Eventually there will be persistent problematic inflation
There has been enormous inflation in the prices of financial assets (stocks and bonds) and lately some inflation in the prices of consumer goods. But inflation, overall, does not yet constitute an economic crisis and, in fact, there are still significant underlying deflationary forces in the economy.
But eventually there will be massive inflation.
Why?
Because once the authorities recognized that they could print money without restraint . . . it was just a question of time until that train got rolling faster and faster and faster.
There used to be a constituency for “sound money.” Many among the elite wanted to know that their investments would not be undercut by inflation. They insisted the dollar be backed by something tangible: gold.
Governmental authorities often are inclined to increase the money supply if they can. It makes them look good, because people getting more money makes them feel good. So there’s always been a tug-of-war between governmental authorities and investment elites.
“Easier money” advocates have gotten the upper hand gradually since the Great Depression. First there was Keynesianism. Then the dollar shed its gold backing. Then there was the “Greenspan put” and QE and MMT. With every recession the “easier money” trend gains momentum.
The authorities feel that what they’re doing is countering the deflationary forces of modern globalization. But they won’t be able to resist the popularity of easy money. Nowadays the populace gets direct checks, the corporations get bailouts, and the banks get “interest on reserves.” Incrementally, the money tree is growing decade by decade. Eventually the debasement of the currency will be a significant problem.
The Fed currently pays banks 0.15% interest on reserves. With QE at $8.9 trillion dollars, banks annually collect $13,350,000,000 interest on free money (QE) the Fed crammed down their throats. This has been going on since former Fed Chair Ben Bernanke lobbied Congress for the right to pay banks money on ‘excess reserves.’ The Fed then reduced the reserve requirement to zero, making all reserves excess reserves, now simply called ‘reserves.’
I suspect interest the Fed pays on reserves will rise, possibly to 0.40% or higher when it hikes in March. If there’s a double-hike by 50 basis points, the Fed might pay as much as 0.60% interest on reserves. Since the Fed has no intention of winding down its balance sheet, the 0.40% interest rate would allow banks to collect $35,600,000,000 a year in “free” money.
Mish then says: “It’s not really free, of course. You and I (taxpayers) foot this bill.” But MMT says the authorities will find a way to . . . just print the money.
I’m sure they will.
