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Why has ‘Quantitative Easing’ not yet caused inflation?

Posted by John Reed on

Copyright 2013 by John T. Reed

On page C1 of the 1/23/13 Wall Street Journal there is an article titled “QE’s Impact Defying Logic.”

It basically wonders why “Quantitative Easing” has not yet caused inflation and suggests people who have said “Quantitative Easing” will cause inflation may therefore be wrong.

First off, I don’t give a damn about the fact that “Quantitative Easing” has not yet caused inflation.

One of my detractors, who shall remain unidentified, claims the fact that I have been saying for years that we are going to get hyperinflation and we have not yet is sufficient evidence to dismiss me.

The first edition of my book How to Protect Your Life Savings from Hyperinflation & Depression starts with the sentence,

It could happen tomorrow.

That edition came out in June 2010. The second edition, which came out October 9, 2012, starts with the same sentence.

The events since June 2010 have not proven that to be incorrect. The critic implies I predicted we would have hyperinflation in the last two years. That is a lie.

Both the first edition and the second also both say that various experts, namely Paul Ryan, Nouriel Roubini, and Kenneth Rogoff, said the time frame for financial crisis stemming from the Quantitative Easing and other irresponsible fiscal and monetary policies is about five years. Starting with the first edition, that would be June 2015

The events since June 2010 have not proven that to be incorrect either.

Nor would it matter. I made it clear in both editions that predicting when it happen is far from a precise science. And I explained my own calculation. Under Obama, our debt-to-GDP ratio has been climbing at 7.5% per year. At that rate, we hit about 140% which is the level at which Greece needed bailouts, in around four years. I showed my work. I did not ask anyone to accept a date from me on faith.


Specifically, I drew a couple of analogies. One was the starting of a train. When the locomotive starts moving, the caboose does not. Rather, you hear a series of bangs as the gap in each coupling is closed until the final gap in the caboose coupling is closed. Then the caboose moves at the same speed as the locomotive.

Another analogy I used was changing course of a sailboat. I am not a sailer but I am told that there is a delay between when you change the rudder and when the boat turns, and often you turn the rudder too much because of that delay and get an overchange in direction as a result. I was quoting another expert when I cited that analogy.

I also quoted Fed observers saying that there were elements of “pushing a string” in monetary policy.

And I likened hyperinflation to an avalanche where each flake of snow that falls onto the mountaintop increase the likelihood of an avalanche and decreases the amount of time left until it happens. The avalanche happens when the flake the “broke the camel’s back” lands.


I also said that, alternatively, rather than starting as a result of flakes being adding to the mountaintop’s back, the avalanche could be started by a shock. At some ski resorts, they deliberately start avalanches by firing recoilless rifles at the building snow cap. (a recoilless rifle is a sort of cannon with no recoil.) They do this to cause mild avalanches and thereby short circuit the larger, more dangerous avalanche.

I wish someone would do that with our debt crisis. In my Unelected President novel that I am writing, the unelected president does try to do that.

I have also listed possible shocks that might trigger hyperinflation:

• Greece leaving the Eurozone and hyperinflating their currency

• Greece not leaving the Eurozone and the euro itself hyperinflating

• the yen hyperinflating

• war with Iran or another country (war is the most common cause of hyperinflation)

• crossing a prominent milestone like the previous record 122% debt-to-GDP ratio which was set at the end of World War II

• massive sell off of U.S. government bonds by a huge holder like China or Japan

• or something not on this list

Fundamentally, the question is on what date will the people of the U.S. and the world lose confidence in the price stability of the U.S. dollar. That group of people is a mob. Mob psychology is not an exact science.

The article attempts to explain. One is that the fact that several countries—the U.S., U.K., and Japan—and the Eurozone—are simultaneously engaging in the same misbehavior. If that is the case, where do you put your money if you take it out of the U.S. dollar?

Swiss franc

Some have gone to the Swiss franc, including me. But on page A1 of the 1/9/13 Wall Street Journal, the Swiss central bank head essentially said his organization will print Swiss francs (currency code CHF) without limit in order to prevent the CHF from rising to more than 1.2 EUR. Actually, Switzerland cannot “print” Swiss francs the way the other countries can because Switzerland does not have enough federal bonds. So the Swiss central bank tries to hold down the value of the CHF in reaction to the euro by printing and selling Swiss francs to buy euros. Here is the second sentence of that article:

[Switzerland’s] central bank is printing and selling as many Swiss franc as need to keep its currency from climbing against the euro wagering an amount approaching Switzerland’s total national output, and, in the process, turning from button-down conservative to the globe’s biggest risk taker.

I may seem to be going on a tangent here. Not really. I have been recommending four foreign currencies to readers. The Swiss franc is one of them. I bought Swiss francs myself, in the form of cash. In that article, I snarled at the then head of the Swiss central bank, Phillipe Hildebrand. He has since left because of a scandal in which his wife was trading CHF and/or EUR for a 50,000 euro profit using inside information she got from her husband.

Now I’m snarling the current Swiss National Bank Chairman Thomas Jordan. Is that a Swiss name? Maybe if you pronounce it yordan or zhordan.

Mr. Jordan’s current monster bet—he’s long the euro and short the Swiss franc—would wipe out much of the capital of the Swiss National Bank if the swiss franc moves up more than 10% in relation to the euro.

Screw everybody to save the Swiss exporters

Jordan’s stated motivation is protecting the export industry of Switzerland, reportedly half of the nation’s GDP. Their main market is the Eurozone.

One of the points I made in my book is that inflation is one side of a thirteen-sided coin. Exports are one of the other twelve sides. But let’s think this through. Jordan is saying he is going to sacrifice the Swiss citizens and others who represent the other twelve sides of the monetary policy coin:

  •  interest rates/bond values/availability of credit
  • unemployment
  • value of the currency relative to other currencies
  • boom/bust
  • hard-asset values
  • incidence of financial fraud
  • liquidity of asset classes
  • inflow/outflow of funds to and away from the country
  • price-earnings rations of stocks
  • leveraging deleveraging by businesses and households
  • incidence of bankruptcies
  • The people being sacrificed by Jordan are
  • importers
  • outgoing tourism
  • Swiss savers
  • Swiss pensioners
  • owners of bonds denominated in Swiss francs
  • makers of loans denominated in Swiss francs
  • holders of Swiss francs worldwide (the IMF has designated the Swiss franc one of seven reserve currencies meaning some countries hold it for that purpose)
  • Swiss job seekers who might work in import, outgoing tourism, lending, bond sales, cash-value life insurance sales
  • Swiss who owe euro-denominated loans
  • Swiss owners of hard assets like homes
  • Swiss owners of non-export stocks

Roughly speaking, if half of the Swiss economy is exporters, the other half is not. Jordan is going to screw half the Swiss economy to try to help—it is not guaranteed to work—the other half.

‘The Man Who Broke the Bank of England’

The Brits tried to play this game in 1992. They decided to try to prop up the pound with these kinds of games. Their opponent was a then not very rich George Soros, who is now known as “The Man Who Broke the Bank of England” because he won that game. The basis of Soros’ fortune is the one billion he made that year betting against the Bank of England. That is also about the amount the British taxpayers lost as a result of the Bank of England trying to bluff the forex market.

The Bank of England is a big boy. U.K. has a GDP of $2.5 T.

Switzerland has a GDP of $.6T.

Switzerland is the size of Tennessee and has the population of Tennessee.


George Soros is still around. He now has lot more money than he did when he defeated the Bank of England. He is not retired. I wont predict he will bet against Jordan and drive the Swiss into a huge loss. He may or may not. I would not be in a position to predict. But I will guarantee you there are lot of people who know what Soros did and who would like to be as rich as him.

But my position on Swiss francs is I think Jordan is bluffing. I say what I said in the above-linked article. If Mr. Jordan wants me and the rest of the world to believe that Switzerland is permanently pegged to a fixed value vis a vis the euro, he can persuade his fellow Swiss to join the euro zone and abandon the Swiss franc. Until then, I’m keeping mine and urging my readers to do the same. I don’t think the people of Switzerland are willing to sacrifice all for the half of the country that is in the export business, nor do I think they have the money to buy enough euros to make it happen if the market does not believe their bluff.

Anyway, Mr. Jordan’s bluff is yet another country saying there is no monetary stability haven so you might as well stay in the euro or U.S. dollar or yen or pound.

But the fact is there are still the other two IMF reserve currencies: the Australian and Canadian dollars. I recommend those along with New Zealand dollars, which are not a reserve currency. I have heard some noise that Australia a d Canada are not happy about being haven currencies which causes their exports to become more expensive. But I have not yet seen them printing their currencies in excess to drive investors away.

There is also the whole issue that the people of the world and U.S. do not need to hold reserve foreign currencies. They can get similar, if less liquid, results from investing in hard assets. China, the largest foreign holder of U.S. debt, has been complaining about U.S. monetary and fiscal policy and switching out of the U.S. bonds to natural resources in Africa and Australia and so on. If the people of the world become concerned about the US dollar, they do not have to move their money into euros or pounds or Swiss francs. They can buy another home or invest in durable commodities and so on.

So why no inflation yet?

Probably a combination of denial, inertia, low velocity (excess money going into cash accounts of corporations and households), laws and regulations requiring many entities to own only federal government bonds, and so on.

But it really does not matter. The implication that the U.S. government—and the governments of U.K., the Eurozone, and Japan can spend money without limit endlessly and simply counterfeit the money to do so without causing inflation is nuts.

We know that the deeper the snow gets on the mountaintop, the more dangerous the impending avalanche and the sooner it will occur. And so it is with inflation. The higher the ratio between money supply and GDP, the more dangerous the impending hyperinflation and the sooner it will occur.

Furthermore, there is no penalty for preparing too early for hyperinflation. I urge readers to buy hard assets and well-managed foreign currencies. There are some theoretical risks to that of hard asset values falling or foreign currency values falling in relation to the U.S. dollar, but the likelihood now is very much the opposite direction. Furthermore, if you buy hard assets that you use first—home second home, stored food, stockpiles of inventory and supplies for your business, etc.—what’s the risk? You are going to use the stuff eventually yourself and the opportunity cost these days of not having the money invested in interest-bearing accounts is about as close to zero as it can get.

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