Say Goodbye to the Purchasing Power of the Dollar

On a long solo car trip last week, I listened to several podcasts to pass the time. One was a classic: The Invention of Money, originally released by NPR's Planet Money team back in January of 2011. I highly recommend listening (or re-listening) to it in full.

The podcast is an effective reminder of how any currency in a monetary system is a fabricated construct. A simpler way to explain this is to say it has value simply because we believe it does.

Through the centuries in historic cultures like that of Yap Island who used giant, immovable stone disks for commerce, to today's United States, whose Dollar fiat currency exists primarily in digital form "money" is able to be exchanged for goods and services because society agrees to accept it (at a certain rate of exchange).

But what happens when a society starts doubting the value of its money?

Fed, the Great & Powerful

The podcast goes into the mind-blowingly simple process by which new money is created in America by the Federal Reserve (or the "Fed"). That is to say:

  1. The Fed holds a meeting
  2. Those in the room decide how many more dollars they think the world needs
  3. Someone walks over to a computer and adds that many dollars to the banks, with a few clicks of the keyboard

The banks then, if they want to, lend this new money out into the economy on a fractional basis, adding even more "thin air" dollars to the nation's money supply.

This unique ability in America lends the Fed enormous power. The power to create new money from nothing. With no limit.

And with that power, the Fed can control and/or influence economies and markets the world over.

Should such power exist? And if so, should a single private entity owned by the major players in the banking system be allowed to wield it?

Such power certainly has its dangers.

Back in 2011, the Planet Money team described the normally staid Fed as having "gone to central-bank Crazytown". Panicked by the global credit contraction, the Fed began a series of programs intent on combating the deflationary force of credit defaults. It essentially force-fed liquidity (a.k.a. freshly-printed dollars) to the world, using ham-fisted tactics that it had fastidiously eschewed over the previous century:

As the financial crisis unfolded, the Fed created...trillion[s of] dollars, which it lent out as emergency loans to all the big names on Wall Street: Goldman Sachs, Morgan Stanley, huge banks like Citigroup and Bank of America. The Fed lent money to private equity firms, hedge funds, and even regular companies like Verizon, GE, and Harley Davidson.

And it wasn't just the recipients of that cash that were new. It was also what the Fed was requiring in return: the collateral.

In the past, in the rare instances that the Fed used its powers to serve as the lender of last resort, it demanded the highest quality collateral in return. Assets that were safe and would hold their value.

But in 2008, the Fed started accepting all sorts of...collateral that just months ago it never would have touched.

The sheer amount of new money that the Fed created was unprecedented. From the time we went off the gold standard of 1933 until 2008, the Fed had created a net total of $800 billion. In the months after the financial crisis, that number nearly tripled to almost $2.4 trillion.

[The Fed was] spending more newly created money in just 15 months than [it] had created in its entire history up until 2008.

And what effect did this fast-and-loose money-printing bonanza have? The big banks were able to recapitalize their damaged balance sheets while continuing to pay themselves record bonuses. Commodities, priced around the globe in U.S. dollars, became much more costly as many more dollars competed for the same amount of real assets. And financial assets, like stocks and bonds, marched upwards, raised by the unrelenting rising tide of Fed liquidity.

Notice however, that the economy itself did not fundamentally improve in the way the Fed had hoped it would. While a collapse of the system was averted (delayed?), economic growth has remained sluggish, unemployment high, and real wages stagnant or worse.

Of course, the reason for this is simple. Money is not wealth. It is merely a claim on wealth.

You can't print your way to prosperity. History is abundantly clear on that. 

With the clarity of hindsight, it's now obvious how the Fed has now painted itself into a corner. Here's how the stock market has fared during the Fed's rescue efforts:

They say a picture is worth a thousand words. In this case, the picture above is worth several trillion dollars (some would argue as much as $9 trillion).

The financial markets have become dependent on new Fed dollars. If you look at the few gray segments of the chart, the stock market swoons nearly immediately once the Fed halts its balance-sheet expansion.

For whatever reason (perhaps because it's owned by banks?), the Federal Reserve has chosen to use the price of financial securities as the signaling device that its efforts are yielding results. But the markets, like any junkie, demand greater and more frequent infusions to reach new highs. Note how the trend of successive Fed programs yields smaller and shorter-lived boosts.

The Fed lives in fear of re-entering recession while unemployment and wealth inequality remain stubbornly elevated. With so many families teetering at the edge, things could get ugly very quickly if a fall in asset prices were to create a "reverse wealth effect" that triggered another recessionary slowdown. So as long as low single-digit GDP growth persists, the Fed's hands are tied. It must continue to print.

No matter that the rising price of financial assets grossly benefits the top classes namely the 1% who own 40% of the entire nation's wealth. In stark contrast, the bottom 80% of Americans own only 7%.

No matter that the Fed's money tsunami is creating asset bubbles (again) in stocks, bonds, college tuition, housing, commodities, etc. further eroding that bottom eighty percent's ability to form capital to fund its future.

The Fed has gone "all in" here. There is no Plan B.

Should We Place Our Faith in the Fed?

Perhaps I'm being overly pessimistic.

Perhaps the Fed has just the right talent and tools we need to finesse our way out of the challenges we face.


As for the talent, the key body that makes decisions on the money supply is the Federal Open Market Committee (FOMC). Many of its members have only had academic and/or government positions throughout their working careers. Voting members with actual business operating expertise, or experience running a commercial bank, for that matter, are rare.

And as for tools, the Fed only really has one: the interest rate. It can move it up or down. But the effects take time to be felt in the markets. And it is a blunt, imprecise tool, at best. Again from the Planet Money podcast, where interviewer Alex Blumberg is talking with Gerald O'Driscoll, former vice president of the Dallas Regional Federal Reserve:

Alex Blumberg: I sort of think of it like a joystick. You move it too far in one direction, you get out-of-control inflation. You move it too far in the other direction and then you can really sort of put the brakes on the economy. Is that too simplistic a way of thinking about it or is that?

Gerald O'Driscoll: I mean, it's okay to think about it that way. I winced a little when you said that, because the joystick presumes a very precise control, which is exactly what they don't have.

Alex Blumberg: Right.

Gerald O'Driscoll: It's more like you're moving a super tanker and you start moving the wheel and there's no effect that you can see for quite a while.

In fact, the inner sanctum itself, where the all-important FOMC meetings takes place, seems much less like the rarified Olympian god-chamber we'd expect, and more like the conference room from Office Space:

Whatever you imagine the room looks like where you can create one and a quarter trillion dollars, this is not it. It is not grand. It is not ornate. It is not ceremonial. It has four grey cubicles, it has computer screens, and there's no other way to say this: It's a mess. There are papers and notes scattered around. There is a yoga ball someone has been sitting on. And there is a basketball net, possibly Nerf brand. This is where the magic happens.

The reality is, the Federal Reserve is like any other organization. Human. And fallible.

And like any other organization, it makes its best assessment of what the future holds and places its bets accordingly.

For those who want to argue that the Fed, with its cadre of hyper-degreed academics and its insider access, has superior information and thus the ability to predict the future with unparalleled accuracy; I humbly ask you to watch the following:

Cyprus: Are Things Different This Time?

In Hollywood, they say you're only as good as your last movie. By that metric, the Fed's latest sanguine prognostications should be taken with a huge amount of salt(ed popcorn):

Cyprus does not pose a threat to the U.S. economy or financial system and there are no signs of stock market bubble, Fed Chairman Ben Bernanke said on Tuesday.

The Fed chief told reporters that the central bank was monitoring the situation in Cyprus. "At this point, we're not seeing a major risk to the U.S. financial system or the U.S. economy," he said.

And while the cheap money supplied by the Fed has pushed up stock prices, Bernanke said the central bank isn't measuring the success of its policies against moves in stocks.

He also said the recent advance was not out of line with historical patterns. "I don't think it's all that surprising that the stock market would rise given that there has been increased optimism about the economy and...profit increases have been substantial," he said.

Sound familiar? Are you feeling comforted yet?

So, how much confidence can we really have in the Fed to navigate these yet uncharted monetary waters, with so many variables and unknowns, and its less-than-spot-on record? Honestly, we'd be fools to assume much.

Cyprus has awakened the world to the reality that central planners can appropriate their money with the bang of a gavel. And while we don't yet know with certainty how things will unfold in Cyprus, we can project that events there have shaken society's confidence in the soundness of fiat currency in general. If we know it can be confiscated or devalued overnight, we are less likely to unquestioningly accept its stated value. This doubt that strikes at the very foundation of modern monetary systems.

Cyprus is meaningful in the way that it shines a light on both the importance of hard assets and the risk it poses to market stability. It certainly increases the risk of our prediction of a 40%+ stock-market correction by Fall, as investors begin to realize that current high values are simply the ephemeral effect of too much money, instead of a sign of true value.

At this point, prudence suggests we prepare for the worst (by parking capital on the sidelines, investing in our personal resilience, etc.) and add to our hard asset holdings (like precious metals bullion, productive real estate, etc.) as insurance to protect our purchasing power. The dollar may strengthen for a bit versus other currencies and perhaps the financial markets, but the long-term trend is a safer and surer bet: Dollars will be inflated. There will be more of them in the future than there are today. So, while our dollars still have the purchasing power they do, we should use the window of time we have now to exchange paper money for tangible wealth at today's prices.

Those with a shorter time horizon, higher risk tolerance, and capital to spare may want to start considering a strategy for going short the financial markets.

Next stop: Crazytown!

This is a companion discussion topic for the original entry at

From a monetary standpoint, all that Fed Crazytown money printing (2.37 trillion) hasn't really moved the needle compared to the 56 trillion TCMDO (total credit outstanding).  That is a massive denominator - it would take 5.6 trillion in printing to increase total US money & credit by 10%, and we're not even halfway way there.
Don't get me wrong, I'm not in favor of printing money - I'm just trying to put it in context.  All Fed money printing has done is offset the deflationary impulse from all those debt bubble writeoffs.  Perhaps its a wash, from a monetary perspective.

And all those food price increases you see at the grocery store now actually happened prior to the 2008 crash when every commodity spiked up right along with oil.  All commodities dropped after the crash, and then food products hit new highs in 2011, only to back off to below-2008 level prices today.  If you look at my Food/Oil price chart (food prices supplied by the FAO), you will see what I'm talking about.

Why did food and so many other commodities rise so dramatically in 2006-2008?  My bet is, the commodity spike had a bunch of fathers - China & India's economic success, the delayed effects from 10 years of property bubble "money printing" in the Eurozone and US, and peaking of oil production. 

Wait, property bubble money printing?

Little known fact: in only the LAST year of the bubble - 2007 - borrowers "printed" 4.7 trillion dollars, which is  twice as much money as the Fed has done in the 4.5 years since the 2008 crash.  Eurozone printing (via borrowing) was about 3 trillion euros during that same period.  And thats in ONE YEAR.  If you think 2.3 Trillion in Fed money printing over 4.5 years is crazytown, how do you define 9 trillion US in just ONE year?

Regular people and businesses borrowing money is THE WAY money gets printed in a normal economy.  That's what the Fed and the ECB tried to do by lowering rates to 0% - get normal people to do their printing work for them.  The abject failure of these super-low rates both here, and in the eurozone to spur borrowing underlines the severity of the debt bubble bust.  In aggregate, normal people really aren't interested in borrowing anymore, no matter how low rates go, because their incomes just won't support it.  So the Fed is stepping in to do the printing, but there are political limitations on just how egregiously the Fed can print, so we end up with an economy that ends up saying: "is that all you got?"

I'm going against the trend here at this site, and against most other places that I know.  But I'm doing my own homework, and following the numbers.  2.37 trillion over 4.5 years isn't that big, especially when you have perhaps 30 trillion in slowly deflating credit (TCMDO in 2000 = 25 trillion) from the bust.  I'm not saying that money printing is a good thing, I'm not defending the Fed, but if we follow the numbers honestly and try to understand their implications, perhaps we'll end up with some valuable insight that is different than the mainstream perceptions.

One last point.  If and when the eurozone debt deflation finally resolves in the way it is starting to do in Cyprus, the move in the dollar in the UP direction will, most likely, blow your socks off.  I'm not saying it will last, but best not be shorting the buck today.  The eurozone banking system is massive.  Total deposits are about 200% of total eurozone GDP, while US total deposits are around 60% of US GDP.  Their banks with deposits of that size are in aggregate unrescuable - just like the ones in Cyprus.  Uninsured depositors in many places have a high risk of taking losses - just like they just did in Cyprus.  And can anyone guess whether uninsured depositors taking losses is inflationary or deflationary?

What's more, overall, the eurozone is in monetary deflation (defined as shrinking of money & credit) today.  That's because unlike the US, the ECB is not monetizing national deficits.  Left to their own devices, economies drop into debt deflation after a bubble pop.  Unsustainable debts have to be defaulted on.  And that's what we're seeing right now.

The ECB could print, and still might, but in order to make an impact, the size of the printing effort would have to be in the trillions, because the debt growth in europe during their 2000-2008 bubble is about 17 trillion euros.  Just in Spain, I estimate the deflation (losses) to come to be about 500 billion euros.  Overall, call it perhaps, a 6 trillion printing effort.  Do you imagine Germany and the northern-euro nations will stick around for that sort of fireworks?


[quote=davefairtex]  The eurozone banking system is massive.  Total deposits are about 200% of total eurozone GDP, while US total deposits are around 60% of US GDP.  Their banks with deposits of that size are in aggregate unrescuable - just like the ones in Cyprus.  Uninsured depositors in many places have a high risk of taking losses - just like they just did in Cyprus.  And can anyone guess whether uninsured depositors taking losses is inflationary or deflationary?
Great perspective on Euro Banks. Would a deflationary event in Europe be worldwide in your view? I can see the strong dollar as money flees Europe. Would that not boost the Equity markets in the US? 

At this point, talking about inflation or deflation as a simple phenomenon is inadequate.  The way we are headed, we are seeing and are likely to continue to see both inflation and deflation within each economy.  The most obvious example is comparing food, energy and health care prices to home prices.
Going forward, it would perhaps be better to discuss inflation by spending category, abandoning aggregate inflation as a meaningful measure of anything.

Regardless of other categories, in 2013, I anticipate food commodity inflation to be above normal.  Inflation in many other categories will be held back by at best flat wage rates.

There are so many game changers coming into play now, it's difficult to keep them all in mind when considering global trends and forecasts.  Retiring baby boomers alone is a game changer, but it's only one of many issues.  How do you rank them or consider them in aggregate.

Perhaps a model similar to World3 (Limits to Growth), but incorporating all of todays constraints would be useful or at least entertaining. 



Dave,  I really don't disagree with any of your numbers… what you have done though is omit any mention of the elephant in the room, which is the US debt.  The printed money, while it might seem small compared to all debt that exists… certainly looks like a much bigger number when we view it in light of the national debt, and especially our tax roll, which in 2012 was $2.47T.  Not only has the FED printed more than a years worth of US total tax revenue in the last few years… all of that has been tacked on to the long term US debt.  Are you a closet MMT guy who believes that Gov't debt doesn't count somehow?   
Have we forgotten the lessons of Rogoff and Reinhart?  Debt to GDP of over 90% being a tipping point?  From a more recent piece by them;

We find that growth effects are significant even in the many episodes where debtor countries were able to secure continual access to capital markets at relatively low real interest rates. That is, growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates
The printing looks more meaningful and susbstantial in the light of US debt, which was a mere $10T in 2008.  Compared to $10T, the FED has printed up a 25% increase in the US debt relative to what existed before the crisis.  As well, the FED printing has enabled the continued profligate spending of our elected officials, which is another thing you missed mentioning.  We are going to blow up eventually... your "alternative analysis" notwithstanding.  Yes, we are behind Japan on the debt front, and our banks are healthier than those of Europe... but we are all on the same path to hell.   

OliveOilGuy-I think monetary deflation in europe will end up affecting the US through CDS depending on what happens where.  If its the slow grinding monetary deflation with occasional bank failures like we have seen to date, it will likely be controllable and won't be a major impact.  If its a major sovereign default or a nationwide bank run, well, all bets are off.
My guess is that US markets both have, and will continue to benefit from capital flight from Europe.  The fact that we're able to print & spend puts off our bubble pop somewhere into the future, and this means means the party can continue a bit longer here.  Our companies can still make money, issue dividends, the bonds still get paid, the system still clicks along - which looks like Nirvana compared to Spanish Austerity (26% unemployment), the 4-year (and counting) Greek Depression, and the brand new Cyprus Uninsured Depositor Party (30% haircut at least, but we'll only know for sure once the bad assets are run off a few years down the road).
One assumes the buyers of the US assets imagine they can always sell if things start to look shaky here, but in the meantime collecting dividends & bond payments seems like a fine idea.  I don't have any data to back this up though, its just my own opinion.  However, the US market does seem to be floating upwards, immune to currency moves, and pretty much every other issue we've seen.  We can either credit "Mysterious Intervention Forces" - or money flows from overseas.  I pick money flows, just because it seems like less of a cop-out and it does make sense.  Money managers everywhere are starved for yield right now - in some sense, they are forced to buy.  After all, they don't get paid their bonus by sitting in 3 month US Treasury bills, or the euro-alternative: negative-yield swiss 2-year bonds.
One advantage we have over the street is that we CAN sit on the sidelines in cash.  We aren't forced to chase the market higher.  We won't get fired from our jobs if we don't beat the S&P 500's performance.
Martin Armstrong is always pointing out that US-centric analysts miss the effects of international capital flows on markets, and I think he has a point.  I have a bit of data to back it up, but its a bit tenuous.  I have more research to do before I can say anything definitive.
Les -
I try and be careful to talk about "monetary deflation", which I see as a pressure on the ability to get credit, describes an overall environment where more defaults & debt paydowns are happening rather than borrowings, which tends to pressure prices downward.  But since we live in a world where a lot of stuff we buy have global prices, and since other nations are doing well and they are big players these days, they get to affect the prices of our stuff, regardless of whether or not we have monetary inflation or deflation pressures.  Additionally, the government supports some sectors through spending which appears to be largely immune to change - education, medicine, and defense are three that come immediately to mind.
So price inflation of stuff China (& the emerging world) wants and can have transported to them, price inflation of government-supported medicine, defense products, and education.  Price deflation in more local stuff, like housing, local wages, and even rents.
So to summarize - if it can be shipped overseas, it is subject to international pricing pressures that ignore our monetary situation.  If it can't be shipped overseas, then it is subject to that deflationary monetary pressure.

Jim H -I agree completely with what you are saying about the US sovereign debt, where we're going, how unsustainable it is, R&R's tipping points, and all of that.  I didn't speak about the sovereign debt issue because - well, it wasn't the subject of the original post!
If you recall, the post was entitled, "Say Goodbye to the Purchasing Power of the Dollar."  When the subject is dollar purchasing power, then the discussion must center around exactly that - what things cause purchasing power to shrink.  And in my worldview,
purchasing power = stuff out there to buy / total money and credit
Holding constant the velocity of money, if you create money & credit at a faster rate than you create stuff to buy, that's inflationary.  So that's why I picked that big denominator.  Its not because I was trying to minimize money printing's impact.  It is only because total money & credit is my definition of money.
Of course, everyone can choose their own definition of money.  Just which one makes sense?
M1: currency + demand deposits; 2.4T
M2: M1 + time deposits + savings accounts + retail money market accounts; 10.4T
Total US marketable sovereign debt; 11.6T 
Total Credit: all credit money, all bonds; 56.3T
Its clear to me we have to include M2.  But that's not all.  I feel we should also add mortgage debt in the definition of "money" - all those home prices went up precisely because of a whole lot of new mortgage debt was borrowed.  That's about 10T, give or take.  And its also clear we have to include government borrowing.  That's sure inflationary.  Just look at medicare.  That's another 11.6T.  And presumably, if we include mortgage debt we should also include consumer debt - when people buy stuff with credit cards, that moves prices.  And corporations too - they drive prices higher when they borrow money and spend it on stuff.  Add it all up - that's TCMDO.
So that's why I picked TCMDO as my denominator.  All that debt represents money borrowed and then spent right into the economy.  And that drives prices higher.  We saw how that worked in the housing bubble.  More borrowed money = higher home prices (and mortgage equity withdrawls, and private schools, and hummers for everyone, etc, etc).
So in my world its the growth in TCMDO that drives monetary inflation.  Or put more simply, "how much new money was borrowed and spent into the economy on an annual basis."  And change in TCMDO over the bubble years was between 7-11% every year.  And the Fed sure wasn't doing any money printing back then.  
What's the change in TCMDO today?  About 3%.  And that's about 60% because of new US government borrowing, monetized by the Fed's money printing operations.
So having said all that, please remember I am not talking about the health of the overall economy, how happy the citizens are, whether the debt burden is sustainable, or even whether or not money printing is an excellent idea - I'm only talking about the purchasing power of the dollar.  And that is really only a discussion of supply and demand, in this case, supply of dollars.
So given all that explanation, what would you pick for your denominator in our discussion on the impact the Fed's money printing has had on the purchasing power of the dollar?  Would you still go for Total US sovereign markeable debt?  If so - could you explain your rationale?

I heartily Disagree with your assessment that the Fed doesn't have control and/or full knowledge of what their movements will create!
you use the video of Bernanke stating that there is no bubble, but as we all know…they LIE.  They have to continue to lie in order to keep the curtains from being pulled open.

i've said this before, and I'll say it again:  What would be the best way to bring about a new monetary system, in which the control of the world would be the end game? 

Answer:  destroy the current World Currency (which btw has run its course and is dying anyway), then bring about their solution.

Problem. -  Reaction - Solution

[quote=davefairtex]So to summarize - if it can be shipped overseas, it is subject to international pricing pressures that ignore our monetary situation.  If it can't be shipped overseas, then it is subject to that deflationary monetary pressure.
I come to an almost opposite conclusion here.  The things that can be shipped overseas are cheap and likely to become even cheaper as excess capacity and chasing the lowest cost labor markets assure rock bottom pricing.
The things that cannot be shipped, college education and medical care to name two, inflate at rates that reveal the true amount of domestic inflation.  
While aware that credit becomes a form of money creation, I note that in aggregate, credit is again reaching new highs… Although this the distribution of the borrowing has shifted from private (mainly shadow banking) to public, I will also note that money supply is growing, growing some more, and continually growing in an exponential fashion.
From a recent Alasdair Macleod piece:

The monthly figures for the US dollar components of Austrian, or True Money Supply, for February are now in. TMS plus excess reserves amount to the quantity of money that can be drawn down without notice, including time deposits that in practice can be instantly drawn down, only foregoing interest. This is shown in the long-term chart below. The black dotted line is the exponential track, which it followed closely until the US government abandoned all gold convertibility in 1971, and continued to do so with a few wobbles until 2008, when TMS took off and became hyperbolic; that is to say it began expanding at a greater rate than exponential. This chart is the clearest way to illustrate the accelerating debasement of the dollar. It serves as proxy for the yen, pound and euro, which are also being issued at ever-increasing rates. The move into hyper-drive was sparked by the central banks responding to the banking crisis, but today there are four reasons why money issuance will probably continue on this hyperbolic path. • The US economy is in a slump. The statistics suggesting it is stable are misleading, because the deflator severely understates inflation. A more correct assessment, in line with the inflation figures calculated by, is that the economy is contracting by perhaps 5% annually. The imperative for central banks to continue to pump new money into the economy is therefore strong. • While the hoped-for economic recovery remains in abeyance the commercial banks will pile up bad debts. The Fed will have to create new money in increasing quantities to keep them in business and to keep loan collateral values from falling and making the situation worse. For this reason alone, interest rates cannot be permitted to rise. • The government’s deficit will continue to increase because tax revenues, which depend on economic recovery, will fail to keep up with government spending. Furthermore, quantitative easing is required to keep the interest cost of government borrowing down, and to enable the Fed to fund the deficit through purchases of Treasury bonds. • Mandated welfare spending, including pensions, healthcare and unemployment benefits are accelerating. This will ensure US government spending continues to increase, dashing any hopes that eventually economic recovery will allow the government to balance its books. Put another way, these future liabilities can only be met by monetary creation.
Squint as I might, I cannot locate any monetary deflation in that chart from 2008 to present. The whole world is doing the same thing, and while we might marvel at the temporary resilience of the heavily manipulated financial markets, there has to be some sort of balance on a long-term basis between the real economy consisting of real things and the money/debt levels. That reckoning is just underway, and since there are far too many claims on the future, whether our POV is the US or elsewhere, the only question is who will the winners and losers be?  Whose claims will not be honored either by outright theft (Cyprus) or the twin processes of deflation and inflation running concurrently nipping and thieving with every passing day?

I see what you are saying… but indeed so many of the deflationary forces are being warehoused in places like the FED's "bad bank" balance sheet.  My own tendency is to look out beyond what's happening today and see where the system is going.  While a savvy currency trader might be able to make some short terms plays in the dollar vs. the yen, or vs. the Euro… I see this all as noise in the more PP-inspired perspective … which is to acknowledge and prepare for an eventual, inflationary endgame.  Japan is just beginning to really rev up their printing press… 
Chris,  I really appreciate this statement from your comment;

The things that can be shipped overseas are cheaper and likely to become even cheaper as excess capacity and chasing the lowest cost labor markets assure rock bottom pricing.

The things that cannot be shipped, college education and medical care to name two, inflate at rates that reveal the true amount of domestic inflation.


  This is one of those insights that is both very deep, and very simple and elegant at the same time.  Smaller packages, higher medical costs… the same wages.  Greece.         

 Chris -

The things that can be shipped overseas are cheaper and likely to become even cheaper as excess capacity and chasing the lowest cost labor markets assure rock bottom pricing.
I wasn't clear in my original post.  I was referring to commodities, not finished goods.  I agree with you completely about finished products.  But commodities that can be shipped overseas end up going up in price here in the US when other people around the world demand more of them.  When this occurs, we get commodity price driven inflation.  This has happened with oil, with food, with copper especially.  If you look at food, the food price inflation was particularly vicious from 2006-2008, and a lot of "inflation" that people complain about these days had its roots back in that 2006-2008 commodity price jump.  I don't think that price move was monetary - unless it was linked to the housing bubble - but there's no neat correlation.
The things that cannot be shipped, college education and medical care to name two, inflate at rates that reveal the true amount of domestic inflation.
I have a competing explanation.  Both college education and medical care are supported by the government.  In the case of college, it's government-supported debt.  In the case of medicine, it's medicare/medicaid.  I'll add defense as a third area.  Government support insulates these areas from normal market pricing and monetary pressures.  CHS makes a similar point about government-protected cartels actually causing the price inflation rather than it being a monetary phenomenon.  I find that argument compelling - more compelling that the monetary argument - because medicine and education have both increased at quite different rates.  If they both represented "true inflation" then they should have increased at roughly the same rate. Now then, about squinting, monetary deflation, and this "Modified Austrian TMS" chart. Why is it you feel that Austrian TMS is a good measure of monetary inflation?  Certainly I can't see monetary deflation in that chart either - but that presupposes its a decent measure - that it has valid explanatory power for price movements of stuff we care about over the time period we're looking at. A 100-year price chart isn't ideal for examining the impact of the Fed's policies over the past 4 years.  At a minimum I'd like to request a chart on TMS that zoomes us in closer to our discussion period today - 2000 - 2013.  My goal is not to be nit-picky, I want to understand how TMS moved during the housing bubble, how it moved during the crash, and what its doing today.  I want to understand the set of real-life price movements that TMS explains.  [Just FYI, TMS looks a bit like M2 - but my squinter isn't that good, I'd need a zoomed-in version to be sure] If that doesn't work for you, I'd be happy with pretty much any analysis you have that correlates TMS with price movements of interesting and relevant items we all care about, like maybe oil, or inflation during the 70s, or home prices, or something like that.   Preferably with net-change or percent-change y/o/y on both timeseries.  And raw data would be even more awesome.  None of my sources have "Austrian TMS" or else I'd have downloaded it and done all this on my own by now! You've been an inspiration to me for 5 years - the single most important thing I've learned from you is to trust myself, and to do my own homework.  I've done a great deal of my own homework on this issue.  I'm asking is for you to help me see your work a bit more clearly with the TMS indicator. Last point.  I couldn't agree more with your last two paragraphs.  Too many claims, too much debt, reckoning just starting, and who the winners and losers will be - as of yet unknown.

[quote=cmartenson]The things that cannot be shipped, college education and medical care to name two, inflate at rates that reveal the true amount of domestic inflation.  
Maybe I'm missing the point, but I could not disagree more with this statement as far as the two examples you site:  college education & medical care.  I am a hospital-based physician & see first hand how healthcare prices have no correlation with what medical care should cost.  Healthcare inflation has everything to do with government involvement as well as the legal system, and nothing with the true underlying costs.  The inflation of college education is a direct result of the government providing essentially unlimited credit to unworthy students.  One example would be my niece & her husband who use their college loans for their living expenses, and I can guarantee they will never repay a dime.  They have been fired from multiple jobs, have GPA's less than 2, and are pretty much delinquints all the way around…and they qualify for huge government loans.  Sound familiar?
I know without any shadow of a doubt that our current healthcare system is going to come crumbing down.  It's only a matter of time.  Things that can not be sustained, will not be sustained.  The same goes with the student loan bubble.
The Fed is like the Wizard of Oz, and is pulling & manipulating 1000 levers all at once.  Being too logical & rational oftentimes leads to incorrect conclusions when it comes to predicting outcomes when dealing with very complex systems. 
My humble recommendations are to stay very diversified in regards to own's wealth.  There are sure to be some huge surprises when the category 5 storm hits shore.

Jim H-I agree with you about "warehoused deflation".  Its tough to measure, and its something I keep in mind when looking at these overall numbers.  That's why I think my deflation claims for the eurozone are pretty easy to make - because they're conservative, since I'm using ECB numbers which are at least some part lies.  But even with those optimistic assements of the value of the loans outstanding, the eurozone is deflating.  And no surprise, eurozone GDP is dropping.  The correlation is pretty accurate.  That's why I care - I can predict GDP by watching change in total credit.  How cool is that!
I did this study on Spain and their property bubble - I'm willing to bet big money that Spain is lying big time about the losses on the banks.  Its just what they do - its what happened in Ireland, until after their "bad bank" formed, at which point they had to take the losses and presto, deflation magically was recorded by the stats trackers at the ECB.  My conclusion in one line: until those losses get resolved, Spain is screwed, and their GDP will continue to shrink until the uncertainty is over.  Again, that's how Ireland went, and their bubbles are quite similar.  And its gonna cost them 500B Euros.  If they go the "bondholder/depositor involvement/Cyprus" route, that's massively deflationary.  The right thing, at some level, but - massively deflationary.
Here in the US, our data is a lot more granular.  If you look at the Z1 mortgage numbers (some percentage of which I'm sure are lies), there's currently deflation in the US mortgage loan market.  And that's the optimistic viewpoint!  That's why most of the buyer boom is about hedge funds and cash buyers coming in to get rental income.  No loans required - because nobody can qualify given their debt levels and incomes, even at 3.8% mortgage rates.  It is really hard to blow a bubble in the same place twice.
Regarding the Fed-
Having done a bit of study of the Fed's balance sheet, I can say (assuming they aren't committing deliberate organizational criminal fraud, which I doubt - I don't think the beancounters over there want to sign up for fraud on that scale) they aren't warehousing any crap that I can see.  The big numbers are in the Treasury bonds and the Fannie/Freddie insured MBS.  The bad loans they used to have were in the Maiden Lane portfolios (and likely some in TALF/TAF/etc), but those are all run off by now.
The Fed might be at risk for losses due to lengthy duration of their portfolio if they need to suck money out of the economy quickly, but for the non-conspiracy-minded, they've just got relatively high grade stuff now.  Didn't used to be the case immediately after the crash, but it is the case today.
Unrelated -
Sometimes I get concerned that when people read articles entitled "The Dollar Will Die" they will take it literally and go short and expect the money to roll in.  I'm with Armstrong - I don't see the dollar dying until Japan, and then the Eurozone go under.  And between then and now, the buck has the possibility of rallying very, very strongly once the next crisis hits.  Heck, we're at 83 now, Spain hasn't resolved a thing.  I could see USD 90 without much difficulty if Spain has to "involve depositors" to any major extent.
My suggestion: if you make a prediction about the buck, it should probably include timeframes, percent probabilities, and if-then statements, so readers have a sense of what sort of action they should take given the posting and over what timeframe.
As a trader, I think this post is terrible trading advice for the next year or two.  My opinion is, risks of a dollar purchasing power collapse are smaller than what might happen to the Yen, or the Euro in the near future.  Now that you understand just how big that denominator is (representing money that wants a safe place to hide), perhaps you can see how Fed money printing will be totally swamped by safe haven moves from capital flight from Europe.  They have 17 trillion Euros in deposits that will be looking for a place to hide - and another 17 trillion in bond debt!  That's EUROS not dollars too!  How does 2.3 trillion USD in Fed printing over 4.5 years stand up?  Sand Castle vs Tsunami.
And Japan, if inflation really does get started there, its instant bond market crash, which either leads to default, or to truly massive money printing - not the little piddly stuff we have going on today.  BOJ would have to buy huge quantities of debt, and that would kill the Yen.  Either way, even more people flee JPY for the US safe haven.  Once again, Fed printing will be overwhelmed, and the US Treasury will be able to borrow for free.
Again, there are no certainties, but gun to my head: 10% US crisis, 30% Japan crisis, 50% Eurozone crisis within 1-2 years; 20% chance "something bad" [Spain] over the next 6 months.  Eurozone highest because Northern Eurozone doesn't care much for Southern Eurozone when push comes to shove, and it will - especially when France's property bubble pops.  (Did you know they had one?  I didn't, until I looked.  262% growth in prices since 1998.).  A few more quarters of bad French GDP numbers will definitely get everyone thinking.  I don't imagine Hollande will be the man to bring back confidence OR growth.  If anything, he's a one-man capital flight creator.
It will be a wild ride all around.  God only knows what gold will do.  Right now its rallying on eurozone issues, something it never really did before.  All I can do is watch and try to understand.
But really, I wouldn't short the buck.  Wait for the dust to settle over there first.  Again, my opinion,  not intended as investment advice, YMMV, etc.

Great discussion here.  Dave and Dryam both said essentially the same thing… here is what Dave said,

I have a competing explanation.  Both college education and medical care are supported by the government.  In the case of college, it's government-supported debt.  In the case of medicine, it's medicare/medicaid.  I'll add defense as a third area.  Government support insulates these areas from normal market pricing and monetary pressures.  CHS makes a similar point about government-protected cartels actually causing the price inflation rather than it being a monetary phenomenon.  I find that argument compelling - more compelling that the monetary argument - because medicine and education have both increased at quite different rates.  If they both represented "true inflation" then they should have increased at roughly the same rate.
And I thought the same thing when I saw Chris' post.. I agree with Dave and Dryam that the cost escalation in both areas is a result of the Gov't propping these areas with cheap money.  Is this not therefore just targeted inflation?  The cartel cannot, "cause" the inflation if the money is not available... the cartel needs the Gov't to either enforce the cartel's monopoly, provide easy money, or both.  When the government works with the banks to blow a bubble.. is that not inflation, especially if the bubble is primarily driven by cheap money credit creation like college loans?  

Finally, Dryam… your post as one from inside the medical system is very impactful.  Just like I speak up, as one inside the semiconductor idustry about the way that Japan's leading edge fiscal imprudence is going to bring down the entire world's interconnected high tech manufacturing industry via their dominance of many material supply chains… your insights help paint the overall picture of where we are headed with more clarity.  Please keep posting!       

Your points all make perfect sense now in this context… thank you very much for explaining your thinking process in such detail.  I made a very similar point to yours (don't short bonds for now) in response to Chris' recent expose on the Bond bubble… ;
I watch Japan with most fascination, since they spend 25% of their tax roll now on debt service, while having the lowest bond rates in the world.  Decidedly non-antifragile! 

[quote=davefairtex]As a trader, I think this post is terrible trading advice for the next year or two.  
Glad you've provided me with this opportunity to clarify. This article is NOT intended as short-term trading advice for making bets against the dollar.
Instead, it's an exercise in zooming way out and observing:
how far the Fed has deviated from its traditional protocol
how dependent the markets have become on ever-greater Fed liquidity
how fallibly human the folks running the Fed are
how Cyprus is giving us a great example of the extreme measures central planners will go to when things don't go as they planned
As I admit in the original post:

The dollar may strengthen for a bit versus other currencies and perhaps the financial markets
The central point of the article is that the wide arc of history suggests that as this story fully unfolds, we can expect more dollars -- and more fiat currency of all types -- to be printed. Yes, the dollar may fare better relative to other paper currencies for much of that time as the proverbial "best-looking horse in the glue factory". A flight to safety as Japan, Europe, etc stumble will likely drive short-term demand for US dollars. And Charles Hugh Smith does his best to remind us not to ignore the influence of Triffin's Paradox on the situation. But the dollar's value relative to tangible assets has a high confidence level of dropping due to further money printing -- possibly quite considerably as the endgame unfolds. That's why the article recommends parking your "safety" capital on the sidelines in the near-term (cash and other liquid assets), and then considering a program of exchanging your remaining paper-based capital for hard assets. To reiterate, this is a viewpoint on a macro trend expected to play out over the next several years (perhaps longer?), and not advice for those looking only to trade for a profit in the near-term.

I like to check in occasionally and see what's new…unfortunately it looks like this is the same dialouge from 5 years ago. At least, as non-member, there is something for me to read.
It's good to see that Dr. M and Jim are still overreacting to the use of the D-word…LR is still here pontificating about the puppetmasters…and davefairtex is still making sense.

John Hussman had something to say about the correlation of QE and the stock market a few weeks back:


From an analytical perspective, it’s striking to me that even some thoughtful economists we know have been making assertions about Fed policy that have no basis in the data. For example, we heard last week that “The number of times we actually had a bear market on our hands with the Fed easing and the economy expanding by any amount is around zero.” Wow. That’s not even true in the “active Fed” period. Consider for example March-October 2002, when the market plunged 30% despite reductions in the Federal Funds rate and the discount rate, despite positive GDP growth – two quarters into an economic recovery, and despite a Purchasing Managers Index persistently above 50. Ditto for late-2007 when a bear market had already started, the Fed was already easing and the PMI was still above 50 (despite a recession that wouldn’t be recognized until several quarters later).

Another assertion that makes me wince is the idea that “since 2009, there has been an 85% correlation between the monetary base and the S&P 500.” This is a distressing use of statistics, because two data series will always have an extremely high correlation if both series capture an uncorrected diagonal move. For example, it is equally true that since 2009, there has been a 94% correlation between beer prices in Iceland and the S&P 500. That’s not to dismiss the enormous effect that Fed policy has had on the markets in recent years, but the implication of an “85% correlation” is that if one increases, the other is sure to increase as well. There is little basis in the data for that belief. The exception is that when stocks are down significantly from their level of 6-months prior, monetary easing is often eventually capable of boosting confidence and reversing recent spikes in risk premiums.

In case you’re wondering, since 2000 there has been only a 9% correlation between the monetary base and the S&P 500, but a 99% correlation between the monetary base and the price of beer in Iceland. Why? The S&P 500 has experienced massive up and down cycles, while the monetary base and beer prices have both trended higher over time.


Looking back over the last 5 years, I think it's safe to say that the market is smarter than all of us, even Uncle Ben.

See ya in September. Cheers with an Iceland Beer....Jeff

Glad that I could play my small part of helping to make everything right in your world.  Here's a bit of what Kuntsler said today… please tell me, in your own words, why you think our own monetary masters here in the US will never run out of pretense?  

Of course, everybody should have been worried a lot sooner than last week because the basic operating system of global banking is accounting fraud, and has become that stealthily, insidiously, for about fifteen years now. Nothing is what it appears to be anymore. Compound interest has not really been working since 2008 because the world can't increase its energy production enough to generate the additional surplus wealth needed to cover the aggregate interest due all around the world. 
        What remains are games of musical chairs, Ponzi schemes, frauds, swindles, stonewalls, ruses, ploys, scams, dodges, bluffs, subterfuges, QE martingales, interventions, rehypothecations, pretenses and other modes of evading or disguising reality. The reality is that there is not enough real wealth to go around, certainly not enough to cover the giant web of obligations that masquerades as "money." So, now whenever somebody or some company or government or entity is called upon to put up or shut up, the danger arises that the whole web will disintegrate, since all the participants are broke. You want "your" money? Wait three days. Make that four days. Check that, let's say next week. How about two months from now? Oh, forget about it.... No wonder folks are spooked.
     This is really getting out of hand. That's why the ills of the poor, untoward, tiny crypto-nation of Cyprus have got everyone's knickers in a twist. Cyprus is everybody writ small. Cyprus ran out of pretense. It's banks are toast. It can't take care of itself. It is too poor to be a "modern" economy.

Adam -I really did like most of what you said regarding your bullet point list.  Its a wide-ranging perspective, and one I largely agree with.  If the title had been something like "Central Banking: We're Not in Kansas Anymore, Toto" I wouldn't have had an issue.  But the title sets the whole tone, and points the mind at the conclusion of the piece, which was effectively Fed Printing Will Hammer The Buck: Next Stop Crazytown [*except it might strengthen "for a bit" somewhere along the way there].
One thing you might consider is that different people interpret "short term" and "long term" differently.  I absolutely don't think 2 years is "short term", for instance.  Neither does the IRS!  Might I suggest - actual timeframe ranges rather than "near term" so people have a better idea of what you really are thinking, instead of having to guess "does he mean IRS capital gains long term, or my-plan-for-retirement long term?"
One last point.  Currency movements are not simply about short term profits and/or trading.  I've lived in foreign countries for extended periods of time, and currency moves really do have impact.  When you arrive somewhere and the buck is $1=35 and two years later the buck is only $1=29 (a 17% move) and in between its bounced all around that area, that's Real Money.

Jim -Agreed the money has to be available (borrowed/monetized, and spent) for the price inflation to take place in the area.  Currently all those government-guaranteed loans are being borrowed and spent by all those students.
Thought experiment: can we predict what happens to education costs once the government stops guaranteeing all those student loans?  Education prices will either a) increase, b) stay the same, or c) decrease.  Any guesses as to which one happens?  Lets see, with less mortgage money being created, home prices fell.   So with fewer student loans…and the same number of schools…
If the answer you picked is c) education prices will drop, then we agree - the ever-rising education costs do NOT represent the true level of overall monetary inflation pressure, but rather simply reflect the outsized contribution from money created by the government loan guarantees.  CHS has some great charts on administration:professor ratios and how they've continually bloated up over the years.  No pressure to cut = excessive overhead, admin bloat, and so on.
Same thing for medicare.  My God, salaries of hospital administrators of mid-sized "nonprofit" hospitals up in the $3M range?
I too enjoyed hearing from our friendly Doctor.  My older sister is a neurosurgeon, and she tells tales of unnecessary spinal fusion surgeries (paid for by insurance, or Medicare) that make lots of money for the surgeon but where the outcomes are really not great for the patient, but I don't feel I can speak with the same level of authority since I just hear them secondhand.
Always ask what the outcomes are, that's what I learned from her.  But I digress.