Alt-M And Deflationist-Statist Fiat-Money Central Banks

A Benjamin Cole post

There is a still-popular framework in some monetary circles (including parts of the Alt-M crowd) that fiat-money central banks are statist-inflationist redoubts, despite the last 35 years of global disinflation and then deflation, along with falling interest rates.

The track record of the last few decades suggests that major fiat-money central banks are actually disinflationist and then deflationist, and appear unwilling to alter course.

The old argument was that nations want to pay off debts with cheap money. So nations deploy central banks to print money—the word “debauchery” and “theft” are often used—and pay off bondholders with devalued currency, cheating the lenders of their just due.


Of course, today we see Europe and Japan in quicksand-deflation and ZLB, and the U.S. perhaps but one recession away from a similar fate.

The sinister statist-inflationist central banks are proving themselves incompetent at printing up cheap money. How can this be?

The Answer

What if the statist central banks are actually very clever? They have figured out that if they can engineer deflation, then nations can borrow in perpetuity for something close to free. Japan, for example, is floating the idea of perma-bonds that pay no interest.

And through quantitative easing, nations are paying off national debt without inflationary consequence, as long as central banks can keep deflation as the norm. In Japan, for example, the Bank of Japan owns one-third of that nation’s national debt.

Central banks, by keeping interest rates artificially high—remember, with ZLB rates have a floor, despite some negative-interest rates here and there—they can use QE to pay off national IOUs forever.

The long road to deflation and ZLB has also resulted in incredible riches for bondholders, who saw their holdings soar in value. Far from being robbed, bondholders have effectively enjoyed three decades of Fat City Boom Days thanks to central banks.

Just by chance, I am sure.


A good cabal theory is that wealthy and politically influential bondholders, through captive central banks, have engineered an economy-sapping long disinflation and then deflation, extorting rising real rents along the way on soaring bond values.

Well, as cabal theories go, it holds more water than the inflation-statist fiat money central banks tale.

The Fed Is Courting a Lethal Deflationary Recessionary Vortex

A Benjamin Cole post

There is something deeply askew about U.S. Federal Reserve policy statements and policies, and, indeed nearly the entire U.S. economics profession.

For example, a Richard Fisher (former Dallas Fed President and FOMC member), an Alan Meltzer or even a Martin Feldstein can go into sweat-drenched hysterics and predict hyperinflation holocausts, and be consistently wrong for years and years, yet still be VSPs.

But no one predicts lethal (to economic growth) deflationary recessionary vortices. I do. I guess if I am wrong for the next 10 years running—well, then I will still be a VUP (Very Unserious Person).

The Threat Is?

But yet, what is the threat today? Inflation or Prolonged Deflationary Recession?

Has Japan ever escaped its low-growth deflation? Can anyone speak confidently of Europe escaping its deflationary recession?

No recovery lasts forever. At current inflation and interest rates, a recession in the U.S. would surely result in deflation and zero lower bound all over again.

But the Fed has set aside QE, and shows no inclination of lowering interest on excess reserves. To go back to QE or eliminating IOER would mark a humiliating flip-flop on policies—and all the while the naysayers would be screaming, “QE didn’t work. See? We are in a recession again. Only tight money works.”

So the Fed will enter the next recession hamstrung, slow to respond to declining prices and recession (I mean ever slower than usual).


The above scenario perfectly sets up a lethal deflationary recessionary vortex, sucking down equities and property values, eviscerating U.S. savings and balance sheets, scaring off investment in plant and equipment. The Fed will be flat-footed while the economy tanks, and unemployment soars. Federal deficit spending will balloon again, resulting in calls for austerity.

Dudes, it will get ugly.

Instead of welcoming a deflationary recession, the Fed should immediately consider “normalization” of interest rates—on excess reserves, which normally earned no interest.

And if the Fed ever wants real interest rates to be “normalized”, i.e., higher than zero, then it has set help set up sustained and robust economic growth. A central bank cannot “normalize” interest rates through monetary suffocation.

In other words, print more money. Like I always say.

The Right-Wing Should Be Sweat-Drenched Hysterics—About Deflation! “Soak The Rich, Who Cares?” Will Be New Global Anthem

A Benjamin Cole post

Okay, this will take some explaining, but deflation is a tax-dagger pointed right at the purses of the wealthy in developed nations.

It goes like this: In high-tax developed economies (i.e., the West and Japan), deflation results in explosions in cash in circulation. Evidently, people and businesses start to save in the form of cash, and then start doing transactions in cash to avoid the tax-man. Dealing in cash becomes socially acceptable.

The problem is people and businesses in the underground economy do not care about taxes. The state needs more money for welfare and warfare? Fine, let ‘em raise taxes!

And who pays income taxes? Who will be left operating legitimate aboveground businesses?

Cash Is King

We see now in the United States more than $4,200 in circulation per resident, and perhaps double that in Japan, the latter long in the throes of deflation, and where many businesses do not “take plastic.” In Europe, euros in circulation have exploded by 66% to €3,600 per resident since 2008 and deflation, despite a stagnant economy and population.

Academic economists have ignored the cash economy—one that cannot be measured, and which only indirectly contributes to official data. The official data is increasingly inaccurate, one might add.

Academics are left with the dubious stance that U.S. cash is offshore and in suitcases doing drug deals. Because they saw that in the movies?

And what explains the explosions of euros and yen in circulation?

The Upshot

So, we in the West we are heading towards deflationary bifurcated economies, one half aboveground, regulated, expensive and taxed, and one half untaxed, unregulated and less expensive.

Oh, guess which is the growing part of such economies?

Of course, disrespect for the law and state can be contagious; see Prohibition in the United States. Once cheating on taxes becomes a virtue…well, see Greece.

Maybe it is better to live with prosperity, an above ground economy and 3% inflation or so.