Flooding The World With New Currency Is Getting Old

A person begins heavy drinking in order to get drunk and stay drunk. Eventually, unless he stops and deals with reality, he drinks just to stay sane—until his health collapses. Likewise, a person may get high from heroin but later need the drug just to stay functional. Creating continual flows of new currency “stimulus” works in a similar fashion on the economy. Thus far, the Fed’s (now slightly reduced) monetary stimulus has kept the stock market rising.

But there are signs that the drug may no longer work to get Wall Street high. According to the Financial Times, “Stocks suffer worst January since 2010.”

Global equities recorded their worst start to a year since 2010 as turmoil in emerging markets left nervous participants seeking safety in highly rated government bonds, the dollar and the yen.

At the close of New York trading, the FTSE All-World equity index was down 4.1 per cent since the start of 2014, its worst January performance since a 4.4 per cent decline four years ago. On Wall Street, the S&P 500 fell 0.7 per cent on the day at 1,782 – leaving it 3.6 per cent down over the year so far, its first monthly loss since August.

I’ve already written about the IMF begging the Federal Reserve to not start “tapering” any further. But I now wonder if that is really the problem. Maybe Christine Lagard really wants the Federal Reserve to increase the flow of new money.

Only a couple of days ago, Ambrose Evans-Pritchard wrote of how “the world risks deflationary shock.”

The Fed is surely courting fate with $10bn of bond tapering each meeting into the teeth of incipient deflation, as Minneapolis Fed chief Narayana Kocherlakota keeps warning.

No doubt, if the stock market slides, the effect will be deflationary. Evans-Pritchard insists deflation is disastrous and begs for more creation of new currency.

But the crash is going to come sooner or later. And the later it comes the harder it will be. Surging new money into the economy is not an increase in wealth. Some have benefited greatly while the rest of us have simply tread water in a stagnant economy. Obama’s trickle-down economics never actually trickled down to anyone. The smart and lucky people will find a way to get out of the stock market at the right time (or already have). The rest will watch the wealth evaporate in a crash.

The signs in domestic retail are not good either. When the numbers for Christmas shopping were disappointing, economists decided it must have been because more people were purchasing online. But now, it turns out, that Amazon’s business was not that great during the holidays.

This may all be a false alarm. I can’t predict the timing of a crash because no one can. But the inflationary boom always creates the conditions that cause the deflationary bust.

What goes up must come down.

The good news is that deflation, despite Evans-Pritchard’s warnings, will mean lower prices and an increased standard of living once we get the bankruptcies out of the way. Withdrawal is painful and so is detox, but they are the only way to a healthy life.