They Want You To Believe “Hyperinflation Is Coming”
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The Federal Reserve, which I will refer to as “The Fed” here, wants you to believe that hyperinflation is coming.
To understand why, you must first understand one thing: Inflation is a self-fulling prophecy.
What does this mean?
If the public expects an inflation of 5% this year, they will act accordingly.
As in, they will expect (or at least want) a 5% raise from their employer, they will expect a 5% increase in their grocery bill, and therefore … they are more likely to spend their money than hold on to it.
At least, this is the theory that the Fed is banking on. More on this later.
That brings me to a small point …
Whenever you see a central bank speech, the use the term “inflation expectations”, because it is the expectation of inflation that must be managed, not actual inflation.
If the public expects a modest inflation, they will spend their money, and in turn, spur the economy … goes the theory.
Going further, if the public expects a huge inflation, they will spend huge some of money, and in the eyes of the Fed, revive the economy.
That leads me to the point I want drill down:
When the economy is in desperation mode, interest rates are dismally low, and a resuscitation is needed, the Fed needs the public to expect hyperinflation.
Why?
People love to complicate it but at its core, the Fed’s job is to cool down the economy when it gets too hot, and spark the economy when it gets too cold. That’s all.
If they tried Quantitive Easing and it did not really work, and they tried lowering interest rates and it did not work (more below), they Fed has no other choice than to try to fool the public that inflation is coming, and somehow, kickstart an actual inflationary cycle to stimulate the economy.
While the stock market continues to rise (though we can have a separate discussion about whether this is sustainable), US GDP growth rate has been consistently falling:
And this is the case, even though interest rates are near all-time-lows:
The rate at which commercial banks are giving out loans to consumers is dropping:
If anything, we are headed into a deflationary cycle, similar to what Japan is still struggling to shake off — and their central bank (Bank of Japan) tried desolately the very same things that USA is trying now (QE, lowering rates).
Deflation is the last thing that a highly-indebted nation (like USA) wants, as the cost of debt becomes higher.
So again, the Fed, whose job it is to spark an economy when it cools and contracts a bit too much, would like nothing more than to have economic growth and thereby, inflation.
But they can’t just magically get inflation without changing people’s expectations about it.
And this time, they are going all out. Let’s get into it.
How The Fed Makes You Believe Inflation Is Coming
The first part boils down to money supply.
Let’s look at the money supply (M1) chart.
M1 consists of cash, demand deposits, and a few more things you can read here.
Notice the gigantic spike. You may think a bunch of money has suddenly been printed, but this is exactly what “they” want you to think.
Now let’s look at M2:
M2 consists of M1, plus a few other things you can read here.
There is a spike here to but notice … the spike is not nearly as huge as the one for M1.
But if M2 includes M1, then why is the spike not translated into M2?
Time to read the fine print.
If you go to the M1 link from earlier, you can see that there has been a slight and subtle change in definition.
Let me summarize.
The Fed changed the definition of M1 to also include “savings deposits (including money market deposit accounts)” around the same time there was a huge spike in M1.
The savings and money market deposits used to be included in M2 not M1, but the switch in definition, so subtle, makes it look like there is a huge spike in M1.
This is the Fed trying to convince the public that M1 has suddenly spiked to ungodly levels.
But wait, there’s more.
The Fed has conveniently discontinued the data for savings deposits, so it is harder to see the relationship between savings deposits and M1.
If you look at the relationship between M1 and one of its other components, demand deposits (DD), you can see that obviously it was not DD that contributed to the huge spike in M1.
Before we get lost in the weeds here, let me remind you the point of all this — the Fed wants to make it look like there is huge money printing going on, so the expectations of inflations increase, so money gets spent in the economy, so the economy gets spurred.
Let’s call this “signaling” to the public that hyperinflation is coming.
Never forget the job of the Fed — cool down the economy when it gets too hot, and spark the economy when it gets too cold. That’s all.
This “signaling” is their last resort; it’s all they have left once interest rates are dismally low.
Now the real question — is this working?
Let’s take a look at inflation expectations:
Clearly, people are buying into this.
But will this translate into real spending in the economy? Remember, that’s the whole point of this all.
Time will tell.
Anyway, now you know a little bit of what’s truly happening behind the curtains.
Nothing is ever as it seems.
My Twitter: @EscapeTheGrip
