247Bull.com Editor: When the US Federal Reserve launched its first programme of Quantitative Easing “QE1” in November 2008 its objective was to prevent a catastrophic financial collapse by saving the major investment banks. Subsequent stimulus measures have also helped to recapitalize banks and other financial firms, however they have failed to generate the desired level of inflation (around 6% which will be reported as around 2 or 3%). Going forward we can expect the Fed and other central banks to find ingenious ways to bypass the banks and inject fresh stimulus money directly into the economy. Unless they are able to get money into the hands of consumers they won’t be able to spur money velocity and inflation will remain subdued.
There are certain major trends, be it in finance or governance, that only go in one direction, until they can’t. For anyone paying attention to the behind the headlines maneuvering of the central banks and their indebted governments, 2012 was a year of great clarity. There is simply no political will anywhere in the world to deal with the current problems of unsustainable sovereign debts and a largely insolvent banking system. Global central bank money creation will continue unabated, until it can’t.
So where is all of the price inflation? Contrary to the irrelevant CPI calculation, there was quite a bit. Ask anyone who had to purchase food or energy last year. (In 2012, Brent crude posted its highest average annual price, netting OPEC a tidy $1trillion.) But the reality is, 2012, like every year since 2008, was largely about charging the inflation battery. The Zerohedge plot of deposits to loans below really tells the tale.
Difference between total bank deposits and loans ($ BN)
Chart courtesy of Zero Hedge
In 2008 a fundamental disconnect between the two occurred and has been growing ever since. Eventually this stored energy will be released in the form of monetary devaluation. Perhaps the financial sector will continue to be successful in directing newly minted money into the equity and bond markets and away from commodities, but don’t count on it. It’s impossible to say when and where the world’s ever expanding digital monetary system will first head off of its own fiat cliff. True market forces are like nature, eventually they have their day, and when they do, it’s quite the destructive process.
Even the central bankers are beginning to accept this reality. Although they’ve been emboldened by how much monetary conjuring they’ve been able to get away with so far, nothing has been fundamentally resolved. This recent Reuters’ headline really tells the tale: Central bankers rethink their devotion to slaying inflation. Central bankers don’t battle inflation, they are its source. But the real message here is that the central banks know price inflation is coming and that they won’t be able to stop it. Instead they need to get out in front of it policy-wise. It will soon be necessary to explain why a rapidly declining standard of living is necessary to “save the economy.”