Michael Pollaro: It’s basic cause and effect. Monetary inflation causes economic
busts. And the larger the monetary inflation, the larger the bust. As
brilliantly explained by the Austrians (see here),
monetary inflation distorts interest rate and price signals. As a
consequence, businesses embark on projects and consumers make purchases
and/or investment decisions that turn out to be mistakes, malinvestments
if you will, that sooner or later must be liquidated. An apparent boom
turns to bust.
Founded on Chairman Bernanke’s QE-based
money printing programs and now increasingly being driven by private
bank money creation too, the US money supply is booming. TMS2 (TMS for True “Austrian” Money Supply), THE CONTRARIAN TAKE’s
broadest and preferred US money supply aggregate, posted another double
digit year-over-year rate of increase in December, this one coming in
at 11.2%. Give or take one or two basis points, that was the 49th
consecutive month that TMS2 posted a double digit year-over-year rate
of increase. This kind of monetary largesse says to us that an economic
bust, and a pretty big one is in the offing. Indeed, the last time we
saw anything even approaching a 49-month double digit rate string was
the 36-month string that gave us the housing boom turn bust turn Great
Recession.The question before us is this: Are we looking at another Great Recession? We think the answer to that question is yes. In fact, we think we are staring at the next Great(er) Recession.
Have a look at the following two charts which compare our latest installment of monetary inflation – call it the Bernanke boom-bust-to-be in honor of its founder – against the monetary inflation that produced the tech boom-bust at the turn of the millennium and the monetary inflation that gave us the housing boom-bust turn Great Recession of 2008-09. The first chart plots the year-over-year rate of change in TMS2, cycle trough to trough. The second chart plots the cumulative change…
These graphics are telling. The current monetary inflation that is the Bernanke boom-bust-to-be is already multiples larger than the monetary inflation that produced the tech bust and, at this point in the boom-bust cycle, even larger than the inflationary surge that gave us the housing bust turn Great Recession. And it’s still going strong.
Certainly this says bust, but does it say the next Great(er) Recession?
Have a look at the following analog table, with special attention to the Bernanke boom-bust-to-be relatives versus the housing boom-bust…
Now in its 53th month, the Bernanke led monetary inflation is sporting a cumulative increase of 71%, 500 basis points greater than the cumulative increase seen in the 53rd month of the housing boom-bust. And in stark contrast to what we saw in the 53rd month of the housing boom-bust, this Bernanke led monetary inflation seems to be picking up steam. The latest TMS2 reading showed monetary inflation growing at an accelerating 11.2% year-over-year rate. In the 53rd month of the housing boom-bust cycle the year-over-year rate of monetary inflation was a smallish and quickly decelerating 5.3%. Said differently, at this point in the boom-bust cycle, the Bernanke led monetary inflation is, in dollar terms, not only 1.7 times larger than the monetary surge that gave us the housing bust turn Great Recession, but it’s a surge that is currently running at 2.1 times the rate seen in the housing boom-bust. And to top it all off, that rate differential seems to be blowing out.
If these trends continue much longer, we think the next Great(er) Recession is virtually guaranteed.
What about a precipitous fall in the rate of monetary inflation negating this thesis? Sure it could happen, but we have our doubts. You see, even if private banks cease their money printing activities, activities that are currently running at a robust year-over-year rate of 15.2% (see the first table), there is still a near certain swath of inflation to come. The reason: Chairman Bernanke’s latest QE program is poised to add $85 billion a month to the money supply until he and the rest of his FOMC team deem the economy healthy enough to survive without it. That means an annual rate of monetary inflation of roughly 10% (on a current TMS2 footing of $9.3 trillion) until further notice. And if private banks continue their money printing ways, instead of a precipitous fall in the rate of monetary inflation we could be looking at a precipitous rise.
A Great(er) Recession in the offing? Yes, we think it’s rapidly being baked in the cake.
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