The Nomad Economist: Too much Money will One Day be Followed by Tears

The Nomad Economist
Premiered Jan 13, 2021

There were a number of inauspicious records set in 2020 and the impacts will continue to reverberate through the economy in the future.

The Federal Reserve created money at a record rate. It also increased its balance sheet to record levels. And not to be outdone, the US government set a budget deficit record.

These three records were actually linked. The money printing and expansion of the Fed balance sheet were necessary to monetize the massive federal debt. And there is no sign that anything will be different in 2021.

When confronted with the reality of the ever-expanding money supply and the skyrocketing debt, most people just shrug. But all of this money printing isn’t without consequences. As economist Pascal Hügli put it, the results are “perfidious.”

Although monetary policy had been ultra expansionary even well before the virus hit the world, central bankers are currently upping the ante once again. While it took the Federal Reserve almost six years to create 3.5 trillion in new US dollar liquidity, this time around it took only ten months to unleash a monetary tsunami of $3 trillion with the projection of at least another $1.8 trillion next year.

While these astronomical numbers don’t really speak to the general public anymore, another astonishing fact resonated with them: after March 2020 alone, the US banking system is reported to have increased the M1 money supply by 37 percent. What this means in plain words is that 37 percent of all outstanding dollars and dollar bank deposits that have ever existed have been created this year. If one bears in mind that monetary aggregates like M0, M1, and M2 today no longer give an accurate account of all the money in the system because they do not account for the shadow banking’s collateral multiplier, one can only guess that the actual extent of monetary expansion must be a lot greater.

Fiscal Policy as Disguised Monetary Policy.

The swaths of liquidity created by the world’s central banks are complemented by fiscal measures on the part of governments. Here, too, the US government is leading the way, having launched stimulus packages in the trillions, and other countries are also eagerly going into debt to counteract the recession. Because of all this borrowing, by the end of this year, global debt levels are expected to reach a new record of $277 trillion, according to an estimate by the Institute of International Finance. This would amount to a debt-to-GDP ratio of 365 percent.

In politics, it is currently debated whether monetary or fiscal policy should have precedence. This debate is just a mirage, though. Today fiscal policy in the form of government stimulus is monetary policy, after all. Government debt has become the most popular and most sought-after asset in monetary policy actions. Fiscal policy has thus mutated into monetary policy in disguise as newly created debt is increasingly taken in by central banks and siloed in their balance sheets. The inevitable consequence is that the quality of their balance sheets—and thus the quality of our money—is continuously deteriorating. The Consequences of Too Much Money.

To have central banks conduct ever more expansionary monetary policy based entirely on debt is politicians’ go-to solution today, as it marks the path of least resistance. Creating ever more money is convenient because this way virtually any interest group can be financially sedated.

The obvious yet perfidious result of this: too much money is sloshing around looking for yields. Governments like Spain’s or Portugal’s, which are hardly known to be model boys when it comes to financial prudence as reliable debtors, are currently able to borrow money at zero cost. This seems to be completely nuts if one bears in mind that during the European debt crisis their high borrowing costs—in Portugal’s case up to 14 percent for its ten-year bond—forced the European Union to approve multibillion-euro bailout packages.

https://www.youtube.com/watch?v=BJZ7ZIspg3k


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