American consumers are not just feeling optimistic; they are thriving. They are borrowing and spending money as if the future holds no consequences.
On Monday, the Federal Reserve published its latest findings on consumer credit outstanding. According to the Fed’s statistics, U.S. consumers accumulated $28 billion in new credit card debt and other non-mortgage loans, such as student and auto loans, during November. This marks an 8.8 percent surge in consumer borrowing, bringing the total consumer debt to an astounding $3.83 trillion.
This spending spree might finally push inflation, as gauged by the personal consumption expenditure (PCE) deflator, toward the Fed’s elusive 2 percent target. Many academic economists and central planners view this 2 percent inflation rate as the ideal balance for achieving economic stability. However, we harbor some doubts.
The Fed seems focused on a strategy of controlled inflation, also known as financial repression. This approach is crucial for maintaining the flow of the debt-based monetary system. Controlled inflation allows borrowers to repay their debts with currency that has less purchasing power over time, benefiting them through the gradual erosion of their financial burdens.
Moreover, the biggest debtor of all is the federal government. Controlled inflation primarily serves Washington’s interests. They borrow extensive sums and inflate their debt away, but this strategy isn’t without risks.
Disaster in the Making
It’s essential to remember that a Treasury bill is merely a claim on future output and does not represent produced goods. The interest on these bills is funded through taxes collected from the labor of working individuals.
Creditors understand the inflationary nature of government deficits. They are aware that if the Fed loses control over this inflation strategy and interest rates suddenly spike, the value of their Treasury holdings will rapidly diminish.
Nevertheless, creditors tend to prefer controlled inflation—and the associated risks of uncontrolled inflation—over deflation, which can lead to unpaid debts and defaults. This necessity for ever-increasing debt levels is critical; without it, the financial system is at risk of collapse.
In contrast, a stable monetary system, like the international gold standard of the late 19th century, relies on growth funded by savings and accumulated capital rather than debt. In this environment, deflation can be beneficial, as lower prices enhance consumer purchasing power without the threat of widespread defaults.
Will the Fed achieve its goal of sustained 2 percent controlled inflation? The answer is unclear, and we would prefer a stable monetary system. History suggests that these schemes rarely unfold as intended. We suspect that the current experiment in monetary policy will eventually lead to significant complications.
Here are some reasons why…
As the Controlled Inflation Scheme Rolls On
“I consumed a lot of Domino’s Pizza before my heart attack,” shared our neighbor, quite seriously, following a myocardial infarction. “Now, I prefer Papa John’s.”
Was Domino’s the cause of his heart issues? Perhaps, but it’s uncertain if switching to Papa John’s is the real solution.
The underlying point is this: humans often struggle to discern simple cause-and-effect relationships. When it involves intricate, non-linear scenarios, understanding becomes even more elusive.
Complex systems, which develop gradually over time, can eventually reach a tipping point, resulting in unpredictable chaos. Thoughtful planning can’t prevent such outcomes. As John Steinbeck remarked about large banks, “Men made it, but they can’t control it.”
Recently, whispers from Bloomberg indicated that Beijing might pause its purchases of U.S. Treasuries. In the past, this would have triggered market panic. Today, however, it seems to have little impact.
Within hours of the rumors regarding China’s stance, the Treasury Department conducted an auction for $20 billion in 10-year notes, with demand surpassing the offered amount by 2.69 times, demonstrating sustained investor interest in these future production claims.
A day later, after China’s foreign exchange regulator labeled the earlier report “fake,” sales of 30-year notes soared, achieving the highest demand relative to size seen in over three years.
And so, the cycle continues. The scheme of controlled inflation presses forward.
Yet, with every indication of smoke, there is often fire concealed beneath the surface. While China’s current report might be dismissed as misinformation today, the reality could strike tomorrow.
Sincerely,
MN Gordon
for Economic Prism
Return from As the Controlled Inflation Scheme Rolls On to Economic Prism
