As a nice follow-up to my post on Friday, Doug Noland’s weekly piece came out and it is, as usual, a good read. He specifically touches on the subject of monetary velocity and the lack of inflation as measured by CPI. An excerpt:
“The conventional view holds that massive QE has not caused inflation because the Fed’s monetary fuel has remained unused as “reserves” on bank balance sheets. From this viewpoint, inflation risks lurk somewhere out in the future: when the banks eventually lend these “reserves” and the monetary fuel finally makes its way into the real economy. Moreover, the optimistic view holds that the Fed has the tools to adeptly manage any future inflation issue.
I take a much different view. QE is anything but benign. The Fed’s monetary fuel certainly doesn’t just sit inertly on bank balance sheets. Indeed, this monetary inflation is immediately unleashed upon the financial markets, with the newly created “money” setting off a chain-reaction of transactions, flows and market impacts. Over time, this dynamic foments huge distortions in marketplace liquidity, risk perceptions, speculative financial flows, asset prices and market stability. And, somehow, when Fed officials discuss QE they avoid any mention of what have become conspicuous inflationary effects on securities prices.
Fundamentally, the repeated injection of Fed liquidity over time – and especially at key junctures - into the financial markets has created Bubbles increasingly vulnerable to even subtle changes in market perceptions and/or changes to the risk-taking and speculative leveraging backdrop. This is the essence of the so-called “addiction” induced by the Fed’s historic monetary inflation.”
Also, Jack Crooks over at Currency Currents notes the following since the 2008 crisis started:
-Government debt has increased $30 trillion
-Central Bank balance sheets have grown $10 trillion
-Private debt has grown $22 trillion
-Stock market capitalizations have risen by $26 trillion
And with all of that, global GDP has grown $8 trillion. In other words, financial assets have increased 11 times relative to underlying real assets upon which those financial assets are supposed to be a claim. Unsustainable. Even if you just focus on central bank balance sheets, you still don't see any one-for-one correlation. Not good.
