laid the foundation for robust economic growth. Austrian-School calls to eliminate credit and eliminate government activity in markets (meaning eliminating regulation) are exactly the opposite of what is required. This way leads to “liquidationism”, the kind of thinking that put the “Great” in the Great Depression.

            • I think that unless you are a farmer you would still need to eat and that takes money.

              I also think that when I save money and place in a GMAC note they lend out this money to someone buying a car.

              Saving does not stave the economy. We are not in a Bartering Economy.

              • First,

                If you “save” and place money in a GMAC note you are not “saving. You are investing right?

                  • Peter. yes I am talking of investment savings it you mean “putting your money to non-productive purposes” That sounds like buying gold. Most of it is Goes in storage until eternity.

                    I agree if saving is not invested it obviously takes that money off the economy but that would be kind of masochistic since money has no underlying value of its own (and it should not)one would almost be sure to lose in a any inflationary context.

    • “Even if inflation were really below 3% (which I doubt) isn’t it funny how the Fed acts like theft of 3% of ones purchasing power every year is a good thing? ”

      First, inflation is below 3% with nearly 100% confidence. If inflation is above 3% this means that people are paying the U.S. government 2.85% just for the security of holding 6 month bills. I find the idea that people are paying to hold cash and T-Bills real money totally crazy. Go here to see current Treasury Yields.

      If inflation is anything above 1% I’d be completely shocked.

      Then as to the “theft” of 3% through inflation. Why in the hell should money retain value over time? Do you think you can bottle a kiss and have it not depreciate in value? How about a sunset, or a car, or a house, or a factory, or a dog, or a street? In the real world, things with useful value decay. Things that get used get worn out. Why should anyone be able to trade a real world good with real world use for something that retains value for all eternity? This is a perpetual motion machine, or immortality, channeled through money, and it disgusts me.

      Money is first and foremost a medium of exchange, a tool to exchange real world goods, and cannot be a way to extract usefulness out of real world objects and put it in a jar to save. We need it to be somewhat of a store of value so it can be used as a medium of exchange, but why in the hell should it be a better store of usefulness than real world goods?

      Shovels are much less useful than they were 100 years ago. Should the money that people use to purchase shovels be a better store of value than a shovel?

  8. The difference between M1 and M3 is purchasing power being accumulated in the FED corporation (his banks). They created a boom, then dried the market of capital, creating a bust. Meanwhile prices run down, they will be enabled to buy anything for cheap.

    but to maximize profits, they need that the market do not react increasing prices meanwhile they buy. So they need a large depression.

    It was exactly the same dynamics of the Great Depression. They caused it, they grabbed control of anything, and got lots of concessions from governments all around the world, like ownership of central banks and the money printing privilege, at no risk.

    They are planning a large depression, buy lots of world wealth -houses, assets, companies-, and then blame government overspending and asking transference of more governments powers all around the world.

    The great depression ended on the second World War, after the corporation owning the FED financed the recovery of Germany, and profited from financing war on both sides, like they did over and over again many times on the history.

    Who is the new Germany? China?

  9. A) It is cumulative.
    B) 2.5%t 5 years, minus taxes, minus inflation = Negative rates.

  10. No, it is NOT ‘just an asset swap’. You should perhaps familiarize yourself with some non-chartalist and non-Keynesian monetary theory. The true US money supply has exploded by well over 30% since August of 2008 – it has been one of the biggest money supply inflations of the post WW2 era so far.
    The measures of money supply you are presenting are not depicting money, which is solely the medium of exchange. They are conflating money and credit instruments, a crucial error. Once you realize that there is a difference between money and credit you will perhaps revise your opinion. As an aside, since you are trying to prove your thesis by means of empirical data, why ignore that the effects of the inflationary policy – sharply rising commodity prices and sharply rising prices in titles to capital (stocks) are all around us? Do you really think these prices would rise without a preceding inflation of the money supply?
    The difference between money and credit explained:

  11. Cullen, is there any story worthwhile in Bill Gross dumping all govt debt?

    Thoughts on ?

    People are using this as an example of the govt having trouble issuing treasuries going forward due to lack of buyers. Did Gross sell to someone else in the economy or to the Fed? I still don’t understand well the dynamic b/w the Fed/Treasury and Primary Dealers, why there are always willing buyers, what influences buyers decision to buy debt at what price, how the Fed maintains control over the interest rates on govt debt despite it being an auction, etc.

  12. The long term inflation resulting from policy that is decried as “theft” through loss of “purchasing power” in some comments here is vital to a functioning economy. It is the only way to value current productivity over past productivity. There is no other way to get this necessary effect.

  13. Must be dreaming the rising prices then. I could have sworn I was paying about 30% more for stuff than I used to a couple of years ago. I’ll just have to pinch myself whenever I recoil in horror at the checkout.

    • How much do you pay for milk? I am paying less today than I did 5 years ago. I joined costco – 2.09 for a gallon of milk.

      If you are paying more, it is by choice, not because prices are going up.

  14. By outlining the non-equivalence of QE with the money supply, refuting hyperinflation thereby, the author of this piece is engaging in verbal sleight of hand. Yes, the ‘money-multiplier myth’ may be just that, but this piece purposely ignores the link between monetization and currency devaluation and its inflationary consequences. This is not simply a point of discussion, but something observed to happen in both the US and UK. For instance, as soon as the Bank of England turned on the printing presses two years ago, Sterling lost 33% of its value against a basket of currencies. Since, and like the US, most every essential that the UK purchases is imported (energy, food), the price of those imports rose by the same degree that the £ we paid for them with fell. Would the author like to bet with me that the inflation that we are experiencing as a consequence is somehow unrelated to paying for things with QE-debased currencies, or that hyperinflation is simply a matter of degree down this endless QE road?

  15. I could be wrong, but it seems to me that both sides of this debate are correct, there is incipient hyperinflation being driven by the Fed and there is next to no inflation and a contraction of money supply. Thanks to globalization loose money supplied by the Fed is igniting hyperinflation OUTSIDE of the US. Why is money supply increasing in China? Yes, Chinese authorities might be responsible for some (a lot?) of this, but so too is foreign money. How is it that Chinese authorities are putting on the brakes and yet money supply is expanding? Perhaps because a lot of the money is coming from elsewhere. Where? Perhaps the world’s largest economy where money is cheap and most investments are bad bets. A similar dynamic went on in Spain. The Spaniards were not entirely irresponsible in the way they ran their banks but they were overwhelmed by foreign money driving a housing boom.

    Now is this a bad thing? Not necessarily, the Chinese government’s foreign exchange policy helps to make investment in China a good bet. If the Chinese government won’t make moves to correct the trade imbalances then it might be reasonable for the Fed to inflate away the Chinese advantage.

  16. Too bad Cullen has nothing to say in response; here’s something from the less-blinkered Marketoracle (

    “…interestingly, the only country in the world that currently fits the bill for hyperinflation is the United Kingdom, where 100 percent of the budget deficit was monetized by the central bank. Unsurprisingly, ever since, inflation in the United Kingdom has consistently overshot the Bank of England’s own forecasts. Apparently, they don’t see a connection”.


    • I’ve explained why Mr. Mauldin’s analysis is incorrect. He has consistently used the Euro crisis as an apples to apples comparison with the USA or Japan. Once you read that you know the author does not understand what he’s talking about. You don’t even need to keep reading as you can be quite certain that most of his conclusions are incorrect. It’s that simple.

  17. Thanks for your reply Cullen, although was actually seeking a reply to my comment of 03/10/2011 at 11:39, viz:

    “…By outlining the non-equivalence of QE with the money supply, refuting hyperinflation thereby, the author of this piece engages in verbal sleight of hand. Yes, the ‘money-multiplier myth’ may be just that, but this piece purposely ignores the link between monetization, currency devaluation and their inflationary consequences. This is not simply a point of discussion, but something observed to happen in both the US and UK. For instance, as soon as the Bank of England turned on the printing presses two years ago, Sterling lost 33% of its value against a basket of currencies. Since, and like the US, most every essential that the UK purchases is imported (energy, food), the price of those imports rose by the same degree that the £ we paid for them with fell. Would the author like to bet with me that the inflation that we are experiencing as a consequence is somehow unrelated to paying for things with QE-debased currencies, or that hyperinflation is simply a matter of degree down this endless QE road?…”