I don’t know the man personally. Not that it would make any
difference; denizens of the swamp within the Beltway usually present well, and
a brief meeting rarely allows you to penetrate someone’s social veneer. But I’m
pretty confident that if we dined together it would be tense and unpleasant.
We’d have no common ground, after the obligatory two minutes on the weather and
the state of the roads.
He’s a
lawyer, has been a Fed Governor for five years, and appears to be a “steady as
she goes” so-called moderate Republican. He’s a lifelong Deep State player. But
let’s not waste time psychoanalyzing this bureaucrat; he’s just a cog in the
machine. And the machine, at this stage, has a life of its own.
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Many of my friends in the alternative press deplore Trump’s
appointment of yet another conventional money printer. They were hoping for a
“hawk,” who would start liquidating the Fed’s $4.5 trillion balance sheet, and
raising interest rates. And they’re right. That $4.5 trillion of super money
has driven stock, bond, and real estate prices to insane levels. And today’s
artificially low interest rates are discouraging saving, and encouraging people
to live above their means.
In an ideal world there would be some radical changes. The best
thing for the US in the (famous) long run is to go “cold turkey.” To abolish
the Federal Reserve, fire its thousands of employees with their worthless PhDs.
Return to 100% reserve banking with a strict separation of demand and time
deposits. Depoliticize money by using gold, not Federal Reserve Notes. And
default on the national debt, which is rewarding crony capitalists, and will
turn future generations of Americans into serfs. And massively deregulate. And
abolish the income tax, while cutting spending 90%. Etc. Etc.
The chances of that happening are exactly zero. So let’s talk,
instead, about what is going to happen.
We’re going to have much higher levels of inflation. The new Fed
Chair will open a monetary hydrant, at least if he doesn’t want to be hung from
a lamppost by his heels. But I’m quite pleased Trump has appointed the guy.
That may sound shocking. Let me explain why.
A sound economist would work to stop money printing and let
interest rates find a market level. But that would precipitate a deflationary
collapse after decades of monetary debasement. And the powers of darkness would
again be able to paint sound policies and the free market as the cause for the
problem, when actually it’s the only cure for economic problems.
From an
economic point of view an inflationist like Powell is a disaster. It’s too bad
he’s nominally a Republican, since for some reason they’re associated with the
free market. As is Trump. Wearing our speculator hats, we’d likely be better
off under Hillary—even more inflation, even more distortions to capitalize on.
Even wearing our economist hats we might be better off under her, because if
the whole rotten structure collapsed on her watch, it might discredit her ideas
for at least a few years. But, as ever, I suspect I’m being too optimistic.
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For decades—at least since I started following these things in
the early ‘70s—free market economists have argued whether the Fed’s
ever-increasing money printing would result in a deflationary depression, or a
hyperinflationary depression.
As to why a catastrophic depression is inevitable—despite the
fact most people try to produce more than they consume, and despite the fact
science and technology are advancing exponentially—is beyond the scope of this
brief article. I refer you to these pieces (here and here) I’ve done in the
past on that topic.
It will be a deflationary collapse if the Fed doesn’t continue
buying debt and creating new dollars. And a hyperinflation if they do.
If they stop printing, the banks would fail, and the public
would lose a good portion of their deposits. The economy would slow down
considerably, causing indebted corporations to default, unemploying their
workers. Tax revenues would fall off, and governments wouldn’t be able to fund
welfare programs. The stock, bond and real estate markets would collapse,
wiping out the asset base of rich people.
It would be a huge social upset. But most of the real wealth in
the world would still exist, it’s just that a lot of it would change ownership.
And the dollar would still exist—there’d just be many fewer of them. Production
and commerce could continue. At least until the cries go out for the government
to “do something.”
But hyperinflation will be an even bigger disaster. And that’s
what we’re going to get. Money will drop radically in value, making production
and consumption much, much harder. Foreigners will dump trillions of them,
sending them back to the US in exchange for real wealth. There’ll be even more
unemployment than with deflation. But the profligate—those who’d borrowed a lot
to live above their means—will be rewarded, while prudent savers will be
punished. Shaky, overindebted corporations might survive, while productive ones
with fat balance sheets will lose. Worse, governments will have their debts
erased, and therefore might even grow in power. They’ll definitely “do something,”
they always do in time of chaos. Stocks and real estate could first crash, then
soar as people try to get out of dollars and into assets. This will benefit the
rich, at least in relative terms.
At this late stage either type of depression will result in not
just financial and economic, but in social and political chaos. It won’t be
fun. In a depression everybody loses. The winners are just those who lose
least. And a few speculators that get lucky. Hopefully we’ll be among them.
Given a choice—and they have a choice, based on whether they
keep printing or not—the government and the Fed will definitely veer towards
more inflation. Everyone in office just hopes to kick the can down the road for
at least one more cycle.
Frankly, I was surprised that things didn’t go over a cliff in
2008 when we entered this most recent hurricane. And I’ve been surprised that
things have held together as well as they have during the long “eye of the
storm.” But governments and central banks around the world have already printed
up scores of trillions of new currency units, and reduced interest rates to
zero and below. What can they do when we go into the trailing edge of the
hurricane?
My guess is that they’ll repeat their actions so far. Print more
money and try to take interest rates even lower. The result will be
hyperinflation, or close to it. And lots of new government controls of all
types.
Why is this—strictly relatively speaking—good news for us?
Because more money printing means more bubbles will be created. And while
bubbles are the enemies of a sound economy, they’re the friend of the
speculator. The current mania in Bitcoin and other cryptocurrencies is an
example.
In particular, I’m looking forward to a bubble in commodities in
general (most are down 50% from the previous peak in 2011), and precious metals
in particular. And not just a bubble, but a hyper bubble in mining stocks.
So, if I’m right, in the next few years we could stand to make a
fortune while the world is falling apart. I know—that sounds harsh to be eating
caviar while the masses are forced to grub for roots and berries. But, as Ayn
Rand said when asked what you should do about the poor: “Just make sure you’re
not one of them.”
Editor’s Note: Regular readers know Doug’s a
legendary speculator. But what you might not know is he’s identified
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