Inflation Prospects With Ellen

The crash of 2008 was a global bankingcrash triggered by the floating of fraudulent paper into the global creditmarkets by the USinvestment banking fraternity. Time has proven their fraudulent nature althoughthe participants at the time possibly kidded themselves into believing theycould get away with what they were selling. The result has been a huge global contraction of credit which is nowlargely over.

The problem is to slowly reinflatecredit both in the USand elsewhere.  Japanese failure tosuccessfully do so is hanging over everyone’s shoulder.  I suggested early on that the best avenue forthe USAwas to rewrite foreclosure laws and provide government guarantees wereappropriate.  There is plenty more to sayin terms of details so that such simply does not become a raid on the treasury,but the real problem is that nothing has been done at all.

In the short term inflationarypressure can be driven by rising costs in terms of commodities, but these havealready been thoroughly factored in. That leaves real increases in wage structures and that is really a slowprocess that is only now becoming possible.

In short we are positioned for asteady slow economic improvement pretty free of inflation for some time untilthe UShousing market is fully restored.

The simple story is that the US housingmarket hugely over financed itself on phony credit and naturally collapseditself and its buyers of such credit.  Thistook a real percentage of the USeconomy with it however it is hidden today. Failure to restore proper credit and to restore State financing will nowprolong the contraction unnecessarily.

Inflation - real or hysteria?

 By Ellen Brown

 Debate continues to rage betweenthe inflationists who say the United States money supply is increasing,dangerously devaluing the currency, and the deflationists who say we need moremoney in the economy to stimulate productivity. The debate is not just anacademic one, since the Federal Reserve's monetary policy turns on it and sodoes congressional budget policy.

 Inflation fears have been fueledsince 2009, when the Fed began its policy of "quantitative easing"(effectively "money printing"). The inflationists point to commodityprices that have shot up. The deflationists, in turn, point to the housingmarket, which has collapsed and taken prices down with it. Prices of consumer productsother than food and fuel are also down. Wages have remained stagnant, so higherfood and gas prices mean people have less money to spend on consumer goods.

 The bubble in commodities, saythe deflationists, has been triggered by the fear of inflation. Commodities areconsidered a safe haven, attracting a flood of "hot money" -investment money racing from one hot investment to another.

 To resolve this debate, we needthe actual money supply figures. Unfortunately, the Fed quit reporting M3, thelargest measure of the money supply, in 2006. Fortunately, figures are stillavailable for the individual components of M3. Here is a graph that is worth athousand words. It comes from ShadowStats.com (Shadow Government Statistics orSGS) and is reconstructed from the available data on those components. The redline is the M3 money supply reported by the Fed until 2006. The blue line is M3after 2006.

 The chart shows that theoverall USmoney supply is shrinking, despite the Fed's determination to inflate it withquantitative easing. Like Japan,which has been doing quantitative easing (QE) for a decade, the US is stillfighting deflation.

 Here is another telling chart -the M1 Money Multiplier from the Federal Reserve Bank of St Louis:

 Barry Ritholtz comments,"All that heavy breathing about the flood of liquidity that was going topour into the system. Hyper-inflation! Except not so much, apparently."

 He quotes David Rosenberg:"Fully 100% of both QEs by the Fed merely was new money printing thatended up sitting idly on commercial bank balance sheets. Money velocity andmoney multiplier are stagnant at best." If QE1 and QE2 are sitting inbank reserve accounts, they're not driving up the price of gold, silver, oiland food; and they're not being multiplied into loans, which are stillcontracting. The part of M3 that collapsed in 2008 was the "shadowbanking system", including money market funds and repos. This is thenon-bank system in which large institutional investors that have substantiallymore to deposit than $250,000 (the Federal Deposit Insurance Corporationinsurance limit) park their money overnight.

 Economist Gary Gorton explains:

[T]he financial crisis ... [was] due to a banking panic in whichinstitutional investors and firms refused to renew sale and repurchaseagreements (repo) - short-term, collateralized, agreements that the Fed rightlyused to count as money. Collateral for repo was, to a large extent, securitizedbonds. Firms were forced to sell assets as a result of the banking panic, reducingbond prices and creating losses. There is nothing mysterious or irrationalabout the panic. There were genuine fears about the locations of subprime riskconcentrations among counterparties. This banking system (the"shadow" or "parallel" banking system) - repo based onsecuritization - is a genuine banking system, as large as the traditional,regulated banking system. It is of critical importance to the economy becauseit is the funding basis for the traditional banking system. Without it, traditionalbanks will not lend, and credit, which is essential for job creation, will notbe created. [Emphasis added.]

Before the banking crisis, the shadow banking system composed abouthalf the money supply, and it still hasn't been restored. Without the shadowbanking system to fund bank loans, banks will not lend; and without credit,there is insufficient money to fund businesses, buy products, or pay salariesor taxes. Neither raising taxes nor slashing services will fix the problem. Itneeds to be addressed at its source, which means getting more credit (or debt)flowing in the local economy.

 When private debt falls off,public debt must increase to fill the void. Public debt is not the same ashousehold debt, which debtors must pay off or face bankruptcy. The US federal debthas not been paid off since 1835. Indeed, it has grown continuously since then,and the economy has grown and flourished along with it.

 As explained in an earlierarticle, the public debt is the people's money. The government pays for goodsand services by writing a check on the national bank account. Whether thispayment is called a "bond" or a "dollar", it is simply adebit against the credit of the nation. As Thomas Edison said in the 1920s:

If our nation can issue a dollar bond, it can issue a dollar bill. Theelement that makes the bond good, makes the bill good, also. The differencebetween the bond and the bill is the bond lets money brokers collect twice theamount of the bond and an additional 20%, whereas the currency pays nobody butthose who contribute directly in some useful way.

... It is absurd to say our country can issue $30 million in bonds andnot $30 million in currency. Both are promises to pay, but one promise fattensthe usurers and the other helps the people.

 That is true, but congress nolonger seems to have the option of issuing dollars, a privilege it hasdelegated to the Federal Reserve. Congress can, however, issue debt, which as Edison says amounts to the same thing. A bond can becashed in quickly at face value. A bond is money, just as a dollar is.

 An accumulating public debt owedto the International Monetary Fund or to foreign banks is to be avoided, butcompounding interest charges can be eliminated by financing state and federaldeficits through state- and federally owned banks. Since the government wouldown the bank, the debt would effectively be interest-free. More important, itwould be free of the demands of private creditors, including austerity measuresand privatization of public assets.

 Far from inflation being theproblem, the money supply has shrunk and we are in a deflationary bind. Themoney supply needs to be pumped back up to generate jobs and productivity; andin the system we have today, that is done by issuing bonds, or debt.

Ellen Brown is an attorney and president of the Public BankingInstitute, PublicBankingInstitute.org. In Web of Debt, her latest of 11 books,she shows how a private cartel has usurped the power to create money from thepeople themselves, and how we the people can get it back. Her websites arewebofdebt.com and ellenbrown.com.

 (Copyright 2011 Ellen Brown)