In 262 AD, plans were being put in place to celebrate the “decennalia” (10 years on the throne) of Roman emperor Gallienus. The following excerpt from the fourth book in Harry Sidebottom’s “Warrior of Rome” series is part of a discussion between Gallienus and his senior advisors regarding how an appropriately-grandiose “decennalia” would be funded:

“The a Rationibus, in charge of the finances of the imperium, did not hesitate. “Celebrating your maiestas is without price and, as you know, Dominus, plans are in place to debase the precious metal in the coinage again. It will be a few months before the merchants catch up.””

In the end Gallienus decides to pay for the celebrations using direct theft (by confiscating and then selling the estates of his enemies and those of their families), but the final sentence of the above excerpt from a work of historical fiction reveals more knowledge of how monetary inflation works than is found in the writings of most Keynesian economists.

Regardless of whether it is implemented via an emperor surreptitiously reducing the precious-metal content of the coinage or by the banking system (the central bank and the commercial banks) creating new currency deposits out of nothing, monetary inflation is a method of forcibly transferring wealth from the rest of the economy to the first users of the new or debased money. In other words, it is a form of theft.

It has always been popular and it has nearly always been effective in the short term because it takes time — potentially a long time — for the people who are having their wealth siphoned away by the inflation to figure out what’s going on. For example, in ancient Rome it took the merchants a few months to catch up following a round of coinage debasement, meaning that it took a few months for prices to adjust to the reduced value of the money. These days it takes much longer, because there is no observable difference between the currency units that are being issued today and the ones that were issued in the past. In fact, these days most people never figure out why they are finding it increasingly difficult to make ends meet.

Just to be clear, if monetary inflation caused a nearly-immediate and uniform increase in prices throughout the economy then it would never have been popular. From the perspective of the ‘inflators’ it would serve no purpose, because it would not enable a small minority to benefit at the expense of the majority. It is only popular because it boosts some prices relative to other prices, thus temporarily benefiting some parts of the economy at the expense of other parts, and because the early users of the new money get to do the bulk of their spending/investing before prices rise.

As mentioned above, these days it is not possible to directly observe the debasement of money. Also, the populace is regularly told that “inflation” is not only not a problem, there isn’t enough of it! As a consequence, knowledge of good economic theory is required to understand what’s happening to money and why slower economic progress, or even a prolonged economic contraction, will be an inevitable result.

Unfortunately, hardly anyone has this knowledge, so most people’s minds are open to the propaganda that central banks are providing genuine support to the economy and that a more interventionist government could help make things better.

This blog post is a excerpt from a recent TSI commentary.

As the name suggests, the weekly American Association of Individual Investors (AAII) sentiment survey is an attempt to measure the sentiment of individual investors. The AAII members who respond to the survey indicate whether they are bullish, neutral or bearish with regard to the US stock market’s performance over the coming 6 months. The AAII then publishes the results as percentages (the percentages that are bullish, neutral and bearish). The Consensus-inc. survey is a little different in that a) it is based on the published views of brokerage analysts and independent advisory services and b) the result is a single number indicating the bullish percentage. However, the results of both surveys should be contrary indicators because in both cases the surveyed population comes under the broad category affectionately known as “dumb money”.

In other words, in both cases it would be normal for high bullish percentages to occur near market tops (when the next big move is to the downside) and for low bullish percentages to occur near market bottoms (when the next big move is to the upside). That’s why the current situation is strange.

With the S&P500 Index (SPX) having made an all-time high as recently as last month and still being within two percent of its high it would be normal for sentiment to be near an optimistic extreme. As evidenced by the blue line on the following chart, that’s exactly what the Consensus-inc survey is indicating. However, the black line on the following chart shows that the AAII survey is indicating something very different. Whereas the Consensus-inc bullish percentage is currently near the top of its 15-year range, as would be expected given the price action, the AAII bullish percentage is currently near the BOTTOM of its 15-year range. According to the AAII sentiment survey, individual investors are only slightly more bullish now than they were at the crescendo of the Global Financial Crisis in November-2008.

The conflict between the AAII survey results and both the price action and the results of other sentiment surveys (the AAII survey is definitely the ‘odd man out’) suggests that small-scale retail investors have, as a group, given up on the stock market and are generally ignoring the bullish opinions of mainstream analysts and advisors. We are pretty sure that a similar set of circumstances has not arisen at any time over the past 40 years, although it may well have arisen during an earlier period.

The lack of interest in the stock market on the part of small-scale individual investors could be construed as bullish, but we don’t see it that way. To us, the fact that the market has come this far and reached such a high valuation without much participation by the “little guy” suggests that the cyclical bull market will run its course without such participation. It also suggests to us that the cyclical bull market is more likely to end via a gradual rolling-over than an upside blow-off, because upside blow-offs in major financial markets require exuberance from the general public.

If you are asking the above question then your understanding of economics is sadly lacking or you are trying to mislead.

The Fed will never be completely out of monetary ammunition, because there is no limit to how much new money the central bank can create. The Fed will therefore always be capable of implementing some form of what Keynesians call stimulus. However, the so-called stimulus cannot possibly help the economy.

To believe that the central-bank monetisation of assets can help the economy you have to believe that an economy can benefit from counterfeiting. And to believe that the economy can be helped by lowering interest rates to below where they would otherwise be you have to believe that fake prices can be economically beneficial. In other words, you have to believe the impossible.

The reality is that the Fed never fights recession or helps the economy recover from recession, but it does cause recessions and gets in the way of genuine recovery after a recession occurs. For example, the monetary stimulus put in place by the Fed in response to the 2001 recession caused mal-investments — primarily associated with real estate — that were the seeds of the 2007-2009 recession. The price distortions caused by the Fed’s efforts to support the US economy from 2008 onward then firstly prevented a full liquidation of the mal-investments of 2002-2007 and then promoted a range of new mal-investments*. It’s therefore not a fluke that the most aggressive ‘monetary accommodation’ of the past 60 years occurred alongside the weakest post-recession recovery of the past 60 years. Moreover, the cause of the next recession will be the mal-investments stemming from the Fed’s earlier attempts to stimulate.

Unfortunately, if you have unswerving faith in a theoretical model that shows stronger real growth as the output following interest-rate cutting and/or money-pumping, then in response to economic weakness your conclusion will always be that interest-rate cutting and/or money-pumping is the appropriate course of action. And if the economy is still weak after such a course of action then your conclusion will naturally be that the same remedy must be applied with greater force.

For example, if cutting the interest rate to 1% isn’t followed by the expected strength then you will assume that the correct next step is to cut the interest rate to zero. If the expected growth still doesn’t appear then you will conclude that a negative interest rate is required, and if the economy stubbornly refuses to show sufficient vigor in response to a negative interest rate then your conclusion will be that the rate simply isn’t negative enough. And so on.

Whatever happens, the validity of the model that shows the economy being given a sustainable boost by central-bank-initiated monetary stimulus must never be questioned. After all, if doubts regarding the validity of the model were allowed to enter mainstream consciousness then people might start to ask: Should there be a central bank?

Circling back to the question posed at the top of this blog post, the question, itself, is a form of propaganda in that it presupposes the validity of the stimulus model (it presumes that the Fed is genuinely capable of fighting a recession, which it patently isn’t). Anyone who asks the question is therefore either a deliberate promoter of dangerous propaganda or a victim of it.

*Examples of the mal-investments promoted by the Fed’s money-pumping and interest-rate suppression during the past several years include the favouring by corporate America of stock buybacks over capital investment, the debt-funding of an unsustainable shale-oil boom, a generally greater amount of risk-taking by bond investors as part of a desperate effort to obtain a real yield above zero, the large-scale extension of credit to ‘subprime’ borrowers to artificially boost the sales of new cars, and the debt-funded investing in college degrees for which there is insufficient demand in the marketplace (a.k.a. the student loan scam).

This blog post is an excerpt from a recent TSI commentary.

The following three charts tell an interesting story.

The first chart shows that the real output of the US manufacturing sector has essentially flat-lined since Q4-2014.

The next chart shows that Total US Business Sales has been down on a year-over-year basis during every month subsequent to December-2014.

The third chart shows that US corporate profits peaked in Q4-2014 and in the latest completed quarter (Q2-2016) were almost 10% below their peak.

The story is that there has been a business recession in the US since the end of 2014. The business recession hasn’t yet transformed into a full-blown economic recession, but it will possibly do so within the next three months and it will probably do so by mid-2017.

The US business recession hasn’t been caused by the relatively strong US$. We know this firstly because a strong currency logically cannot be the cause of persistent economic weakness and secondly because the following chart shows that Net US Exports have improved slightly since the end of 2014.

Economic weakness outside the US has almost certainly played a part in the US slowdown, but the biggest part has been played by the Fed. Monetary policy has simultaneously caused stock prices to remain high and underlying businesses to languish, with the most obvious evidence being the favouring of debt-funded stock buybacks over capital investment.