Government Spending and the Path to Money Printing

Stocks down yesterday. Gold down. Oil down. Everything was down. The beginning of the end? Beats us. The Fed is still pumping in money. But investors are beginning to look beyond QE2.

If the economy really is recovering, they say to themselves, the Fed will be able to back off from money printing. Stocks, gold, commodities – everything should go down.

Did we mention a “hyperinflationary depression”?

What’s that, you’re probably wondering.

Well, it’s when you have a deflationary correction…and soaring prices too. And that’s what happens when the feds try to stop a major correction by pumping in huge amounts of money and credit.

But let’s stop and look at how an economy works.

As an expansion gets underway, first consumers spend money that they earn. Then, they spend money that they will earn in the future. And then, they spend money that they will never earn.

The private economies of many of the world’s developed nations reached the “never earn” stage in 2007. All of a sudden, lenders realized that they were never going to see their money again. Many borrowers would never earn enough money to pay off their loans.

The economy began a contraction…correcting its mistakes by writing down the value of those loans.

Markets are always discovering what things are worth. In 2007, they began to discover that a lot of the world’s credits weren’t worth as much as people had thought.

But then the feds were on the case.

While an individual person might run up debts greater than he can pay, the feds go one step further.

First, an expanding government lives on what taxpayers give it. Then, it lives on what taxpayers give it, plus what it can borrow from them. Then, it spends everything that it can squeeze out of taxpayers, plus what it plans to squeeze out of generations of taxpayers who haven’t been born yet. Finally, when it has crushed all the blood out of the turnips, current and future, it spends money that no taxpayer will ever earn or pay in taxes. It just prints money.

This creates a far bigger problem. Because, no one knows what to make of this new money. Where did it come from? Who earned it? What does it mean?

Since the economy is contracting, the new money doesn’t have much traction…at first. It is lent to hedge funds, banks, and other speculators. Soon, it finds its way into asset markets and basic commodity prices.

That’s why we’ve seen so many record setting prices in recent weeks.

But this is a special kind of inflation. Instead of stimulating people to buy, spend, borrow, and invest…it makes them feel poor. They pay more for gasoline and have less left over for other things. If they have a job, their earnings barely creep up…while prices race ahead.

Want to see the process in action? It’s happening already in the US. And it is even more advanced in England. Here’s the report from The Telegraph:

The Centre for Economics and Business Research (CEBR) said soaring inflation coupled with low pay rises means household peacetime disposable income is at its lowest since 1921.

Rising food, clothing and energy prices mean the average British family will have £910 less to spend this year than they did in 2009.

The CEBR calculates that household disposable income will fall by 2pc this year, more than double last year’s fall of 0.8pc and the biggest drop since the savage 1919 to 1921 post-First World War recession.

It forecasts inflation will average 3.9pc in 2011, its highest since 1992, as January’s increase in VAT from 17.5pc to 20pc and the rising cost of oil and other commodities continue to drive up prices.

At the same time, salaries will rise just 1.9pc as unemployment remains high and the public sector makes cutbacks.

Is this the description of a hyperinflation depression? Nope. Just an inflationary recession…so far. But wait until the feds pump some more…

Stay tuned.

And more thoughts…

“Argentina isn’t perfect, but I don’t know what’s better,” said our old friend, Doug Casey.

Doug has built a community in Northwest Argentina. He intended it as a Galt’s Gulch…a place where like-minded people could live in agreeable circumstances, even if the rest of the world fell apart.

“How’s it coming?” we asked.

“It’s incredible. It might be the only new development in the world that actually is working. We’ve finished the golf course…and the spa and the clubhouse. We’ve got tennis courts. Polo fields. There’s a boutique hotel coming in. Houses are being built.

“I decided to take a trip around the country to look at what was going on in other new, comparable communities. But none of them are comparable. Ours is easily the best place in Argentina. Maybe it’s the best place in all of Latin America, I don’t know.

“We already have a sports spa…now we’re going to build an aesthetic spa. And we’re putting in a movie theatre. It’s really amazing. I’m going to start my own house there soon. It will be the first house I’ve ever built. I want to get it finished before the world economy collapses.”

On our agenda for tomorrow…taking a look at Doug’s new community. And then, going on to our own place.

Trouble is, it’s far away. There’s no email, telephone, or television service. So, you won’t hear from us for the next week.

Dear, dear reader…we hope you’ll be all right without us.


Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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I guess BB will hold off a bit on QE3 until the dumbasses beg for it.

Bill, the thing that I keep having to remind myself of is that ADR and quite a few other bloggers, thinkers and the like predicted the current US economic crisis a LONG time before it happened, and with it the demise of fiat money. The story of the crisis so far is obviously not spontaneous. Even a boy scout would recognise it as a crime scene. But what is more interesting now is that what people once regarded as crackpot conspiracy theorists predicted events even further – that there would be the looting of public wealth of a scale never… Read more »
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