In PodCasts
  • Politicians replace central banks with “Fountain Pen Money”
  • A potent cocktail: Inflation & Financial Repression
  • Inflation is a tax on the poor


The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

From Helicopter Money To Fire Hose Favoritism
April 27, 2021

“Bureaucrats in D.C. and in Brussels and in London, in Berlin, they’re inclined to focus the flows of cash to constituencies that will ensure enduring power for years to come, inflation was once considered dead. Now, you see politicians, you’d say, “Inflation, be damned. There’s an opportunity here to harness the taxing power to lessen the burden of debt while simultaneously buying votes via the direction of credit and credit guarantees to every pet project on the planet.”
— David McAlvany

Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. 

David, in 2002, Ben Bernanke talked about something called helicopter money. Honestly, I thought that that was the first time that was used, but it was doing a little bit of research, and Milton Friedman, all the way back to 1969, used it as an example of just spreading money generally to the public. Now, you and I have lived this helicopter money for the last, oh, 10, 12 years since the global financial crisis. Now, it’s starting to look like it’s not going to be helicopter money anymore. It doesn’t look like just spreading it over a wide path works. I’m thinking fire hose money. What are you thinking, where it’s now going to be directed to whoever is the privileged few?

David: Well, I think in the age of Amazon where everything is delivered to your doorstep, maybe we call it drone money instead of helicopter money. It’s not dropped equally on everyone, but it’s delivered to a particular address. We know who you are, we know where you are, we have all the data on you and we’re going to get you just what you need.

Kevin: It sounds to me because of the COVID accident, the politicians are the ones that will be sending those drones.

David: Yeah. When I think about inflation and the nature of monetary delivery, whether it is a drone or a fire hose, it’s like we have NASA saying, “Houston, we have a problem.” Only instead of Houston, we have a problem. It’s “Houston. We have a transitory problem.”

Kevin: Isn’t it amazing how they use the word transitory when they don’t want us to think that this is actually a real issue?

David: It’s going to go away. The definition is that it is non-permanent.

Kevin: Well, World War II was transitory.

David: That’s right.

Kevin: Yeah.

David: What is not transitory, but in the age of big data, when more granular details can be analyzed and integrated into big conclusions, we have the Fed choosing to downgrade its information flows. This is not for the first time they’re doing it again. The first major move was in 2006, March 9th, 2006. The Fed said this, “M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years.” That last point I’m sure is the case, but they said, “Consequently, the board judged that the cost of collecting the underlying data and publishing M3 outweigh the benefits.”

Kevin: I just wonder if that’s propaganda costs rather than actual costs. I mean, these days, the cost of gathering data is not that expensive.

David: Well, the Federal Reserve stripped out repurchase agreements from the money supply data. That was one of the main ingredients in M3 and one of the main ingredients within the global financial crisis and the meltdown that we saw in 2008 and 2009. The Federal Reserve takes out repurchase agreements from the money supply data and that was 2006. They walk into the global financial crisis unable to see a critical element in the crisis, ready to blow up with dramatic consequences for the US and for the world. While they’re saying the costs of collecting outweigh the benefits, I think back and think, should we compare the cost of collecting the underlying data with the costs of bailing out Fannie Mae and Freddie Mac and Bear Stearns and Lehman and AIG and Countrywide and Washington Mutual? If you go across the pond, Northern Rock and countless other financial entities in Europe? 

Kevin: Yeah. If you’re not measuring something you don’t want to see, they don’t see it. 

David: Yeah. I said, again they are choosing to downgrade their data. Again, Lawrence Goodman from the Center for Financial Stability notes the latest shift, he says in recent weeks, the Federal Reserve monetary data took another step backwards, savings deposits, and other checkable deposits are now lumped together. Worse, bank deposits are now reported monthly rather than weekly and with a long lag. As the world becomes filled with more granular data and government agencies request ever greater quantities of data from banks and non-bank financial institutions, the Federal Reserve is moving in the opposite direction with its own reporting.

Kevin: Well, David, as we talk about the Federal Reserve, there are different ways of characterizing what we’re talking about. I brought up helicopter money, but it’s also called printing press money or central bank money. There is a difference between that and what we’re talking about now, this shift possibly where politicians are sending the drones, that’s fountain pen money, isn’t it? That’s where they sign on the bottom line for those that they would like to see get it.

David: This is the irony because the Federal Reserve is basically saying we can combine savings deposits, and other checkable deposits together. We don’t have to look at the information very often, and yet that is precisely where the inflation-oriented money is coming from—fountain pen money. What Keynes called bank money is increasing in both quantity and velocity, but let’s dial back to the information we have there. That’s what they’re saying. We don’t need the information, this increase of quantity and velocity of bank money, as Keynes put it, or as fountain pen monies other people have called it. They don’t think it’s necessary to keep track on that.

Kevin: I think it’s interesting too. You have to watch what you call something. When a politician says, “I want to draw your attention to an inconvenient truth.” Actually, it’s a convenient truth for them to draw the attention too. The real inconvenient truth is what they don’t report.

David: Well, whether it’s bureaucrats or academics, that’s the trait they seem to hold in common. Inconvenient truths are hastily passed over in favor of clear operating assumptions. These assumptions feed into frameworks and models, which provide sweeping, if not incomplete, explanatory power. That’s where an academic will tend to fixate, where they have a model and the information that went in generated conclusions, and we have vast explanatory power on the basis of these models. It’s very clear thinking, and it does happen in the context of modeling. Thinking, which is as helpful as the scope of the data included. There is the reality that modeling requires data and you need a lot of it to gain adequate perspective.

Kevin: Data’s interesting, too, because data’s transitory to a degree. Think about this for a second, David. What if the first 10 years of your life were the model that the next 10 years, your teenage years, were modeled after. Or your 20s were modeled after the teen years, or your 30s, you get the idea. Modeling requires a lot of data for the long haul. If you’re going to look at a lifetime, I mean, look at our lifetime. In the last 40 years, if you said interest rates, you’d say falling, falling, always falling.

David: I sat on the edge of my daughter’s bed last night and she said, “Dad, do you think I should get married in my late 20s or early 30s?” I said— She’s 10. Right?

Kevin: Yeah. Right.

David: I said, “Well, believe it or not, in the vast history of the world, a lot of people were marrying at 13, 14 and 15. Granted their lifespan was to 35 and 45.”

Kevin: Right?

David: You live to be the old age, which I’m being accused of right now.

Kevin: I don’t think they picked their spouse either. I think .

David: That’s true. That’s true.

Kevin: Yeah.

David: A lot has changed, but you’re right. There’s different data points and you have to be careful of what you’re modeling on the basis of. Now, she’s probably more accurate. There is more people being married in their late 20s, early 30s today, but that is actually contrary to the vast majority of human history.

Kevin: Historic data is key, is what you’re saying?

David: If you ignore historic data, there’s going to be some conclusions that are not entirely accurate, or if they’re accurate, they only pertain to a certain set of conditions. If the conditions change, the conclusions that you had in mind are no longer valid.

Kevin: Well, that’s why it’s interesting, David, talking about cryptocurrencies. We do have— Okay. Well, the data we have is about 13 years old. That doesn’t mean that we know the trajectory from here, but we also really don’t have much of a model set.

David: No, that is key, assumptions are key. History has very long tails, and records a surprising number of outliers and uncommon events when you go back far enough. That is another problem with today’s progressive era of finance. We prefer the clever financial construct to the Clarion calls of the past. It’s almost like not appreciating a dead language. We discard etymology in favor of the latest meme. We love things that can be tweeted, and have no idea the meaning of words or that even certain words exist.

Kevin: Okay. The Federal Reserve’s talking about transitory, but what you’re saying is, in a way it’s a modern meme.

David: Yeah. Inflation is something that we need not be concerned about. Transitory is the primary word in the central bank vocabulary on the topic of inflation. Give me a data point, it’s transitory; commodities, transitory; housing price inflation, transitory; shipping costs increasing, transitory.

Kevin: Transitory. Right.

David: Coca-Cola raising its prices because of an increase in cost, transitory, transitory, transitory.

Kevin: Yeah. They’ll lower the costs. Coca-Cola, I mean, Copper is going to come back down. Let’s face it.

David: It’s a dismissive adjective and it speaks to the presumptions of the user and it suggests that there is a fuller scope of data in view when— Actually, the opposite is the case. The expert perspective allows for the unconcerned air and even the flippant outlook, yet that is not wise. We cannot be flippant and unconcerned with something that has and will continue to sink its teeth deep into our financial hide.

Kevin: I think of what C.S. Lewis was talking about. He was talking about writing about a toothache and he said, “You can either know something or feel something or experience it.” He says, “You can’t do both at the same time. You’re either writing about a toothache in memory of what it was like, or you’re experiencing a toothache and not writing.”

David: Well, I think the great consolation from the central bankers will be that pain is transitory too.

Kevin: Right. Right.

David: It is real. Pain is real. At the end of the decade or the end of an era, we can call it transitory because it was indeed not permanent, but was it in real time? Did it have that sense of being transitory as you were experiencing it? How helpful is that adjective?

Kevin: Okay. If we’re going to put the two words together, I mean, we both lived through a transitory period of time of very high inflation, and the damage was done. Remember the 1970s? That was transitory, but boy did it have an effect.

David: Yeah. Can’t you include everything in that? Climate change, disease, pestilence. We talk about the Spanish flu, and guess what? It was a long time ago. It was over a 100 years ago. Everything is transitory with enough time in view. In the context of a millennia, you’re talking about a mere year, a mere decade, a mere era. Right? To actually use that word as the primary description, as it pertains to inflation, it’s meaningless.

Kevin: Well, tell that to a Venezuelan.

David: Yeah. Venezuelan hyperinflation is transitory. That’s right. In between now and tomorrow morning, you’re still going to be hungry. It’s not permanent. Thanks. That’s tremendously helpful. Is that what models show? I even think, Donald Trump, if he was referring to COVID-19 as transitory, he’d be accused of being dismissive and you’re responsible. He would be tarred and feathered as unscientific and insane. Well, of course it’s transitory, but does that mean we should be dismissive? Does that mean we should ignore it then?

Kevin: Okay. Talking about tracking numbers, granted the Fed doesn’t want us to track everything, so they just dismiss it, but the tracked numbers right now are showing that inflation has turned.

David: Our colleague Doug Noland tracks a number of those numbers, and Bloomberg commodities index jumped 2.2% last week.

Kevin: Transitory.

David: Trading to a new three-year high, and Monday’s additional 1.2% advance boosted the Bloomberg commodity index to 14.7% for the 2021 year to date.

Kevin: Transitory.

David: Wheat and corn each gained about 4% earlier in the week, surging to eight-year highs, soybeans rose to the high going back to 2014.

Kevin: Transitory, transitory, transitory.

David: Copper prices jumped to the highest since 2011, lumber surged another 4% to an all-time high, boosting 2021 gains to 63%. Iron ore traded to an 11-year high.

Kevin: Oh, pay no attention though, to the inflation behind the curtain. It’s just transitory.

David: When we look at commodity prices and we look at the price of anything, clearly there’s volatility involved. What we have today may not be what we have tomorrow. These prices are transitory, but think about this, the additional cost to build a new house is now floating between 25 and $30,000.

Kevin: That’s just lumber costs, isn’t it?

David: That’s going to add to the owner’s debt level, and that my friend is permanent. Well, technically a 30-year mortgage is not permanent either, but as far as you’re concerned in your lifetime, paying off a 30-year mortgage, that doesn’t feel transitory.

Kevin: Well, remember when you learned as a kid, what that actually meant? A 30-year mortgage means you pay—

David: You pay double.

Kevin: Yeah. Double—up to triple, depending on interest rate.

David: Depending on the interest rate.

Kevin: Yeah.

David: Try telling the owner not to worry about making mortgage payments. There is a point where you cannot be dismissive. Money supply growth would suggest that point is right now. Broad measures of money, we’re now dealing with them too, because as we mentioned in 2006, M3 was euthanized and we’re moving aggressively with monetary supply numbers for the first time in a decade. 

Something shifted in 2020, and whatever Jerome Powell and the central bank band is playing at this point, it sounds rather off key. He’s recalling the sage advice of the banking community in the last period of financial excess. At least that’s the way it seems to me. If the music is playing, you get up and dance. That’s what he’s asking us to do. Just enjoy it. This is not a big deal. We’ve got it well under hand, dance for Jay, dance for the band. We’ve got it all well in hand. It’s transitory.

Kevin: Okay. The dance wasn’t really working, was it? Because if the dance is to stimulate the economy, trillions and trillions and trillions have been printed, we’ve talked about this before. You’ve characterized it like water behind Hoover Dam. Okay. All that liquidity that’s been sitting there, it has not had the economic effect that it probably would have if—you’ve talked about fountain pen money—if you start directing that money based on political ambitions, that probably will get into the economy. Won’t it?

David: Well, next week, our conversation with Russell Napier is about the difference between the high-powered money that the central banks created and how it has ricocheted about within the financial markets and has not gotten into the economy.

Kevin: Yeah.

David: Like so much liquidity held behind the dam, but the case is made that there is a different kind of money. The kind of money that jingles around in somebody’s pocket. If you can put money in somebody’s pocket directly, then it does circulate within the economy and not just in financial assets.

Kevin: So we’re not talking a helicopter here. We’re talking something far more directed.

David: That’s right. Charles Calomiris points out that inflation is not an accident, but it’s a chosen method of taxation. He says that the government is, in essence, taxing the public, but does it silently and automatically by making the cash in their pockets or stuffed into their mattresses worth less with each passing day. Yesterday, the dollar in my pocket bought a loaf of bread, but today, that same dollar buys only half a loaf. Then he goes on to say, “A very large proportion of the meager assets of the poor is in their pockets, in the form of cash. As a consequence, the burden of the inflation tax falls disproportionately on the poor.” It’s ironic to me that we bring in a new political cast of characters into DC.

Kevin: Right. They say they’re only going to tax the very, very, very wealthy.

David: They also say, “I’m from the government and I’m here to help.”

Kevin: Right

David: When in fact, the tools that they are now beginning to employ impact the poorest the most of all.

Kevin: The inflation tax is larger than any tax they’ll bring in on the top 10th of 1%.

David: That’s right. Because it applies universally. Russell Napier will argue that a shift towards fountain pen money—that is, money in the commercial banking sector—is driving the growth in your monetary supply numbers. Central bank balance sheets are moving higher and they have been at a record pace of change, but as we’ve seen over the last decade, that kind of liquidity, the central bank liquidity, stays largely locked in the financial sector with dramatic impact on asset prices.

Kevin: Right. We have had inflation. The inflation has just been in things that would be in the asset markets.

David: That’s right. Not in the economy, not in consumer prices. Lots of liquidity, no inflation. Because of this patterned behavior of liquidity creation and no inflation, it has everyone thinking that, “Well, we don’t have any problem here.” If we do have inflation, it goes 2%, 3%, 4%. It’s transitory in nature. I think what you’re looking at is classic complacency built on normalcy bias.

Kevin: Okay. Let’s ask though. Okay. Central banks, how much do they print on an annual basis? How much are they adding to the overall money supply?

David: Yeah. US central bank has seen its balance sheet expand an average of 2% per year, from 1913 to 2007. It increased pretty significantly, 10% per year from the global financial crisis up to the pandemic, on average. Now, it’s running at a 33% rate since March of 2020.

Kevin: That’s annual.

David: That’s right.

Kevin: Oh, my…

David: We have exceeded the growth of central bank assets by 200% when you comparing the expansion of central bank assets back in the great depression or World War II, and that is central bank balance sheet expansion, which of course explains the exuberance in all asset classes. This is where we get the Everything Bubble. The Everything Bubble is tied to QE. The Everything Bubble is tied to central bank, or should we call it state, money, is how Keynes described it, versus bank money, in contrast with what Russell Napier describes as fountain pen money or bank money. The M2 expansion, the M2 expansion has a tie to Commercial Bank balance sheets, not central bank balance sheets. This is the revolution which Napier thinks had already occurred and no one cares, but they will.

Kevin: Okay. All right. Let’s really break this down because this is really important to understand. For years, we’ve had central banks bear the burden, we’ve even talked to central bankers. David, you’ve talked to Central bankers that have said, “We need to see the politicians step in here and take over fiscal policy. We’re sick of doing it all on our own.” Now, what we’re seeing is a major transition, and isn’t it convenient? The COVID accident, let’s go ahead and call it an accident, we’re not allowed to call it Wuhan flu anymore, but the COVID accident came at just the right time, because the last couple of years, David, the central bankers that you’ve talked to have said, “We need fiscal stimulus.” That’s what we’re talking about here.

David: That’s fine, but one of the things that could be misconstrued here is that we’re getting only fiscal stimulus. The COVID accident transitioned interventionism from the Federal Reserve and monetary policy to government and fiscal policy. That’s clear enough.

Kevin: Right.

David: What we generally expect from government is fiscal initiatives, which either compliment or stand in for monetary policy initiatives, so we’re back to that whole helicopter money. In this case, governments around the world have discovered something that they have practiced in the past before, but have not used in awhile. Something more than just deficit spending, that they have the power to direct credit and offer guarantees through the commercial banks, removing any danger of making loans from the commercial banks, and that in essence gets money directly into the fray amongst the Hoi polloi. 

They have rediscovered the power of state-directed credit. Grants, loans, any form of company or personal credit, backed by a government guarantee allows for commercial banks to be a conduit of liquidity into the economy with low to no risk to the banks themselves. That’s where Russell argues, “This is monetary in nature. You might think fiscal, but this is actually monetary in nature. They are going around the central bank to create their own version of money flowing through the commercial banks with only a contingent fiscal liability at the end of day.

Kevin: Okay. It pays to be a banker at this point, a commercial banker, because what you’re talking about is they can give loans to— Let’s just call it what it is, political favorites. If you are a political favorite, whether it’s green or whether it’s playing to inequality, whatever the favorite is, that that loan goes out to, it’s going to be backed by the government. Why wouldn’t you want to be a banker?

David: Calomiris wrote 500 pages on how credit and banking—this is Charles Calomiris—about how credit and banking are used as political tools.

Kevin: That book is Fragile by Design.

David: That’s right.

Kevin: You interviewed him last. What was it? 2019?

David: January 2019.

Kevin: Yeah.

David: Now, we have a pandemic-inspired burnishing of those old tools, which is finally delivering liquidity into the real economy—for better and for worse. If you don’t care to read 500 pages, the takeaway is that credit has always been politicized at some point, and it creates major problems. Where we end up with banking and monetary crisis is, Charles Calomiris would argue, ultimately pinned on the politicians who abused credit system.

Kevin: Okay. Let’s look at the sequence here. All right. Inflation, which is a tool of political power, it’s no longer impotent. Why don’t you give the steps of what you’re talking about, David, how it gets into the system and how it gets directed?

David: Well, central banks have actually wanted to see some inflation. They’ve wanted to see that in the context of economic growth, they’re comfortable with the 2% number, and they have been impotent and the inflation statistics have appeared to be as well.

Kevin: Now, command and control steps in.

David: Yeah. That impotency is a thing of the past. Politicians are the ones that are driving money creation, in league with commercial banks, leading us by the nose into a new era of financial oppression.

Kevin: Okay. Winners and losers at this point are picked?

David: That’s right. That theme of financial oppression has been a theme that we’ve looked at and had as a— It’s just been a reality for us for over a decade. After the global financial crisis, winners and losers were determined by policy choice to rebuild the financial sector, low rates, we’re channeling economic benefits to those in the financial sector while stripping out income from savers and retirees. 

The same policy was chosen in the late ’90s in China, you had a banking crisis and the same repressive regime, and you slowly rebuilt the banking sector on the backs of the depositors. What you also did is created a negative incentive for people to say, “Look, I’m not getting my needs met. I can’t pay my bills off of a 0% rate.” You ended up reinforcing the benefits into the financial sector as there was a behavioral shift amongst investors, forcing savings out of safe investments, into high risk assets to meet the same income needs and expectations that the public had before. You got asset inflation, both via carrot and stick.

Kevin: The interview years ago. Now, I can’t remember the year, but you interview Russell Napier often. I remembered the interview, David, I was so depressed afterwards because he had told you, if you want to study how things are going to move forward, study Eastern Europe, the economics of command and control economy, but he had also brought something up. He said, “Treasury bills, don’t be surprised if Treasury bills go negative.” Granted, there’s real negative and then there’s nominal negative. Look how close he’s been on this. That was another way that this financial repression came about.

David: It was like sitting in our asset management meeting and having Lila say, “Don’t be surprised if oil prices go negative.”

Kevin: Yeah.

David: Everybody scratches their heads and goes, “I don’t have a dataset that accounts for that.” Help me—

Kevin: That was about a year ago that she said that.

David: Help me understand how does that happen?

Kevin: It did. What was that? 55 bucks negative, a barrel?

David: In the 30s.

Kevin: Okay.

David: He says in June last year, the age of disinflation is ended where central banks failed to create money and inflation. Governments have now stepped in, and through their control of commercial bank balance sheets are pushing broad money growth, sharply higher. We have a lot to talk about next week with Napier. 

The reality is inflation now stands at the door and academics are going to linger, with their concern over disinflation for a while longer, even as market dynamics are changing. People are feeling the pinch today. Just wait until they’ve lived with persistent and pervasive inflation for a number of years.

Kevin: You were talking last week about austerity. Austerity is almost a cuss word to a politician.

David: Politicians are driving this transition to bank money largess, and I think they’re opportunistically addressing the debt to GDP ratios, which have reached historically destabilizing levels. Politicians are not somehow finding religion. They’re not interested in fiscal conservatism. This is not about debt reduction or inspired entrepreneurship and a growth in GDP to solve the debt to GDP crisis. They’re interested in the control of unlimited money creation. Yes, they can chop and hack away at our debt issues with the inflation axe, but they can also take this bank money largess and funnel it to their closest friends and family. I bet that doesn’t surprise anyone out there.

Kevin: Well, it’s in the name of social promises. When you’re the one who the promise is made to, you’re not going to speak up against it.

David: Yeah. The problem really isn’t for the politicians because they get to chop and hack away at the burden of debt. The real impact for the average human is purchasing power. It’s tough for the consumer, but the benefits conferred to government, hacking away at that debt to GDP figure is absolutely profound. Yes, it reduces the burden of debt. 

If you’re going to counteract the negative social impact of inflation, the concerns, the frustrations of running out of money before you run out of month, then what you have to do is hand out money to sensitive segments of the population. This is where— It’s like a one-two punch. On the one hand, you do increase taxes, increase revenue if you can, and start handing out money. At the same time your inflation taxing the heck out of everybody on the planet. If social promises are made and programs initiated, people will tend to protest less about the inflation that they’re experiencing.

Kevin: Well, of course, you’ve got to pay for the nanny state. I mean, student loans probably forgiven, healthcare, retirement, it’s all taken care of.

David: A childcare is going to be a part of the next one.

Kevin: Okay.

David: There’s a whole slew of initiatives. I mean, we’re talking about another 4 trillion in spending initiatives, which are in the offing, which will bring this year’s well, who knows what it’ll bring it to. We don’t know the bounds of creativity yet. What I’m more impressed by with each day that goes by is how we’re being served by our members of Congress and the folks back in Washington. We have cradle to grave congressional concierge to serve our every need. 

Government is now in the driver’s seat for credit creation. What they had to go begging for from the Federal Reserve—loosen credit a little bit more; increase liquidity in the system, will ya?—now, they don’t have to. You can see that pandemic crisis lending quickly is becoming infrastructure lending, then will become green lending, then social justice lending, then equity lending—as in: equity for all. At least, equity for those in society that we want to bring equity and equality to. We’re at the front edge of a trend where the equivalent of sesame credits will determine if we are the right kind of person for a loan. This is what Napier diagnoses as the politicization of credit.

Kevin: David, I’m sure you remember interviewing Otmar Issing. One of the things that Otmar talked about was the European Central Bank. The first thing that they wanted to do was unite the currency, but the question comes up. You’ve got an awful lot of different countries with different debt situations and different spending situations, all lumped into one. This directing of credit, we’re starting to see nations emerge. Are we not? In the United States, we’ve got our politicians who are going to be directing, but if this is a worldwide movement, what does that do for these loose monetary agreements like the European Union?

David: Oh, it’s very interesting because Otmar was keen to point out, they knew the problems going in, and they could see that there was an unhealthy blending of interests.

Kevin: You said that they were actually going to probably move to a crisis level where decisions had to be made that would reduce national sovereignty.

David: They would deal with those political concerns after the monetary union had been established. If you asked for a political union, you would never get any union at all. You started— Like the camel with his nose under the tent, you started with the monetary and hope to move towards the political union, ultimately. But he knew that, financially speaking, if you’ve got German savings heading to fund real estate loans in Spain, and now Spanish loans are being treated as the equivalent credit as German credit, that something was being mispriced and capital was moving in a dangerous way cross border. This national distinction, he knew was going to be problematic, and yet he just thought the stakes are too big, the stakes are too high, we have to forge ahead and we’ll solve those problems as creatively as we can when we get to them.

Kevin: In a way, it would be a little bit like the United States trying to figure out how they were going to pay Mexico’s or Argentina’s or Venezuela’s debt off.

David: Right. It’s accurate, this idea of the politicization of credit. If it’s accurate here in the United States, it might be irksome to me or to you to realize that credit is not going to be fairly applied, that there will be some version of, can I say reverse racism? Can I say social justice back through the ages? We can address the grievances of three, four, five hundred years ago. There’s so many things that you can do with credit and that’s what we get to experiment with going forward. 

That may be irksome to some here in the United States, but it is an existential concern in Europe. The power to create money has rested in the hands of the central bank, that is the European Central Bank, until now. It is now being wrested, as in taken away, by national governments via the explicit guarantees attached to commercial bank loans, which creates the kind of money that burns inflation white hot. 

That money is not being generated by the ECB. It’s being instead pumped out by national politicians via the commercial banks with a vested interest in local politics. That leaves the ECB on the outside looking in. It brings into question a single currency system, if it’s actually feasible or viable going forward for the 19 member states. The power now exists for each of those states to circumvent the ECB in the money creation process, which means you may have one currency, but you’ve got many unique inflationary trends within the member countries. What Napier concludes is that the euro cannot survive.

Kevin: One of the things that has puzzled us through the last decade or so is the lack of velocity in money. All this printing that the central banks did—we’ll go ahead and call it helicopter money, where it just generally gets out there—it didn’t generally get into the economy, like you said. It actually propped up asset prices and was in the financial sector. Velocity, now that there’s been this change, this word revolution. Okay. Where it’s shifting from the central banks to actual government favoritism. What happens to velocity?

David: Exactly. Well, central banks have the high-powered money, and that could not thaw the inflation rate. Because of that, you’ve got academics who have created new theories to explain how excess money is not inflationary at all. It’s fascinating how they use current circumstances. If you don’t have enough data, you just say, “Well, it’s different this time, and we’ve got a new theory to explain.” If they just look back far enough in time, they’d see, actually, it’s not that excess money is not inflationary. You have to ask what kind of money this is. 

The complacency that has been bred, tied directly to misunderstanding the type of liquidity central banks create, is a growing problem. Pocket change moves around the streets faster than a repo agreement. Think about this. If you’re talking about different kinds of money— if I’m the central bank, and I’m like, “Look, I’ve got a repo agreement, let me situate or help you fund a collateralized debt obligation.” Pocket change moves around the street faster than a repo agreement. If I gave you a repo agreement, if I gave you a collateral debt obligation, how do you spend that?

Kevin: Right.

David: What do you do with it? It is a form of liquidity, but it’s not pocket change. I’ve been told that velocity is no longer relevant as the statistics have reached multi-decade lows.

Kevin: Well, that’s from central bankers. You’re talking people in the know are saying, “Oh, don’t worry about velocity. We can print as much money we want.”

David: To me, it sounds like a lazy explanation for an anomaly. Yeah. Just dismiss it. Or an inability to deal with the data at a cycle extreme. Napier argues that we have cycles, and that the velocity cycle is running in a similar trajectory with the inflation cycle, and both have turned up—not will turn, both have already turned up.

Kevin: Okay. I’m going to go back to the Hoover Dam metaphor because it’s just so powerful. You have all this water, all this liquidity that’s been printed since the global financial crisis. It did not get down to the man in the street. It got into the financial system, but because of no velocity, there was no water flowing over that dam because of no velocity, we haven’t experienced the inflation, but that liquidity still exists, David. With this change, that liquidity, that water behind the dam still exists.

David: I think of almost two different groups of people. Imagine the lake people and the river people. The river people are downstream from all the people who are enjoying life on the lake. And they’ve got their boats—in some instances, yachts—and they’ve got palatial spots to get away from the city and the muck and the mire, getting out to enjoy— Buffy, don’t we enjoy getting to the countryside?

Kevin: Look at this liquidity.

David: Yeah. They sit around this vast hoard of liquidity and entertain themselves, and get to play in it. Right? Meanwhile, the trickle coming out the bottom of that dam hardly feeds the river people. The river people don’t get anything, really, compared to the vast quantities only available to the lake people.

Kevin: Unless velocity changes.

David: Well, all that central bank created liquidity still exists. We’re talking about repo agreements and collateralized debt obligations. It doesn’t exit to the streets. You’ve got bureaucrats in DC and in Brussels and in London and Berlin, they’re inclined to focus the flows of cash. Again, not CDOs, CLOs, and repos, but actual cash. They want to focus to constituencies that will ensure enduring power for years to come. Inflation was once considered dead. Now, you see politicians who’d say “Inflation, be damned. There’s an opportunity here to harness the taxing power to lessen the burden of debt,” while simultaneously buying votes via the direction of credit and credit guarantees to every pet project on the planet.

Kevin: You’ve been listening to the McAlvany Weekly Commentary. I’m Kevin Orrick, along with David McAlvany. You can find us at, You can call us at 800-525-9556.

This has been the McAlvany Weekly Commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany Weekly Commentary.

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