Depression... Inflation... Destruction

Details

Published on Wednesday, 18 July 2012 15:41

Written by Bill Bonner, Founder and President, Agora Inc.

Hits: 732

There is no debate. Inflation is coming. But first, we've got to endure a nasty depression.

Depression now. Inflation (and possibly hyperinflation) later.

The formula above is a working hypothesis. And not a bad description of the world we've been in since the financial markets blew up in 2008. The private sector is deleveraging and the public sector continues to leverage up (at least in the U.S.).

In the near term, defaults, cutbacks and unemployment in the private sector have a depressing effect on the economy. This leaves the feds trying to take up the slack...

If Japan is any indication, this period could last for many years. Ben Bernanke said as much in his report to Congress yesterday.

But in the long term something's gotta give. The private sector is bound to find solid ground sooner or later. And then, if not before, the public sector will need to be deleveraged. That is when it should get interesting. Because a counterfeiter never defaults. Instead, he prints up the money...

... which is where the inflation comes from.

At least, that's the idea.

Yesterday was an interesting day on Wall Street. Not because of what happened, but because of what didn't.

Everything -- or almost everything -- responds to the law of diminishing returns. Even the Fed's QE announcements.

When Bernanke announced the first big round of QE, in March 2009, stock markets went up... and kept going up. The response to each subsequent iteration of the process has been less dramatic. The "rush" from more money dope, in other words, is less exciting.

But yesterday, Bernanke spoke to Congress. And he didn't promise more QE. Nor did he rule it out for the future. The papers announced this morning that investors were "disappointed." Initially, stocks fell on the news.

Later, stocks went up. Either investors were reassured by Bernanke's gloomy remarks (he might not have given them more dope yesterday, but it's coming). Or the effect of the EZ money drug is wearing off.

Of course, QE was never effective at causing genuine economic growth or boosting employment, as the Fed once claimed. But it was effective at creating a stirring in the loins of stock market investors. But even that is diminishing...

But if my "depression now... inflation later" hypothesis is correct, money printing must turn into higher consumer prices some day. It seems obvious that it will. But so far there is no sign of it. Instead, QE money went into bank vaults... or into higher prices for stocks and commodities, which later fell when the drug wore off.

When prices for gasoline or wheat go up, this looks like consumer price inflation. But it is strange variety. Because it actually takes money out of the consumers' pockets. Result: less money available to drive up other consumer prices.

QE or no QE, we're not getting real, broad consumer price inflation.

That's because we're still in the "depression now" stage. The private sector is deleveraging. You can print up money... but it does not stimulate a general increase in business or consumer activity.

Instead, it juices up asset prices...

Typically, in a depression stock markets fall. In the 1990s, the Japanese stock market lost three-quarters of its value. (It has yet to recover.)

U.S. stocks lost about 50% of their value in 2008. But then QE, the TARP and other boondoggles have helped pushed them back up.

When the Fed announces more QE -- probably in September -- stocks may get another boost. But betting on a juiced-up market seems like a bad wager... the juice is bound to lose its jolt sooner or later...