What strikes me most about the Corona Crash is how easily Congress authorized $3T+ in stimulus and
no one batted an eye.  No backlash in the press.  No excoriating conservative commentary.  Nothing.  And the same in Europe with their own bailouts.

One well-known observer thinks all this money printing will cause the US dollar’s value will plummet.  That’s another way of saying we’ll have inflation.

For these and many other reasons, Stephen Roach, the former Morgan Stanley chairman and currently a Yale University senior fellow, is now forecasting that the dollar will decline 35% against the currencies of its major trading partners, and that this plunge could happen “soon” and “at warp speed.”

What's the Best Place to Invest Before the U.S. Dollar Plunges? Hint: It Isn't Gold.It looks to many observers as though the greenback is suspended in midair after running off a cliff. What does that mean for investors?www.barrons.com

But that’s been said before and nothing happened.

Twelve years ago, as the Global Financial Crisis was unfolding, everyone complained about TARP – the
Troubled Asset Relief Program – a $700B liquidity injection designed to keep the banking system from collapsing. 

President Bush’s own party members rebelled against it and Hank Paulson, the Treasury Secretary
physically begged Nancy Pelosi to approve it.  Then came QE2 and QE3 and plenty more complaining.

But despite all the concern, inflation never came.

The lesson central banks and Congress seemingly learned in 2008-2009 was that deficits don’t
matter.  Seems reasonable since there has been no uptick in inflation in nearly a dozen years since then.

Modern Monetary Theory has gone global.  Since nothing bad happened last time, let’s double down this time!

So why no inflation in the last dozen years after all that global money printing?

The Fed, the European Central Bank and the Japanese Central Bank have been trying mightily to induce a modest 2% inflation rate.  You would think flooding the economy with near-zero interest rate lending would cause some inflation, but nope.

Not so for Zimbabwe in 2008.  Robert Mugabe tried printing his way to a better economy, the result of which was the largest denomination paper note ever printed, the $100 Trillion dollar bill.  That’s not a misprint.  One hundred trillllllion dollars (in the voice of Dr. Evil).

Don’t laugh.  I have a hundred-pack of these notes.  And hundred-packs of the 1 billion, 10 billion, 50 billion, 10 trillion, 20 trillion and 50 trillion dollar notes that came before.  (I’ve used these as party favors!)

As Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon, in the sense
that it cannot occur without a more rapid increase in the quantity of money than in output.”

So, if central banks are increasing the money supply like gangbusters, but inflation remains stubbornly low, then there must be a corresponding deflationary offset caused by increased productivity.

Alan Greenspan made a similar comment when he was the Fed Chairman and concluded that new technology – computers and software – were causing offsetting deflation that wasn’t accounted for in econometric models.

I think he might be right.

While in Corona Quarantine, I sit in my comfortable Nest-controlled house, and my essentials, and plenty of non-essentials, magically appear on my doorstep, courtesy of app-driven delivery services.  Nest’s Eco mode even reduces my air-conditioning expense without me lifting a finger, which I can control from anywhere on the planet now that I am allowed to leave.

Funny story… My wife and I were in Budapest last year when our neighbor Clementina rang our front doorbell.  From my hotel room, I opened the Ring app on my iPhone (which didn’t exist until 2007) and told her we were in Budapest.  She wanted to borrow our folding chairs for a party she was hosting that night.  No problem.  Using the Lift Master app on my iPhone, I opened the garage door for her … from Budapest.  She took the chairs and I closed the garage door.

What’s the deflationary impact of all that software, Internet and MedTech stuff?  Hard to say, and that was Greenspan’s dilemma, but the first IBM XT I bought in 1984 cost $4,995 at Computerland …in 1984 dollars.  You can’t buy a personal computer that expensive today … in 2020 dollars … and it’s literally 10,000 times more powerful.

Now if the deflationary headwind ever abates, lookout Zimbabwe, here we come!

Here’s an alternate explanation from a good friend of mine, a hedge fund manager and astute Fed watcher…

I would add a few thoughts.   I think another overall problem is that capital is trapped in the debt system.   The Fed can go buy corporate bonds and treasuries to provide liquidity in broken markets, but all that is really happening is that the seller is getting bailed out and the debt is moving from the seller’s balance sheet to the Fed’s balance sheet.  

If the seller thinks the world is screwed or is in poor financial shape, which they would have to if they were selling the debt, then will they take their cash and activate it to create velocity (the Keynes multiplier)?   I think the answer is most likely no, they will probably hoard the cash (they think the world is screwed) or pay off other bills with it (poor financial shape). So, all that bluster from the Fed’s bully pulpit and all that huge increase in money supply probably won’t create any velocity.   No velocity, no demand-based inflation.

Inflation reporting is a whole other can of worms.   Higher education, medical services, housing, and now food are skyrocketing – some estimating 5-6% annual inflation or more (Shadow Stats).    The government hides a lot of this with “hedonics”, which basically means that when under pressure, consumers trade down to lesser goods (hamburger instead of steak, Chico State instead of Berkeley).  The current inflation theory isn’t a wage-price spiral (demand-based), but rather a supply-driven price spiral.   The worst of all worlds.   30
million out of work and prices skyrocketing.

I think coastal techno-love doesn’t necessarily equate to American techno-love.    When push comes to shove, i.e. a supply-driven inflation spiral, we will see how many people continue to buy techno gadgets with illusive productivity gains.     Let’s see, mortgage? Car payment? Grocery store run?  Private high school bill?   Gaming/Entertainment bill?  Or, new Nest system and a new iPhone?    I can only hit the top 3…  I think housing and the car business are screwed BTW.   

What I have been pondering is the next phase of downward pressure on entertainment services.   Gaming, streaming, etc. are big budget items for half the country.    Think back to our early adulthood.   No cable bills, no cell phone bills, no Netflix, Hulu, Xbox, etc. bills.      Those are all deemed top priority items to pay – will that continue?

What I have been pondering is the next phase of downward pressure on entertainment services.   Gaming, streaming, etc. are big budget items for half the country.    Think back to our early adulthood.   No cable bills, no cell phone bills, no Netflix, Hulu, Xbox, etc. bills.      Those are all deemed top priority items to pay – will that continue?

During the 1970s, a Los Angeles baker by the name of Wally Amos held a Hollywood style opening, with giant movie spotlights shining into the night sky for miles. His opening was for an incredible luxurious ... cookie 🍪. Wally realized that people were downgrading not from steak to hamburger, but from hamburger to hamburger helper. People needed a little something special in their lives in spite of the belt tightening and so Wally’s Famous Amos cookies were a huge success, inspite of being an extravagance during a recession.

People always crave entertainment or escape from their day to day and I don’t see that being cut.

But I do see a reduction of services subscribed to and at least one major service going bankrupt or being acquired. Quibi is probably going to suffer one or the other fate in the next 12 months. Netflix and Prime are probably safe based on their extensive libraries and deep pockets. Hulu feels old and even with their “FX on Hulu” deal they still have a ridiculously weak library compared to Netflix. I also can see a lot of cancellations of premium cable services like HBO if they run out of new episodes for their current series. Or will they steal new series from HBO Max to keep the cable service relevant?

Further reading

SEE on Apple TV+ starring Jason Momoa is a unique future vision.I'm only one episode in, but I'm already incredibly impressed by the risk-taking and creative storytelling that SEE on Apple TV+ brings to life. https://www.youtube.com/watch?v=7Rg0y7NT1gU The ...cake.co

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Katzenberg may be on to Something: Watching a Movie in Discrete ChaptersThe thing about watching Most Dangerous Game in 7 to 9 minute chapters is that after awhile it becomes a case of "you can't just watch one." As CEO of Dreamworks Animation and as chairman of Walt ...cake.co

Fascinating, Alan. I wish I had a clearer understanding of this because the deficit feels like a one-way door, where once you have it, it’s hard to go back.

I’ve read the passionate arguments over the years about trickle-down economics and economic stimulus from tax cuts, but my impression is they provide a short-term boost maybe but not much else.

After 8 years during the Obama admin of Republicans being so vehemently opposed to deficits, I agreed, deficits seemed to be the devil they said they were.

So I was surprised to see republicans reverse their position on deficits so quickly when Trump rose to power. And very surprised to hear Paul Krugman, who doesn’t believe tax cuts or trickle-down economics work, say judicious deficit spending does work and we would have been wise to allow Obama the infrastructure money he wanted.

Your thoughts?

Trillions are really hard for most people to comprehend. I see cashiers who cannot make change if their electronic register goes down, and seem mystified if I can actually tell them the correct amount of my change while I stand in line to pay - without consulting my phone, either.

So I have often thought that federal spending bills should be detailed by how much they cost per person and per federal taxpayer, in addition to their total cost. I actually think this deserves to be a federal regulation. Indeed, in Indiana and many other states, spending beyond revenue is not permitted.

So a 3 trillion dollar stimulus might be explained to the public, thus - ~ 350 million Americans - as about $8751 dollars per person. But of course, not everyone works, or pays federal taxes - so if we assume that 150 million people of 350 million citizens are really taxpayers , then 3 trillion is $20,000 dollars added to "your" tax bill for your government's generosity, assuming readers of this post are likely to actually BE federal taxpayers.

The great thing about being an elected federal politician who is able to spend unlimited sums, via federal borrowing, is that they will get the benefit of the spending, but never pay the bill.

As Nassim Taleb said - they have no skin in the game.

I’ve pondered for some time why the Federal Reserve has very publicly committed to a 2% annual inflation rate.  Why not 3% or 5%, or more importantly, 0%?  Wouldn’t the ideal inflation rate be zero with prices overall neither increasing nor decreasing?

This goes all the way back to Greenspan who had a charming way of bamboozling Congressmen when testifying such that no Congressman wanted to ask for clarification and risk looking less smart than Greenspan.  They took his word as gospel and it stuck.

When asked about this, Fed officials give vacuous responses about growing the economy, wage growth is positive, and so forth.  But never a hard, conclusive response that seems to make sense, at least to me.

In the Fed’s own words:

Low and stable inflation helps the economy operate efficiently. The Federal Open Market
Committee (FOMC) judges that an annual increase in inflation of 2 percent is most consistent over the longer run with the Federal Reserve's mandate for price stability and maximum employment.

The Fed - Why does the Federal Reserve aim for 2 percent inflation over time?Low and stable inflation helps the economy operate efficiently. The Federal Open Market Committee (FOMC) judges that an annual increase in inflation of 2 percent is most consistent over the longer run with the Federal Reserve's mandate for price stability and maximum employment.www.federalreserve.gov

There you have it: Inflation is price stability!  Sounds positively Orwellian doesn’t it?

The Wharton Public Policy Initiative says:

For over two decades now, the Federal Reserve has targeted a 2% inflation rate per year. … Yet, the 2% inflation rate serves as a point of stability and reliability for the public, which was one of the main reasons it was chosen in the first place.

Why Do We Target 2% Inflation?For over two decades now, the Federal Reserve has targeted a 2% inflation rate per year. While hardly drawn into question over that time, the Fed's inab...publicpolicy.wharton.upenn.edu

Again more doublespeak: Inflation is stability and reliability.

I finally concluded that 2% inflation is an annual deficit reduction tax applied to all Americans to pay down the deficit by devaluing the US dollar. 

Inflation is just another way of saying currency devaluation, because inflation erodes the purchasing power of currency. Because loans are repaid in future dollars, inflation / currency devaluation means those loans are repaid in future dollars that are worth less than today’s dollars.  And when the Treasury sells a 30-year bond, or occasionally longer-term bonds, that 2% compounded adds up to a considerable reduction over a 30-year period.

$1.00 * 0.98 * 0.98 * 0.98 .... 0.98

Of course, the Fed can’t publicly say that 2% systemic inflation is a tax because only Congress can impose taxes.  And calling it ‘currency devaluation’ is also a no-no because that sounds much worse than calling it ‘inflation’.

Why devalue the currency at all? Simple. Does anyone think the Federal deficit can ever be repaid? The last two times we had federal budget surpluses were during the Clinton and Kennedy administrations. That's not a political endorsement, just a comment about how infrequently they occur. So regardless of the party in power, there seems to be no real appetite for paying off the deficit. Hence, the need for a 2% annual stealth tax.

That’s my two cents… or should I say two percent?

I have written here on cake about how a real US silver dollar would purchase 5 gallons of gasoline in 1962. I know this because I did frequently purchase 5 gallons for one paper dollar in 1962.

US silver dollars were still in circulation in Kansas City Missouri in 1962, and would occasisionally pass through my hands when I was working for minimum wage - 60- 75 cents per hour.

That same silver dollar, sitting on a shelf, not in a bank account, without earning any interest whatsoever for almost 60 years, will still buy 5-10 gallons of gasoline at current market prices for gasoline and silver coinage. IF that silver dollar had appreciated at 3 or 4% for 60 years, it would literally buy hundreds of gallons of gasoline or other goods.

I have often stated that the inflation that occurs with fiat currency is the greatest travesty to the working classes - because much of the wealth of working people is in their savings account, not in financial instruments such as equities or land which stand up to inflation much better than fiat currencies. Most folks just role their eyes at me, as a foolish old fellow, not seeming to comprehend the scale of the theft that has occurred to them and their fellow citizens.

Like the present financial repression with zero interest rates - just imagine how much wealth has been extracted from the savers in North America or in Europe over the last decade or two. Is it possible that cheap mortgages have contributed to too many McMansions?

I confess to believing that TINSTAAFL is actually true. Assuming that one is not actually stealing, in which case, is may seem that one has found a free lunch. For a while, anyway.

I do agree, the Federal Reserve actually officially desiring 2% inflation - seems a violation of the Fed's charter, but what do I know!

Replying to @afisher

Math is fun if it is easy - But I cannot do compound negative interest calculations in my head 30 times- so I went to -

I calculated a 30 year period, once annually, at -2.0 % for one million dollars, and after 30 years at -2%, the loan value is $545,484.32 dollars which is essentially cut in half.

But if one compounds at -2% for 40 years --- $445,700.40

If I have not made any errors - so any mathematicians please check my work

As an aside, I also calculated what one silver dollar at 4% for 40 years might be worth and the answer is 4.8 silver dollars, or almost 100 current paper dollars ( assuming an average price of $20 paper dollars for an average grade silver dollar).

And at 60 years, per my discussion above, $10.2 silver dollars or close to 200 current paper dollars. Or in 60 years, an average lifespan, one's paper currency has lost 95% of its value... One dollar in silver, 60 years ago, now is worth roughly 20 paper dollars so 1/20th or 0.05 or 5% remaining value. The other 95% of value disappeared somewhere along the way

It is hard to get ahead at that kind of table.

And America has had one of the better currencies in the world over the last century. Some folks think those days may be coming to an end, if the dollar ceases to be a major reserve currency for the globe.

One non-violent tactic of modern warfare is destroying the value of your foes currency.......

I’m with Paul Krugman on this. With interest rates so low the USA government is a long way from having to be concerned about printing money. USA economy and dollar is a safe haven for money thus far and will if anything cause the dollar to continue its rise. Helicopter drops and Keynesianism is here to stay in all advanced strong economies.