Why You’ll Never Change Our Mind About Inflation

After central bankers created trillions of dollars to bail out banks, foreign banks, car companies and insurers in 2008, how can anyone seriously doubt they will bail out governments?

Sure, banks, car companies and insurers are more important than governments. But central banks are practically part of the government they will be bailing out. Not only that, but central banks hold vast amounts of government bonds – the very asset that needs saving. Without a rescue, the central banks will be in trouble themselves. And if they get into trouble, they’ll need a government bailout…

It might be funny, but it isn’t priceless. Instead, the inflation tax is the price we pay.

The coming bailouts will further increase the money supply around the world. Once the taboo of financing government deficits with printed money is broken, there’s no stopping the deluge.

As the German central banker Jens Weideman put it, it’s addictive like a drug. That’s one part of history that just about all historians seem to agree on. Once you start printing money, you just can’t stop.

But the effect money printing has changes over time. At first, it can have a positive effect on the economy and asset prices. This is what we saw in the lead up to 2007. But eventually easy monetary policy shows up as inflation. Especially if you just keep on printing.

Slipstream Trader Murray Dawes, presently somewhere off the coast of France, highlighted just how addictive money printing is in one of our favourite Markets and Moneys:

‘I wrote a piece for Markets and Money last year about the course of events leading to hyperinflation following the French revolution. I quoted a section from a book called Fiat Money Inflation in France by Andrew Dickson. I think that we should revisit that quote now that we may be on the edge of QE3:

“The first result of this issue [i.e QE1] was apparently all that the most sanguine could desire: the treasury was at once greatly relieved; a portion of the public debt was paid; creditors were encouraged; credit revived; ordinary expenses were met, and, a considerable part of this paper money having thus been passed from the government into the hands of the people, trade increased and all difficulties seemed to vanish.

“The anxieties of Necker, the prophecies of Maury and Cazalès seemed proven utterly futile. And, indeed, it is quite possible that, if the national authorities had stopped with this issue, few of the financial evils which afterwards arose would have been severely felt; the four hundred millions of paper money then issued would have simply discharged the function of a similar amount of specie.

“But soon there came another result: times grew less easy; by the end of September, within five months after the issue of the four hundred millions in assignats, the government had spent them and was again in distress.

“It progressed according to a law in social physics which we may call the “law of accelerating issue and depreciation.” It was comparatively easy to refrain from the first issue; it was exceedingly difficult to refrain from the second; to refrain from the third and those following was practically impossible.

“It brought, as we have seen, commerce and manufactures, the mercantile interest, the agricultural interest, to ruin. It brought on these the same destruction which would come to a Hollander opening the dykes of the sea to irrigate his garden in a dry summer.

It ended in the complete financial, moral and political prostration of France-a prostration from which only a Napoleon could raise it.”‘

Central bankers hope inflation doesn’t appear on their watch, but after it. ‘Apres moi les deluge,’ they think. In the lingua franca, ‘After me, let the deluge come.’

French King Louis XV supposedly said that, predicting (and hoping) the French Revolution would occur after his death. His forecast was 15 years too early. That gives our warnings of inflation quite some time to play out before we have to give up on being right.

We can’t be too disparaging of the French. In their time, the Germans pulled off some impressive inflation too. By the way, the Germans have been running a fiscal surplus for the first half of this year.

They are calling it the ‘Haushaltswunder’ – the ‘Household wonder’. ‘Numbers the crisis countries can only dream of,’ writes Der Spiegel. The funniest thing is that the politicians are arguing about the best reason why they shouldn’t spend the surplus money!

Meanwhile, over in America, inflation is showing up in an odd way. Retiring politician Ron Paul predicted the economic crisis way back in 2002, when the boom got started. Recently, he pointed out to a 7000 strong and rather enthusiastic crowd how inflation is creeping away in the American economy. And how that creeping will end:

‘The question has always been ‘what are we going to do with the penny?’ They want to change it to steel. But they can’t even afford the steel… We’re off the gold, we’re off the silver, we’re off the copper standard and now we’re on the zinc standard… We can’t even afford a zinc penny. Now they want to make them out of steel. But … it costs more than a penny to make a steel penny.

‘There was an article headline that came out the other day that said: ‘Can we save the penny?’ The bigger question that we will be forced to face is ‘can we save the dollar!’

It’s the same story in Australia. The 5 cent coin is facing the chop because of the cost of producing it.

You can profit from this global currency debasement. Don’t let it rip you off. All you have to do is get exposure to assets that benefit from inflation. Like the zinc in American pennies, or the metal in Australian coins. Gold, property (where property bubbles have already popped) and other ‘real’ assets are the more obvious choices.

But remember, it might take a significant deflationary shock, like the financial crisis of 2008, before central bankers are willing to step in again and print money. We’ll go into what that deflationary crash scenario looks like, and why Australia is particularly exposed, in Saturday’s Markets and Money.

In short, it means you might see your inflation proof assets plunge in value before they protect you from the coming inflationary crisis.

Don’t expect to enjoy seeing your assets rise with inflation. It isn’t much fun living through a high inflation environment, even if your wealth manages to tread water. That’s because inflation has a bunch of very real effects beyond higher prices.

Just read Murray’s quote about revolutionary France again. One central banker has recently the gall to admit the destructive effect of loose monetary policy, despite being part of the problem:

‘…ultra easy monetary policies have a wide variety of undesirable medium term effects – the unintended consequences. They create malinvestments in the real economy, threaten the health of financial institutions and the functioning of financial markets, constrain the “independent” pursuit of price stability by central banks, encourage governments to refrain from confronting sovereign debt problems in a timely way, and redistribute income and wealth in a highly regressive fashion.’

It’s not going to be a pleasant inflation. But there is going to be inflation.


Nick Hubble
for Markets and Money

From the Archives…

The Gold Sub-Standard and the Inflation Cake
24-08-2012 – Greg Canavan

BHP and Rio: Just Following the Followers
23-08-2012 – Greg Canavan

How Media Regulation is Just a Clamp Down on Freedom of Speech
22-08-2012 – Dan Denning

Monarchs, the Masses and Democratic Mayhem
21-08-2012 – Bill Bonner

Why China’s Crack-Economy Needs a New Fix
20-08-2012 – Dan Denning

Nick Hubble
Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

Leave a Reply

2 Comments on "Why You’ll Never Change Our Mind About Inflation"

Notify of
Sort by:   newest | oldest | most voted

In the age of the mandatory superannuation revenue input, and pass through fees, something like the following says this result is as crook as Rookwood.


Is it skin in the game of past “product”?
Is it in the investor switch to cash?


Nick I love you like a brother my friend. To be honest I can not wait until Friday afternoons’ Daily Reckoning email so that I can read your contributions and insight., but on this topic I can not disagree more. The fact is that I believe we are in a deflationary death spiral. I think you see this subliminally and to use your own recommendation: “..You can profit from this global currency debasement. Don’t let it rip you off. All you have to do is get exposure to assets that benefit from inflation. Like the zinc in American pennies, or… Read more »
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au