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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Doug Noland
April 14, 2010
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Inflationism today dominates economic doctrine and policy - and has so for years.  The view holds that the Federal Reserve’s manipulation of the general price level moderately higher each year (say, a steady 2 to 3%) helps grease the economic wheels - while underpinning the value asset markets and system debt.  Federal Reserve manipulation of interest rates and Fed market interventions, as necessary, remain fundamental to ensuring requisite Credit system expansion and systemic stability.  The Greenspan and Bernanke Federal Reserve convinced themselves that asset price inflation should be disregarded, as long as consumer prices remained well-contained.  And their strategy for how they would deal with Credit system and asset price dislocations was communicated quite explicitly to the markets:  “mopping up” would entail aggressively inflating system Credit as required to buttress asset prices, the general price level, and debt market stability.  Deflation was THE scourge to be avoided at all cost.

The “inflationism” intellectual and policy doctrine was instrumental in forging a historic market distortion:  the perception of mortgage Credit “moneyness.”  Inflationism is the root cause of the recent crisis – and a rather lengthy list of debacles throughout history.  Today, the same dangerous incongruity exits that throughout history has propped up inflationism when apparent failings should have led to this dogma’s collapse:  Instead of inflationism being recognized as the problem – the force behind the boom and unavoidable bust - more extreme inflationism is instead viewed as the solution.  There is today virtually universal support for policies that would incite a rapid increase in stock market and real estate prices; rising employment, incomes and spending; and a brisk economic recovery.  The common view today is that the greatest risk is to fail to inflate sufficiently.  

It’s fine that the Financial Crisis Inquiry Commission is holding scores of hearings.  But it is battling the last war.  AIG, the Wall Street firms and the banks will not be the instigators of the next crisis.  Today’s excesses and market distortions are not conjoined with “Wall Street Alchemy” or the “moneyness” of private-sector Credit.  Inflationism and its market distortions are not these days promoting ridiculous behavior by our financial sector executives.  Today’s abuses and market distortions go to the heart of “money.”

The greatest danger posed by the Wall Street/mortgage finance Bubble was that its bursting would incite a policymaker response with the potential to destroy the Creditworthiness of our entire Credit system.  Gross lending and speculating excesses destroyed the “moneyness” of private-sector mortgage Credit.  Now, aggressive “mopping up” policies that inflate Trillions of government debt securities, obligations and guarantees nurture new market distortions and Bubble Dynamics.

Despite alarming financial vulnerability, state and local governments continue to pile on debt at incredibly attractive terms.  In spite of underlying financial and economic fragility, junk debt issuance is running at record pace.  Inflows continue to inundate bond funds - at home and abroad.  Estimates now put hedge fund asset as high as $2 Trillion by the end of the year.  Retail stocks are not far away from record highs.  Risk premiums are narrow throughout.

The massive issuance of government “money” has always been inflationism’s trump card.  It’s now in play, and this latest round of inflationism is again profoundly distorting market perceptions.  “Too big to fail” has broadened from large financial institutions to encompass the entire system.  Today, GSE obligations and municipal debt enjoy “moneyness” only because of the markets’ belief that Washington will not tolerate disruptions in these key markets.  Risk premiums throughout the corporate debt market have collapsed on the back of the view that massive stimulus ensures economic growth and strong company balance sheets.  Throughout the risk markets, prices are buoyed by confidence that the Fed will restart monetization operations in the event of any market liquidity disruption.  Hedge funds and other speculators are thriving once again as they successfully exploit Washington’s inflationary policymaking.  Washington further disrupts the market pricing mechanism with its ongoing massive fiscal stimulus, ultra-low interest rates, and liquidity backstop operations.  

I noted above that “‘Money’ is inherently dangerous because virtually insatiable demand creates a propensity for over-issuance.”  There is a second fundamental danger inherent in “money:” A loss of confidence immediately incites a very disruptive systemic dislocation.  If you can’t trust money, what can you trust?  No trust – no functioning Credit system or stable economy.  Indeed, you really don’t want to mess with “money.”  

Importantly, you don’t want to allow distortions in money perceptions to establish a foothold.  Such distortions are always and everywhere the lifeblood of Bubbles.  Above all, you certainly don’t want to finance a massive inflation of non-productive debt with “money.”  This only ensures a problematic widening gulf between perceptions of safety and liquidity and the actual deteriorating underlying soundness of these financial claims.  And when the inflation of this money is also distorting market perceptions for Credit and asset prices throughout the entire system, inflationism is really playing with fire.  Money Not Good

Doug Noland is a market strategist at Prudent Bear Funds. Their website is