Monetary Avalanche

Yesterday’s markets barely moved in any significant direction, so we will ignore them and go on to today. It’s a big day for the men who rule us. The Fed’s Open Market Committee meets to decide what to do.

On the table are a number of small steps…and one big one.

Barron’s highlights the big one on this week’s cover:

“Why the Fed will soon print $2 trillion,” is its headline. The idea behind the headline is simple enough. The recovery is a flop. All that stimulus spending has done nothing. Unemployment is not getting better. Consumers aren’t shopping. Banks aren’t lending. And the money supply is actually falling.

What to do? The Fed has already shot off its monetary ammunition. It has been lending money without asking anything in return for the last two years. What else can it do?

Well, it still has some weapons it can use. Quantitative easing, for example.

The idea of QE is that it permits a central bank to fund its government’s deficit by printing money. The Fed prints money. It uses the new cash to buy US Treasury debt (or anything else, for that matter.) Result: more money in the system.

Maybe it is fear of inflation that is driving the dollar back down. Have you noticed that after all the “end of the euro” talk, the European currency is actually back to $1.32?

Stocks, too, may be reacting largely to fears of inflation. If you think higher rates of inflation are coming, owning a piece of a real business is surely better than holding cash. Cash (or bonds) can become totally worthless. A business – if it can survive the financial crisis – will still be worth something…and maybe even more than it was before.

But inflation is no sure thing – at least not anytime soon. The Fed increased the monetary foundation of the dollar-based world by $1.25 trillion when it bought up Wall Street’s toxic debts. Still, for the most part, prices continued to fall.

How so? Because money wasn’t changing hands…because people preferred to hold onto their cash rather than spend it. Which is what people do when they’re worried about the future. Unless, that is, they’re worried about inflation. Then, they spend money as fast as possible.

Therein lies a big conundrum for the Fed.

“Damn the risks of triggering a bit of inflation and some modest investment bubbles,” says Barron’s. “The alternatives are far worse.”

But that’s just the problem. The alternatives are not worse.

The Fed cannot really create a “bit of inflation”…not when the market is scared, and generally de-leveraging. People save. They buy US Treasury bonds. They watch their money and worry. The velocity of money slows, so that even if you add more money to the system, prices still do not rise.

It is like adding snow to the top of a mountain. As long as it remains cold, it just builds up. But when it melts…watch out!

There is nearly $60 trillion worth of dollar-denominated debt in the world. The value of that debt rests on the value of the money in which it is calibrated. As long as people think the dollar is more-or-less okay, they’re willing to have and to hold US dollar debt. The snow stays where it is.

But what would happen if the Fed really did print $2 trillion? Maybe nothing. Or maybe something. Maybe something that was worse than the soft depression we’re experiencing now – an avalanche or a flood.

People might suddenly want to get rid of dollars – in all forms. Then what? Consumer (and probably asset) prices would soar. Bonds would collapse. You could forget about financing any more deficits. Then, in order to restore faith in the dollar and the Fed’s credibility, you’d have to do what Paul Volcker did in ’79. You’d have to get ahead of the inflation rate, with Fed-imposed interest rates even higher than the CPI. Those rates would send the economy into a tailspin of de- leveraging, debt cancellation and depression. When Volcker did it, America had its worst recession since the Great Depression. And that was without quantitative easing, derivatives, subprime, trade deficits, trillion-dollar federal deficits, housing bubbles, or any of the other maladies we suffer today. The next downturn would be much, much worse.

In other words, the effect of printing trillions more dollars would probably be to cause an even deeper depression than the one the authorities think they are trying to avoid.

They won’t do it…not yet.

And more thoughts…

Too much stuff.

People come to think what they must think when they must think it. With stagnant incomes, towering debts, and no real hope of increasing their purchasing power, they’re beginning to think that they don’t need so much stuff.

“Rethinking the pursuit of happiness in a recession,” is a headline from The New York Times. The article talks about people who live quite happily and comfortably with little stuff and little income. One couple has an income of $24,000 per year – and no debt. They make a point of having 100 personal items – or less. They could earn more money, but they don’t need to. Because they are no longer supporting so much stuff.

“The idea that you need to go bigger to be happy is false,” says the woman in question.

“Studies of consumption and happiness show that people are happier when they spend money on experiences rather than material objects,” says the Times.

And when people downsize their lives intentionally they end up with more time and money to spend on experiences – such as vacations. Or tennis lessons. Or reading a good book.

You take a vacation. Even if it isn’t perfect, you tend to remember the good parts for a long time. An object, on the other hand, gives its satisfaction very quickly…and then becomes a source of expense and nuisance.

We spent the last week cleaning out the garage and the workshop.

“I just can’t believe it. I mean, how fast things fill up. We bought this place 15 years ago. It was huge. It was empty. I thought we could fill it with junk for the rest of our lives. But now it’s so full, we have to throw things out. Besides, I’ve had enough of this. I want to get rid of all this. From now on, I want to lead a simpler, more organized life.”

Elizabeth seemed ready to take up the “less is more” chant herself.

“No, I don’t necessarily want less… I want better. And that means being more choosy and getting rid of junk. We keep things for years and years thinking we’ll need them. Then, we don’t need them at all and have to throw them out.”

Damien (our gardener) backed up a big wagon in front of the garage. Old paint cans. Bicycles with broken wheels. Pieces of steel. Cardboard boxes. A rusty barbecue. Everything went into the wagon.

“Wait…Damien…what’s that you’re throwing away…?”

Once he gets started, Damien is hard to stop. In his hands was an antique – a hoe-like metal object used for raking the coals out of a brick bread oven.

“Wait a minute…let’s save that.”

“Why, what good is it?”

“I don’t know…it’s an antique…”

“Well, if we wait long enough, everything will be an antique…”

“Good point.” The hoe went into the wagon too.


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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22 Comments on "Monetary Avalanche"

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excellent quote!

“It is like adding snow to the top of a mountain. As long as it remains cold, it just builds up. But when it melts…watch out!”

Inflation is more likely to gain accelerated momentum than a gradual increase, the hard question is when..


There’s a lot to be said for simplification of lives. And capping national populations.

The popular saying “he who dies with the most toys wins” sums up our problem in the developed world. “He who dies with the most friends wins” is better – and I don’t mean dying together on a bus trip :-)

Capitalism has done remarkably well considering it is largely based on selling people things they don’t need.


Further to my above comment – of course, he who has the most toys in the western world probably also has the most friends, so perhaps I should just shut up.


My favourite Chinese saying, I’ve got it on the lounge wall in an original calligraphy:
The sun is above the clouds,
And the Yellow River runs all the way to the sea,
If you want a better view,
Climb higher.

Buying all that useless sh#t, stuffing it into that daypack (bought to hold useless sh*t so you can be hands-free at the mall), and stuffing your face with sh*t on top of the disgusting sh*t you had for breakfast is a joke….
you have to buy cool sh*t if you want to climb higher :D

I love it when you get people like Paul Gilding run around warning about how unsustainable things are and how we are going into a crash and how we have to cut back on and on and on. Then you do a bit of searching youself and find out the dude has five kids of his own. Seriously, you want everyone else to change but you can do whatever you want? What if everyone on the planet wanted what you have and had 5 of their own? Not a problem then yeah? Oh, that’s right – we should: “Do as… Read more »

“When all these hypocrites sell down their million dollar properties, move into more modest 1 or 2 bedroom flats or townhouses and start peddling to work, I might take some notice.”

HaHaHa… !!~ Watching him on TV last night I was thinking the same thing.
No sinner like a reformed one, is there?!~ ;)


I guess if its a case of “let who is without sin cast the first stone” we would all shut up… be kind of boring though. yes, I think of the electronic dick in those terms (a helicopter FFS), but then again, it’s better than the business as usual mob and at least dick made something from nothing (AFAIKnow), so I give him kudos for that.

..peterg (lost my 89’s).

I disagree there peter, these guys have the money and resources to demonstrate to the rest of us the way it should be done if they truly, absolutely believe in what they say. Start in your own backyard and walk the walk I say. Dick Smith is obviously a high achieving individual who has worked hard and taken risks for everything he has – good on him and we should all aspire to that. However I do take issue when he professes to be able to tell the rest of us how bad we all are and how we have… Read more »

“…the only way out of this mess is through innovation and invention…”

Right… and considering his particular niche, you’d think he’d be the first to take that position, wouldn’t you… ?


The population problem is very location specific, confined mainly to Sydney and Melbourne. If backwards govts in SA and Tas cut taxed they would attract more business and people and reverse the brain drain…simple

Ned S

The one that I struggle with a bit is us saying to the developing nations “Now don’t you cut down all your trees and burn lots of coal and just generally pillage the environment to get a better standard of living like we did!” Like we can’t seriously think they are going to look at that proposal and say “Oh, what a good plan!” surely?


“Like we can’t seriously think they are going to look at that proposal and say “Oh, what a good plan!” surely?”

Funnily enough, they’re now the movers and shakers in solar and EV technology, Ned. Their scientists are also actively working on desertification… worried that the wind erosion of nutrients into the sea will expedite loss of agricultural productivity.

I take your point, though. It’s both ironic and hypocritical of us to shove our new-found environmental ethics down their throats… .

Ned S

“they’re now the movers and shakers in solar and EV technology” – Doesn’t surprise me too much Biker. I daresay there are lots of mistakes we’ve made that they figure they can learn from. What did the nice Chinese head of state say when the GFC kicked in … Something to the effect “I think the teacher needs a lesson”? :)

Biker Pete

I think where ‘cheaper’ meets ‘cleaner’ we’re going to see spectacular technological change, Ned. And the more efficient _minute_ delivery of valuable resources (water, fuel, etc) to point of need is also part of the next phase. Watching my windmill very slowly turning in high wind, in our ‘hole in the forest’, I know there’s a better way than this ancient technology!~


“I think the teacher needs a lesson” … they are interesting words, Ned!

I think China’s growth, while sustainable for China, is not sustainable for everyone else. Much of the hi-tech industry on which our “green” future depends relies on Chinese mineral exports – rare earth minerals particularly. Once China’s domestic demand overruns its export capacity, then a new problem develops which is far more real than finance and fiat money. I read somewhere that this is estimated to occur within 24 months.

Biker Pete

“Once China’s domestic demand overruns its export capacity, then a new problem develops which is far more real than finance and fiat money.”

If true, then this utterly reverses the old truisms about China’s loss of export markets as Western consumers cut back. Two years? Unlikely, but I’m sure we’ll see that future you describe during our lifetimes.

If true, it may also herald a long(er) period of prosperity for resource economies. Rising cost of imports (here) may also mean Aussie companies start to compete… . :)


OK, I’m with you. Your comment was a little more specific than my response.

Back on 26 May 2009, I commented on DRA about the Chinese advertising, worldwide, on the internet, for one particular rare earth:

“And further to the ‘thorium’ possibility, China is actively buying monazite, even on the internet:

I suspect we’re very quietly mining it within 100km of one of ‘our suburbs’. Wonder if _we_ should be restricting its export, in retaliation?! :D


Holy Cow!~ They’ve pulled the ad… .


It does bode well for Australian miners of rare earth elements, but it will make all the touchy-feely green tech priced out of practicality for a long time, as all the spare demand will be taken up by the military – an industry that doesn’t appear to have felt any negative effects whatsoever from the GFC.

Biker Pete
“…it will make all the touchy-feely green tech priced out of practicality for a long time…” Well, it’s hard to know, when technologies leapfrog each other so quickly these days, whether anyone can actually corner the market on ‘newly emerging’ resources. ;) Dyesol, an Aussie company (originally) has been working for several years, to replicate photosynthesis to create electricity. Dye technologies may step in to create new opportunities, such as spray-on film: Or key panel components may go another direction entirely. Two decades ago lithium had little commercial value (other than medicinal) yet it may enjoy a half-century or… Read more »

It is true the Fed cannot create inflation. Government is ussually the culprit when it comes to creating inflation by going on a spending spree with freshly printed cash. It does not matter what the market does.

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