Inflation as a deliberate instrument of state

If you follow this blog, you know I contend that deliberate inflation is necessary to the survival of a fiat monetary system thus it is necessary to the survival of the state that imposes the system on society. I also contend that inflation is exponential in character thus it conforms to the law of diminishing returns. If I am right, where do we find evidence?

If inflation is inherently necessary and it is exponential in nature, it follows that the state must manipulate interest rates progressively lower in order to induce ever greater degrees of inflation into the system$TYX&p=M&b=1&g=0&id=p25250323038

(the chart above depicts the trend of the long term 30 and 10 years US bond – however, today banks have the privilege of borrowing from the Fed at 0%)

But inflation being exponential, it follows that you always need greater degrees of inflation in order to obtain the same degree of GDP expansion. Thus, if I am right, as interest rates trend lower, GDP expansion is fairly constant…

FRED Graph
So, as interest rates drop ever lower (today we are at unimaginable lows), GDP only really potters about between 1% to 3%  yoy with your occasional peak at 6%
So the question we are faced with today is:
Since interest rates are today at historic lows… what are we going to do for an encore?
I grant you that the past year has brought us great creativity from the monetary authorities that have been able to keep it together… apparently… and so it is that today banks can borrow from the Fed at 0% and then lend to industry or individuals at anywhere between 4 to 6 per cent. How’s that for a sweet deal?
You say banks cannot find worthwhile borrowers? No problem. Courtesy of our own Fed, not only can the banks borrow at 0% but… get this… they can use this money to deposit it with the Fed… at interest… that’s right! The Fed gives the banks money for free and then gives them more money to keep that same money with the Fed!!!
The banks can’t loose.
Along with the fact that our governments deliberately allow the banks to disregard mark-to-market accounting rules, banks can now carry worthless assets on their balance sheets and still retain investment grade ratings from the major rating agencies. This allows the banks to do two things. First, the investment grade rating allows them to attract more funds from institutions such as insurance companies and pension funds (your insurance and your pension money because fund managers are not paid commissions if they sit in cash – they only get paid if the funds are invested). Second, banks can be free to not pursue repossessions in real estate thus allowing borrowers to live rent free if they so choose. And many have chosen to do so. By not pursuing repossession, banks can avoid to recognize the real value of the asset thus it can claim the asset is still worth what the banks valued it at during the housing boom.
Isn’t the inflationary imperative grand?
You may ask why our governments should be pursuing such seemingly aberrant policies? The reason is horrendously pedestrian. Governments are trying to buy time.
The question is: buy time for what?
People less cynical than I will say governments are trying to buy time waiting for the economy to turn up.
My response to that is as follows. Government has manipulated interest rates lower for the past thirty years and we are today at zero. All we have to show for it is an economy that “progressed” at an average of 3% yearly. Great! But now that interest rates are at ZERO how much lower can they go? So far, the Fed is doing the unthinkable. So far, the Fed is doing the criminally unthinkable. The Fed is paying the banks to take money. This is truly Kafkian. What’s next? Paying consumers to take loans? Then why not just give a government salary to every man, woman and child and lets all be rich!
No! The sad truth is that interest rates have nowhere to go but up. So, considering the stimulus that thirty years of declining interest rates have contributed, what can we expect from rising interest rates?
So, why are governments buying time?

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One Response to “Inflation as a deliberate instrument of state”

  1. David W. Lincoln Says:

    As long as chicanery is allowed, we will continue to see the shell game played by the ethically dubious.

    When a business says an asset is worth x dollars, when it is worth maybe 10% of x, that business is punished accordingly.

    So, why are banks allowed to get away with it?

    As Shakespeare said, something is rotten in the state of Denmark.

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