Tag Archives: inflation

Coronavirus: Bursting Babylon’s Bubble

Hanging Gardens of Babylon

Our world has been hurtling toward globalization for decades. Progressives spend their lives devoted to the cause of globalization with zeal unmatched by most of their ideological opponents. And, with the enthusiastic and unwitting help of their conservative opponents, a global capital economy has engulfed the majority of today’s societies.

From the point of view of economics, a nation is simply a political barrier to the movement of the factors of production. Since capital freely flows across borders in our modern global economy, globalization is nearly accomplished from an economic standpoint. Regional economies such as the European Union already allow the free movement across national borders of another factor of production—labor.

With a global economic system in place, progressives need only consolidate political power to achieve their goal of a one-world government. Progressives hate nationalist and populist movements because they stand in their way. I think this explains the irrational hatred of Donald Trump and his supporters among the media and progressive elites as well as the opposition to Brexit.

Nations Have a Purpose

From one man he made all the nations, that they should inhabit the whole earth; and he marked out their appointed times in history and the boundaries of their lands. God did this so that they would seek him and perhaps reach out for him and find him, though he is not far from any one of us.

—Acts 17:26-27

People have a natural, sinful tendency to think they are self-sufficient, without any need for God to help them succeed.

You may say to yourself, “My power and the strength of my hands have produced this wealth for me.” But remember the Lord your God, for it is he who gives you the ability to produce wealth—Deuteronomy 8:17-18

In the Bible, Babylon represents any world system antagonistic toward God and his people. It is no wonder then, that the most famous king of Babylon was judged for failing to recognize God’s sovereignty over him.

All this happened to King Nebuchadnezzar. Twelve months later, as the king was walking on the roof of the royal palace of Babylon, he said, “Is not this the great Babylon I have built as the royal residence, by my mighty power and for the glory of my majesty?”—Daniel 4:28-30

This illusion is even more powerful and destructive when the entire world gathers together to solve humanity’s perceived problems without any deference to God and without acknowledging the real problem facing humanity—sin. At the tower of Babel the result of humanity’s desire to unite in rebellion would have been so disastrous that God, in his mercy, confused their language and scattered them over the earth. Better a world divided into nations than a world united in apostasy.

Recognizing Babylon

Both Scripture and history describe the world system called Babylon.

John in Revelation 17:5 describes Babylon as the great harlot (Revelation 17:5). The Bible uses adultery to describe idolatry. Idolatry is unfaithfulness to God (Hosea 1:2). Babylon opposes God’s redemptive plan and replaces it with human self-sufficiency. Babylon seeks power and wealth in an illusory attempt to get away with a sinful lifestyle opposed to God’s standards (Revelation 18:3). The great whore Babylon seeks worldly wealth convinced that its lack is humanity’s real problem. It hates the real riches we can obtain only through Jesus (2 Corinthians 8:9).

Babylon at the time John wrote the Revelation was Rome, an empire that persecuted Christians and sought to control vast portions of the world. The world system Babylon at the end of the age will be drunk with the blood of the saints (Revelation 17:6) as it seeks luxury. Its merchants will both fear and mourn her demise, one she never saw coming because of her rebellion against God (Revelation 18: 7,10-11).

We can recognize Babylon as any society that makes wealth acquisition its top priority at the expense of others (i.e., slavery in Rome, or enslavement by debt in modern societies) and one that opposes God’s standards of morality while persecuting Christians who would stand against its man-made standards.

Coronavirus vs Globalization

Globalists/progressives try to plan the world’s course without God. Our modern day situation is really not that much different than that at the tower of Babel. The predictable outcome now seen in the developed world—record individual, government and corporate debt, unrestrained sexual immorality, rampant abortion, small families and the resultant demographic crises—can be directly attributed to the all-out quest to serve money instead of God.

The coronavirus, with astonishing speed, has brought the global economy to a standstill.

Will anyone notice the spiritual implications?

We don’t know how long the coronavirus will wreak havoc on the global economy. But even if the pandemic ends sooner than expected, it will leave in its wake a worldwide economic crisis (more on that in my past and future blogs).

Has coronavirus dealt a serious blow to globalization? Or, will progressives find a way to use it to their advantage, not willing to let any crisis go to waste? It’s not hard to imagine a progressive call to unite the world to fight future pandemics and to resolve the looming worldwide economic crisis. Of course, they will want to expand government to attain their goal.

Bursting Babylon’s Bubble

This is where American Evangelical Christians need discernment. We have been told that, before coronavirus, the United States economy was very strong; even the best we’ve ever had. That’s a lie. Our economy and the world economy were unsustainable; they were built on debt. Coronavirus was simply the pin that pricked the debt bubble. The underlying problems in our economy and that of the world are so deep and severe that two or three months of a shut down economy pale in comparison.

Years of artificially low interest rates have increased the money supply (in the form of debt) to unprecedented levels. When all of that money is unleashed on economies that have misallocated resources into non-productive assets, prices will skyrocket as competition for necessities increases amid a slowed economy. The world is awash in debt it cannot repay (Psalm 37:21). Babylon cannot solve the problems it has made for itself.

Christians Unite

God will not give his glory to another (Isaiah 42:8). Not to progressives, not to conservative politicians, not to our economy, not to a united world. God provided the solution to the world’s problems when Jesus Christ died on the cross for our sins and rose from the dead. If Christians are to unite, let’s do so to proclaim God’s mercy to the world.

How Much Socialism Does It Take to Collapse An Economy? – Part 2

Empty shelves depicting economic collapse
The Road to Economic Ruin

In Part 1, I asked if the economic havoc wreaked by socialist dictators can be replicated in a capitalist democracy. I also stated that while Venezuela exports oil to fund their social programs, we, in part, export dollars to fund ours.

But what if the price of our main source for funding our social programs drops dramatically, will we experience the same problems as Venezuela did when the price of oil plummeted?

If the U.S. dollar plummets in value we will not be able to import goods in the quantity that we do now unless it’s at inflated prices. As inflation increases, foreigners will not want to hold dollars that continually decline in value relative to their own currency. They will decrease purchases of U.S. debt used to fund our social programs. Instead of buying treasuries that yield little interest, they will dump their dollars for something that will at least retain its purchasing power.1

We have been in this situation before. Under the Bretton-Woods system the U.S. government spent more than it took in. But the dollar was tied to gold at a fixed price, so governments and individuals could redeem their dollars for gold if they saw their dollar holdings decreasing in value due to government spending. In fact, they redeemed dollars for gold at such a rate that, in 1971, President Nixon had to close the gold window and remove the dollar from its tie to gold. The dollar became a fiat currency.

Today, without the option to redeem dollars for gold at a fixed price and with U.S. Treasury interest rates at historic lows, it makes sense for foreigners to use their dollars to buy America’s assets putting even more upward pressure on prices.

So, why not raise interest rates on government bonds to attract foreigners to buy our debt? When inflation raised its ugly head after Bretton-Woods’s demise, Fed chairman Paul Volker raised the federal funds rate as high as 20% in 1981 to combat an annual inflation rate that had risen to almost 15%. By 1983 inflation had fallen to 3%. The cost to control inflation was a painful recession in which unemployment rose to 11%.

And that is one of the reasons the Federal Reserve doesn’t raise rates now – fear of a recession. However, critics of the Fed correctly claim that continuing the low interest rate policy will only make the inevitable recession and resulting economic pain worse.

But there is another reason the Federal Reserve doesn’t raise interest rates – it can’t afford to. In 1981 the U.S. debt to GDP ratio was at an all time low of 31%; now it is over 100%. We have so much debt that we cannot afford an interest rate significantly above zero. Our national debt is over $20 trillion. We owe foreign governments over $5 trillion. Raising interest rates would increase the cost of servicing our debt beyond what we can pay.

The Federal Reserve is in a prison of its own making. If they raise interest rates the economy will go into a deep recession. If they keep rates low they risk out of control inflation.

Tipping Point

The U.S. dollar will experience a serious devaluation when the creditors of the United States lose confidence in the dollar because they have become convinced that the U.S. will never get its fiscal house in order.

When everyone wants to dump dollars at the same time, the resulting sell-off will crush the value of the dollar in relation to other currencies and could induce an inflationary spiral.

Can the U.S. Dollar Maintain its Status as the World’s Reserve Currency and Safe Haven?

Some economists aren’t worried, claiming the United States cannot default on its debt because our debt is denominated in dollars and we can always print more of them. Notwithstanding the moral implications of such a statement, this assumes that the dollar will always be the reserve currency and that other nations must always accept it as payment.

But creditors may decide to dump the dollar even if it means taking a loss. The process may have already begun. China recently announced the launch of a Yuan-denominated oil futures contract. These contracts will be convertible to gold. This is significant because oil exporters under U.S. sanctions will be able to get around them by avoiding oil contracts denominated in U.S. dollars. Not only does this move signify a possible crack in dollar hegemony but also undermines political influence the U.S. enjoys because the dollar is the world’s reserve currency.

In other words, an economic catastrophe probably cannot be avoided simply because the dollar is the world’s reserve currency, at least not for long.

Others argue that it will be a long time before the U.S. dollar loses its status as the reserve currency because there is no better alternative to replace it and that the dollar is still a safe haven when troubles ripple through the global economy. Therefore we still have plenty of time to turn our economic ship around. Besides, many other nations with large economies are in worse financial shape than the United States.

A New Normal – Monetization of U.S. Debt

Nothing signals economic trouble quite like monetization of debt.

“If the Fed wants to lower interest rates, it creates money and uses it to purchase Treasury debt. If the Fed wants to raise interest rates, it destroys the money collected through sales of Treasury debt.”2

The Fed does not consider its purchase of Treasuries to be monetizing government debt unless the purchase of securities is permanent. Quantitative easing (QE), which included the purchase of mortgage backed securities as well as Treasuries, has resulted in $4.5 trillion created by the Federal Reserve.

But does anyone believe the Fed will follow through with any meaningful reduction of its balance sheet? Ben Bernanke has stated that reduction of the Fed’s balance sheet will not begin in earnest until interest rates are well on their way to normalization. The world has seen the U.S. go through three rounds of quantitative easing already without being able to normalize interest rates. They are still at one percent.

Janet Yellen announced on September 20, 2017 that the Fed intends to begin reducing its $4.5 trillion balance sheet in October. But the amounts are miniscule, 0.2% per month. Furthermore, Fed officials are on record as saying they don’t expect the Fed’s balance sheet to return to pre-2008 levels. In other words, the new normal actually does involve monetization of debt.

Signs of Trouble Ahead

The stock market is overdue for a crash. The current bull market is the second longest ever. The current economic expansion is the third longest of eleven since World War 2. Raising interest rates will pop the housing and stock market bubbles that the Fed’s low interest rate policies have inflated. Having propped up the stock market for over eight years, the Fed is not going to change course now. Any claims by the Fed to raise interest rates look more like self-deception or a bluff than implementable policy.

At the first sign of trouble, just like in 2008, the Fed will likely want to step in and attempt to stimulate the economy.

But the Fed is in a bind. They want to raise interest rates so that they will have a weapon to employ (lowering rates) when the next recession hits. If they raise interest rates too quickly causing a stock market crash, they will be blamed. If they are unable to raise rates for fear of recession, then per their own statements, they will not reduce their balance sheet and it becomes clear that the U.S. monetization of debt is permanent.

How then will the Fed fight the next recession? Interest rates cannot be lowered much from one percent unless they go negative. The Fed fears deflation above all else so they will try to stimulate the economy with more quantitative easing and will achieve the same dismal result.

Not only will QE4 not stimulate the economy, it will indicate to nearly everyone that quantitative easing will never end and that the dollar is in trouble. The Treasury will only find buyers for its bonds at higher interest rates. If the Fed tries to reduce its balance sheet by letting its bonds expire, the treasury has to sell that many more bonds to pay back the Fed, putting upward pressure on interest rates in order to sell the bonds it needs to run the government. If the Fed sells bonds on the open market they compete with the Treasury also causing rates to rise.3

What’s the Big Deal?

So what’s the big deal if the Federal Reserve unwinds its balance sheet and lets interest rates rise so people have incentive to buy U.S. bonds? They cannot for two reasons, 1) we can’t afford the higher interest payments, and 2) it will pop the stock market bubble fueled by low interest rates. People will put their savings in safer investments than the stock market if they can earn decent interest, thus decreasing demand for stocks.

Well then, if the Fed thinks we need more economic stimulus when the next crisis hits, why not employ another round of quantitative easing? After all, we’ve gotten away with it thus far.

Inflation, Inflation, Inflation!

Inflation is an increase in the quantity of money in circulation. Rising prices result from inflation, they are not in themselves inflation. Why is this distinction important? Because one cannot fight rising prices unless one attacks the root cause.

The identity equation of the Quantity Theory of Money, MV=PY, shows how the quantity of money affects the economy. In this equation, M is the money supply, V is the velocity of circulation (the number of times per year the average dollar is spent), P denotes the price of one unit of output and Y denotes the total output of the economy. PY is the same as nominal GDP from the viewpoint of the production or seller side.

Economists often assume that the velocity of money, V, is constant. They then use this equation to show that the price level changes proportionally to the money supply.

But Fed economists evidently don’t believe V is constant (It’s not). After a crisis, the powers that be seem to think that business and consumers incorrectly lose faith in the economy and don’t spend enough. In other words, when V falls (less spending), the Fed believes it must come to the rescue and increase the money supply to prevent a decrease in nominal GDP. What they fear most is price deflation. But, unlike the Fed, the average Joe knows what he is doing. He is in debt and broke, that is the reason for the decrease in spending (V).

That is why QE hasn’t caused much price inflation of general goods, though methods of measuring inflation hide some of the price increases. The average person or business doesn’t want to go into more debt so the velocity of money remains low. But QE hasn’t stimulated the economy either. What it has done is transfer wealth from the bottom to the top by generating asset price bubbles in housing and the stock market. I have often mentioned these wealth transfers but how they happen deserves repeating:

Increases in the money supply set in motion an exchange of nothing for something. They divert real funding away from wealth generators toward the holders of the newly created money. This is what sets in motion the misallocation of resources, not price rises as such. Moreover, the beneficiaries of the newly created money–i.e., money “out of thin air”–are always the first recipients of money, for they can divert a greater portion of wealth to themselves. Obviously, those who either don’t receive any of the newly created money or get it last will find that what is left for them is a diminished portion of the real pool of funding.4,5

Armed with the false belief that deflation is the worst possible outcome (and evidently with the belief that they must arm-twist financially broke Americans into spending) the Fed believes they can stimulate nominal GDP (PY in above equation)  by increasing the money supply (M) to make up for decreased spending (V). Austrian economists would counter that the equation balances naturally by allowing prices (P) to fall (inflated bubbles pop). With lower prices, people will spend more and (V) will return to normal.

The Fed’s plan hasn’t worked. The “recovery” from the Great Recession is a sham. Stock and housing prices inflated, transferring wealth to a small portion of society, but real economic growth is low and wages have stagnated.

Not only that, but instead of people’s bank accounts being filled with dollars that are worth more due to falling prices if nothing had been done, they are worth less because of the Fed’s “money printing.”

However, the inflationary effects of QE will eventually show up. At some point people will realize the government has gone too far. Both foreign and domestic holders of U.S. dollars will spend them before they become worthless. When spending (V) returns to normal or above, that along with the increased money supply due to quantitative easing increases the value of MV in the identity equation. But MV, by definition, must equal PY. Since the new money from QE was not put to productive use, but mostly into inflating the price of existing assets, Y (production or real GDP) was not increased by QE. This means that the price (P) of the goods and services we use every day must increase.

Inflation will take off. If we don’t want to end up like Venezuela, the Fed will have to admit defeat, raise interest rates and send the economy into a recession that will be far worse than if they had never implemented their easy-money policy.

Here’s the question – will the Fed be as stubborn as a socialist dictator and stay the course when crisis comes? If the Fed responds to the next recession with QE4, in my opinion, it will be “game over.” They will sacrifice the dollar and our economy with it.

So, will the path we are on predictably and inexorably lead to a currency collapse? Yes, but the Fed can change its path. I read years ago one man’s observation that when an economy reaches the critical point, rich Western nations choose deflation over inflation. I believed it then. Now I’m not so sure.

Finally, how much socialism does it take to collapse an economy? It only takes the amount necessary to direct an economy away from its natural course into the precarious position we now experience. Without quantifying how much socialism is required, it is safe to say that we have enough, especially since the government has a monopoly on money in the form of the Federal Reserve.

(Part 3 will offer some possible Christian responses to these grim prospects for our economy.)

Notes:

  1. This is not inconsequential. As of September 2016. foreigners held 30% of our public debt — $6 trillion in treasuries. But they also held $5 trillion in corporate bonds and another $6 trillion in mutual funds, ETFs and other portfolio assets.
  2. Federal Reserve Bank of St. Louis, “In-Depth: Is the Fed Monetizing Government Debt”
  3. Peter Schiff, “The Fed Is Going to Sacrifice the Dollar,”
  4. Frank Shostak, “Defining Inflation,” https://mises.org/library/defining-inflation.
  5. In the case of QE, the first recipients and primary beneficiaries of the newly created money are the too big to fail financial institutions such as Goldman Sachs. See the complete list of primary dealers here at the New York Fed.

References:

Helicopter Money

helicopter drops money

According to some economists and government leaders, parents all across America have evidently been wrong for decades. Money actually does grow on trees.

To these leaders, money is free. All you have to do is create it, ex nihilo, and watch as it magically transforms into stuff everyone can use and enjoy. This is but one more example of economists abandoning common sense while claiming that what holds true for individuals somehow doesn’t apply to nations.

The Economic Chicken and Egg Question

Most economic theory boils down to two disparate beliefs, either that supply necessarily precedes demand or that demand necessarily precedes supply. The predominate belief, implemented by central banks around the world, is the latter. It’s otherwise known as Keynesian economics.

It is true that need precedes supply, but need is different from demand. Need always exists. Demand doesn’t. Demand implies the ability to pay for what someone else supplies.

In reality, the only thing we have to offer anyone for their goods or services is the fruit of our own labor be it in the form of goods or services. Not so for Keynesians. They believe simply having money creates legitimate demand. But this is a disingenuous position, because even Keynesians would not accept counterfeiting by individuals.

Somehow, though, counterfeiting is morally good if done by the government.

They base this belief that it is good for the government to create money “out of thin air” on the premise that falling prices, i.e. deflation, leads to a death spiral of delayed spending, reduced profits and increased unemployment. I discussed this false premise in a previous article on negative interest rates.

Thus, for many economists, inflation is the key to economic growth. They believe the threat of higher prices in the future causes people to spend more now, leading companies to hire more workers to produce goods that meet this demand.

So, when considering supply and demand, which is the chicken and which is the egg?

Why It Matters

Too much money chasing too few goods and services produces inflation. If governments can increase the amount of money people spend without a commensurate increase in the amount of goods they supply to society they can achieve their goal of inflation.

There are only three ways to gain wealth above and beyond what you have produced through work. You can steal, borrow or receive a gift.

I have discussed how inflation is theft, yet governments and central banks act as if inflation is the gift that keeps on giving. Our government, in its quest for inflation and ever-increasing demand, encourages covetousness and its accomplice debt by offering tax deductions for interest payments. Artificially low interest rates allow this generation to steal from the next.

The alternative perspective that supply is prior to demand recognizes that need motivates people to provide for themselves and their families. As they become more productive through experience and innovation, their productivity increases which means they can gain more wealth per hour of labor. This is just another way of saying prices fall (deflation).

This cycle of work/save/spend is morally superior to the Keynesian cycle of borrow/spend/work because it recognizes that the borrower is a slave to the lender. Its practitioners are less likely to succumb to covetous desires to acquire wealth outside God’s providential timetable. It also does not leave them open to being those the Bible describes as wicked because they borrow and do not repay.

Helicopter Money

I suppose that one’s stance on these matters depends, in part, on whether or not one believes that policies geared toward increasing demand have worked.

Despite declarations from politicians and economists that the economy has recovered from the 2008 crisis, it has not. Keynesian policy has not worked as evidenced by the fact that the dire situation portrayed in my post, The Wizard of Odd, has only gotten worse during the past year. Quantitative easing and near zero interest rates have not succeeded in increasing inflation or the hoped for demand but have succeeded in increasing debt.

Rather than admit defeat, central bankers are willing to go “all in” to prove their economic theories work. Not only has there been talk of negative interest rates, but also of “helicopter money.” This term is not new, Milton Friedman coined it in 1969 to describe what could theoretically be done when all else failed to produce inflation. The fact that anyone even mentions helicopter money now indicates the poor condition our economy is in.

The Federal Reserve’s Hubris

With their heads planted firmly in the sand, central bankers continue to deny the ticking time bomb they have created by flooding the economy with money. They even have the hubris to blame the failure of their policies to increase demand on banks for not lending the money and on consumers for not taking out loans. So, in their benevolence and intellectual superiority, they will consider plans to place money directly into the hands of consumers. Instead of giving money to people who already have plenty like they did with quantitative easing, they will give it to people they believe will actually spend it.

But, I think these “intellectual giants” have underestimated the public. Yes, many will spend the money, but there will be plenty of people who will be prudent enough to pay off debt with the money they are given. The problem of low demand the Federal Reserve seeks to fix will persist.

Former Federal Reserve chairman Ben Bernanke, while acknowledging the political difficulty of implementing a helicopter money policy (because it will remove central bank independence), touts the benefits of “helicopter money” in the form of increased public spending or tax cuts financed by a permanent increase in the money supply. He asserts that such a move, unlike debt-financed programs, would not be paid for by issuing new government debt to the public and would not increase future tax burdens.1

Money Doesn’t Grow On Trees

Herein lies a major flaw in Keynesian economics – failure to recognize that every dollar issued is an I.O.U. Helicopter money will monetize debt, both public and private. Critics warn it could result in hyperinflation. They’re correct.

But this is the endgame we find ourselves in. Those in charge of our money will destroy it because of an irrational fear of deflation and because of a defiant defense of their belief that “governments should never have to give in to deflation.” 2

Imagining that money grows on trees won’t save our economy. Money dropped from metaphorical helicopters won’t either.

Notes:

  1. Bernanke, B S. (2016), “What tools does the Fed have left? Part 3: Helicopter money”, Brookings Institution, 11 April.
  2. Bernanke, B S. (2016), “What tools does the Fed have left? Part 3: Helicopter money”, Brookings Institution, 11 April.