The Fed Must Inflate


The Fed is busy doing everything in its considerable power to get credit (that is, debt) growing again so that we can get back to what it considers to be “normal.” But the problem is that the recent past was not normal.


Somewhere right around 1980, things really changed, and debt began climbing far faster than GDP. And that, right there, is the long and the short of why any attempt to continue the behavior that got us to this point is certain to fail.

It is simply not possible to grow your debts faster than your income forever. However, that’s been the practice since 1980, and current politicians and Federal Reserve officials developed their opinions about “how the world works” during the 33-year period between 1980 and 2013.

Put bluntly, they want to get us back on that same track, and as soon as possible. The reason? Because every major power center, be that in D.C. or on Wall Street, tuned their thinking, systems, and sense of entitlement, during that period. And, frankly, a huge number of financial firms and political careers will melt away if and when that credit expansion finally stops. And stop it will; that’s just a mathematical certainty.

Total Credit Market Debt (TCMD) is a measure of all the various forms of debt in the U.S. That includes corporate, state, federal, and household borrowing. So student loans are in there, as are auto loans, mortgages, and municipal and federal debt. It’s pretty much everything debt-related. What it does not include, though, are any unfunded obligations, entitlements, or other types of liabilities. So the Social Security shortfalls are not in there, nor are the underfunded pensions at the state or corporate levels. TCMD is just debt, plain and simple.

As you can see in this next chart, since 1970, TCMD has been growing almost exponentially.

That tiny little wiggle happened in 2008-2009, and it apparently nearly brought down the entire global financial system. That little deviation was practically too much all on its own for the markets to handle.

Now debts are climbing again at a quite nice pace. That’s mainly due to the Fed monetizing U.S. federal debt just to keep things patched together. As an aside, based on this chart, we’d expect the Fed to not end their QE efforts until and unless households and corporations once more engage in robust borrowing. The system apparently needs borrowing to keep growing exponentially, or it risks collapse.

One could ask why credit can’t just keep growing. But there are many reasons to believe that the future will not resemble the past. Let’s start in 1980, when credit growth really took off. This period also happens to be the happy time that the Fed is trying (desperately) to recreate. Between 1980 and 2013, total credit grew by an astonishing 8 percent per year, compounded. I say “astonishing” because anything growing by 8 percent per year will fully double every 9 years. So let’s run the math experiment and ask what will happen if the Fed is successful and total credit grows for the next 30 years at exactly the same rate it did over the prior 30. That’s all. This is nothing fancy, and it is simply the same rate of growth that everybody got accustomed to while they were figuring out “how the world works.”

What happens to the current $57 trillion in TCMD as it advances by 8 percent per year for 30 years? It mushrooms into a silly number: $573 trillion. That is, an 8 percent growth paradigm gives us a 10-fold increase in total credit in just 30 years:

For perspective, the GDP of the entire globe was just $85 trillion in 2012. Even if we advance global GDP by some hefty number, like 4 percent per year for the next 30 years, under an 8 percent growth regime, U.S. credit would be twice as large as global GDP in 2043.

If that comparison didn’t do it for you, then just ask yourself: Why, exactly, would U.S. corporations, households, and government borrow more than $500 trillion over the next 30 years?

Rothbard, Murray N.

The total mortgage market is currently $10 trillion, so might the plan include developing an additional 50 more U.S. residential real estate markets?

So perhaps the situation moderates a bit, and instead of growing at 8 percent, credit market debt grows at just half that rate. So what happens if credit just grows by 4 percent per year? That gets us to $185 trillion, or another $128 trillion higher than today — a more than 3x increase. Again: for what will we borrow (only) $128 trillion for, over the next 30 years?

When I run these numbers, I am entirely confident that the rate of growth in debt between 1980 and 2013 will not be recreated between 2013 and 2043. But, I’ve been assuming that dollars remain valuable. If dollars were to lose 90 percent or more of their value (say, perhaps due to our central bank creating too many of them), then it’s entirely possible to achieve any sorts of fantastical numbers one wishes to see.

For the Fed to achieve anything even close to the historical rate of credit growth, the dollar will have to lose a lot of value. This may in fact be the Fed’s grand plan, and it’s entirely about keeping the financial system primed with sufficient new credit to prevent it from imploding.

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commented 2013-12-01 21:57:06 -0500 · Flag
A.R. writes:

Spartacus writes: As for Obama, he is one sick, Debased, Racist tool, the fact that this man could harbor this kind of Open animosity (victimology) despite the enormous care, love and privilege that his White Grandparents provided is stunning…

He may have received care and love from his white progenitors, but he also received a perfect indoctrination in to the “Progressive” (i.e. Leftists, collectivist, Marxist) mindset and dogma. They helped make him what he is today…a vapid Socialist.
commented 2013-12-01 21:50:19 -0500 · Flag
Ben writes:

I agree about inflation. I said it was low and later described it as not big which is what gold bugs were expecting. I agree that inflation is probably in the 8-10% range versus the
commented 2013-12-01 21:49:31 -0500 · Flag
Spartacus writes:


I think your analysis is spot on, MINUS comments about non-existent
inflation, I do Not Share your views on this aspect, I am watching
the purchasing power of my savings be eviscerated ! who are you
going to believe ? Bernake or your own Lying EYES !

The Game being played is Intellectually & Morally Bankrupt
but it is the Reality at this moment in time.

For the 2nd time in my Life, I have watched the Government
completely obliterate my knowledge base, 1st in 2008 when they
decided that the Rules of Gravity No Longer Apply and that they
will make Water Run Up Hill, which they have Now Done for 5 years,

Now that Obama-care has been revealed, all the decisions that
I have made the past 20 years managing my Healthcare have been
nullified, relationships with Dr.’s and Medical Centers will be terminated.

Anyone who Does Not see what is transpiring before them in
Broad Daylight, is a Mediocre thinker, at Best, this is Totalitarianism
masquerading as democracy with individual liberties.

As for Obama, he is one sick, Debased, Racist tool,
the fact that this man could harbor this kind of Open animosity
(victimology) despite the enormous care, love and privilege that his
White Grandparents provided is stunning, this Guy is a Full
Blown Psychopath !

He is incapable of course correction, so to answer you question,
the Game will go on and those who are Most Patriotic will continue
to absorb the greatest punishment meted out by the system,
Join the parade to oblivion or be crushed !

how comforting and enlightening.
commented 2013-12-01 21:45:54 -0500 · Flag
Ben writes:

Great question Victor.

I have been expecting both to continue to go down with an occasional bounce
so long as inflation stays low, the Fed is able to keep interest rates at or
below the rate of inflation, the Fed continues to fund the profligacy of our
Congress, and the dollar looks no worse than other currencies. A fifty
percent or more retracement in the price of gold is not unusual after a
significant rise as we had from $250 to $1900. Gold is not an investment
that earns income and searching for earned income is the name of the game

The mistake gold bugs have made is that they believed big increases in the
supply of dollars would create big inflation thus causing a big rush to gold
as insurance against a big devaluation of the dollar. They neglected to
anticipate the huge decrease in the velocity of money caused by our
anti-business fiscal policies and our shift to an economy run on credit
rather than savings. Finance is a far bigger part of our economy today than
ever before thus decreasing the value and role of investing time and money
in the making products to make profits. The so-called robber barons made
their fortunes making products that people wanted, not by buying and selling
assets as do the non-producers like Buffet. Big bankers don’t need to lend
money to make money anymore. They can just be traders, speculators, and
manipulators of markets.

We all know that this house of cards will fall. We just don’t know when and
so far that event is farther in the future than most had anticipated. I
think the wild card is not so much inflation from helicopter Ben dropping
dollars as it is the reserve currency status to the dollar. Almost no one
trusts us as a country anymore and the dollar is only backed by the full
faith and credit of our government, they presently being a bunch of
corrupted liars and cheats. Whether or not the world loses all faith in us
may well be dictated by the outcome of the 2014 election.
commented 2013-12-01 21:43:03 -0500 · Flag
Vic writes:

Why is silver and gold taking a beating while money is being printed like
mad??! Tired of buying commodities to watch them go down!
commented 2013-12-01 21:42:30 -0500 · Flag
C.R. writes:

Agreed. The inflation-deflation debate is a false one, we’re guaranteed
both: STAGFLATION which will make the 1970s version look like a preschool lunch break.
commented 2013-12-01 21:41:16 -0500 · Flag
Spartacus writes:

Obamacare is chump change compared with the systematic FRAUD (ponzi scheme) that has been put on the citizens of the U.S. since 1980.
I used to distinguish between people who had Wealth pre-Greenspan, and those whose money was simply a function of the corrupt Federal Reserve policy’s after Greenspan took over the milking operation.
I know, lets go back to Clintonomics, ‘I seem to re-call that the economy was pretty good under Bill Clinton’ , sure thing Mr. McGoo.
It has ALL been predicated on kiting assets higher with unsustainable leverage, look for the US stock Market to make a New High.
And who has been the cheerleader for this Entire kiting scheme, Why none other than Uncle Buttons by way of Nebraska.