FROM THE NEW NORMAL TO THE NEW CRAZY

Vincent Deluard

This is a commentary on the excellent essay by Mr. Deluard in the September 16, 2016 issue of the weekly GaveKal newsletter

David Hay's introduction: 1 David notes that Vincent has written that the FED and other central banks have 'fabricated' 15 trillion in QE process to buy government bonds.
I agree.
And that this has not generated the high inflation that was feared.
I agree and note two reasons are (a) much of the new 'money' is spent outside the country (such as in China and Japan) and (b) it is barely countering what would otherwise be big deflation.
David notes that Vincent concludes from this that QE can continue to painlessly extinguish debt.

With this I question or disagree because I think the QE creates debt rather than extinguishes it, but of a special kind. The 'miracle solution' is to create debt that never needs to be paid, but it is creating the massive credit on which the world money supply is running. Like the original Bank of England 'perpetuals'.
However, U.S. treasury bonds held by foreign investors (banks) may pose a problem.
And to the extent that the Treasury via banks gives credit to pension funds and insurance companies what happens is that those entities use that credit to buy long term Treasuries and that keeps the credit from expanding the money supply.

David continues: "the Achilles' heel is that the trillions the central banks have created to buy the bonds are essentially stuck in the global banking system.
Exactly, stuck, and that is the "miracle."

He continues "all that funny money has done precious little to help the planet's economy"
Well, it has kept the world out of deflation, but otherwise I agree.

David continues again: 'The reason is that velocity (the circulation rate of money in the financial system) has been falling as fast as the pseudo-dough was created."

I disagree with the theory of velocity, and will discuss it separately.
And continues, if "the trillions truly do begin to circulate, leading to virulent inflation, a condition always and everywhere devastating to financial markets (and human beings.)

No question about result of inflation. But some of the trillions already ARE circulating and are offsetting deflation - they circulate in the form of negotiable credit. It appears that the V in their equation is decreasing because M has been increasing so much. But not as much as it would have if all warehoused credit had been put into circulation. But the money supply does not circulate, it expands or contracts. The derivitave - V=dm/dt - the first derivative of position is a measure of expansion rather than movement. And it is the second derivative of position A=dm2/dt called acceleration that is the really deadly problem - Not only is the volume of credit expanding, that expansion is accelerating. If the Treasury-FED operation continues perhaps the 3rd derivative of position (known as Jerk) that is the acceleration of the acceleration will create the full diaster. But, again, I note that much of the credit being supplied replaces prior credit that is being extinguished. A significant decrease in the credit component of the money supply would lead to depression.

I believe one problem is that everyone focuses on Debt - but for every dollar of debt created there must be an equal dollar of credit. I do not see any real discussion of the result of negotiable credit (which is denomnated in money) in the economy. Exception is Felix Martin - Money: The Unauthorized Biography - excellent description that shows Money IS Credit and reverse. But then he is incoherent on concept of 'value'.

But it is credit that is fueling, for instance, the hedge funds and these wondrous 'unicorns' whose 'valuations' Forbes and others applaud so much. These valuations are paper, that is credit. Forbes itself regularly lists some billionaire whose 'net worth' increased or decreased by several hundred million without him doing anything.

David again, "...my quibbles would be with the idea that there has been deleveraging since the Great Recession ended."

With this I fully agree. The world is leveraged out the kazoo. Yes, private sector reneged on some mortgages, but more remain in limbo and will soon hit the fan, plus student loan debt and auto loan debt are increasing. Felix Martin has important thought related to this. He shows there are two kinds of 'money - credit' sovereign money and private money.

David then rightly notes: "global IOUs have risen by a staggering $57 trillion in recent years.".

Exactly, and what pray tell is an IOU but a credit instrument. That is the credit, which is the automatic counter part of the debt. And the fact that the world economy is floating on that credit is why the debt cannot be liquidated. (And Martin shows that a huge amount of this is private money, not sovereign money). As for 'economic growth' (I hate that term - it should be expansion). But that it has very little to show for it is for one thing -simply a result of the law of large numbers. Every added 'dollar' of credit now must produce significantly less than a dollar added to output than when debt=credit was a tenth its current size. The world is not only swimming in credit but is on a treadmill to generate more and more credit.

David continues: about the U.S. economy retail sales report.
I have no real opinion on this but it does seem to me that if the long earnings recession they cite or question is ending it is due to it being measured in smaller and smaller dollars - accelerating 'growth', meaning expansion, if it happens, will be a monetary phenomena.

Finally, with respect to this introduction, Vincent may be right that we will see 'an explosive up-move in the market', but it would be on the basis of the 'funny money' and an example of inflation - that is reduction in the nominal value of money. Will it, could it, be due to an 'explosive increase' in real output of goods and services?

The following is comment on Vincent Deluard's essay.

He begins with: "about twelve trillion of negative yielding bonds foretell a plague of deflation, massive capital misallocation, and lurking black swans."

Misallocation of capital and black swans for sure. But not 'foretell' but - are result of deflation. Note, that governments try to keep interest rates below the rate of inflation in order to repay debt with cheaper 'money'. This is the 'financial repression' practiced for instance, in the 1940-70's to repay debt of WWII. But with interest rates made and kept low to avoid increase of current government payment on deficit. The government MUST also keep private interest rates below the inflation rate that the government itself manipulates. The FED continually speaks about a target 2% inflation rate - unobtainable in a deflationary epoch. So, as long as the nominal inflation rate is near zero the interest rate on private savings has to be below that.

The following graph is terrific - Of what do this global central bank assets consist? Assets must be balanced with liabilities - of what do the central bank liabilities consist? Rather important to understand.

Indeed, as Vincent remarks, "difficult questions need to be boiled down to a binary decision." His decision tends toward a 'bullish' case for increased market 'value'. He then notes some potential dangers which would turn into a bear market.

I will try to describe my thought on what the worst 'danger' will be.

Next - the Bearish case
- No question the current market condition is painful for bears - they insist that fundamental economics analysis results in a bear market - yet the bull keeps pawing and snorting if not yet charging. He cites the Shiller P/E - on which I don't base very much reliability.

I believe Vincent's comments on the Shiller are right. Another excellent graph. Explanations to a Martian are enlightening. I believe we have many Martians around us who should study explanations. Key point, the 'fantastic gains amassed by capital owners adjusting for inflation.'
Just look a the specific names in Forbes wealthy 400 and check the sources of their wealth. By my count about 25% of them are in financial industry BUT NOT CEO's of big banks. They are using the phoney credit the FED is generating - see above. Very few have anything to do with manufacturing. Look what happened to that young lady who created Theranos and was credited with a net worth of many billions only to loose it all in a few months.

Next - "Since wealth is a relative concept."
Please, please put this in neon lights and frame it. Make a heading out of it and put at top of ALL publications. If readers would absorb this one fact, it would make study of the report worth gold bars. The rest of his conclusions from this are irrefutable. See again Theranos. 'Value' is also a relative concept and both are abstract concepts.

But then we read, "Capitalism's relentless pursuit of profits squeezes wages, which naturally reduces final demand, just as the economy produces more goods. As a result, capitalism needs to be constantly expanding to avoid collapsing on its own contradictions."

I have to disagree with this. What is constantly expanding is the credit based money supply which makes each marginal addition to that supply worth less. New markets are expanding world wide now at greater extent than in the 19th century for the new products. But, true, demographics is reducing populations and shifting age distributions, which shift relative demand for various goods and services as he then notes. So the content of output must change. I see no reason that the size of the economic pie must shrink.

Vincent's paragraph on innovation is excellent. But I would be surprised if there is a 'collapse of productivity' on an individual worker basis among actual workers - but no doubt there is a 'collapse of productivity' on a total population base (even an age 20-60 base) because so many people are at zero productivity which will bring the average and total down greatly.

More on this later, but for now think of producers and consumers. Everyone is a consumer, but relatively few are producers. People who are only consumers cannot 'save' - Only producers save, because savings are retained output. Something must be produced before it can be saved. Anything given to a consumer that he didn't produce but then does not consume was produced and saved by someone else.

For more on the critical importance of 'innovation' read Deirdre McCloskey's three volumes on Bourgeois and George Gilder's books.
Vincent is 100% right in noting the cause of the housing 'bubble' and the phoney concept of 'wealth effect'.

4. FED and other banks missed their chance -
Vincent remarks, "the Federal Reserve will be in the historically unprecedented position of fighting a recession without the ability to cut rates."
I never have understood the theory of fighting 'recessions' or expansions by cutting or raising interest rates. And I don't understand why 2014 was an auspicious time to raise interest rates. Rates are kept low to reduce the Federal deficit. Of course 'data-driven' is Jaberwaky speak. The Jackson Hole conference is indeed a comically show - maybe like SNL. Vincent's remark about the central banker's blind following should be illustrated with a Bruegel painting. But once on the dance floor they all have to dance- other wise the FOREX would go crazy.

Next comes another priceless comment. "Alas, the temptations of a control economy are too great."

Well, why opt for a career as a controller unless you get to control? Same goes for all 'regulators'. Opera singers love to sing, and Regulators love to regulate.

Chinese debt is the book keeping side of credit just like all other debt. And of course same result occurs as mentioned above - each new marginal yuan of credit produces much less than a new yuan of output. Vincent is very helpful in putting numbers to the show - 33 'cents' now versus '73' cents earlier. So what is the comparable result for the dollar of marginal credit and of EU?

But, of course more debt is needed - we all are Keynesians now are we not? Isn't Krugman the messiah of expanded credit?

I copy another statement to be framed. "Perversely, the fall of 'debt multiplier' means that an ever-increasing amount of debt is required to achieve the same government-mandated 'growth' target."

Didn't I say tread mill? But please change 'debt' to 'credit'.

Another revealing graph - "Chinese Model and its Limits" -what about a similar graph for the USA?
Yes, indeed 'Brexit' is a great 'enabler'. Anything now is jumped on in the search for 'enablers'.

But more great phrases follow. I love this stuff. "Any economic data point can be used to justify all central bankers' decisions." But expand that into 'all economists' theories. If something does not appear to 'justify' one thing it often can be used to 'justify' the opposite.

I love 'distortion field' as well. Vincent has a career beckoning as a presidential speech writer.

Now - "The Bullish case'.
Vincent apologizes un necessarily for giving us strong bearish arguments. The 'scare' is very real - the question (to be explored below) is how long the wizards can keep their curtain closed in the Land of OZ. Lets see what Vincent thinks. "Hopefully' is the key word here and he is clearly a short term optimist.

Ok - the 'scare' is that Trust will disappear again. Money (that is credit) itself exists on the basis of trust - trust that the one holding the 'short end' so to speak will be able to exchange his asset (IOU) back into an asset at least as 'valuable' as the one he exchanged for this IOU. Note, that when the collapse came in 2008 the FED and Treasury did not 'print' more currency - even though they were terrified that everyone would rush to exchange his credit for currency, thinking that currency was safer.- they threw more credit into the market to show that while private money was no longer trustworthy they would supply sovereign money as needed. The 'scare' is - can they do that again?

1 - All valuations --
-Vincent repeats comment about the Shiller P/E It is indeed one theory out of many. He dissects it with a scalpel then states his view. "As far as valuations go. I prefer to use Tobin's Equity Q ratio."

ME too. Yes, it is a bit controversial. But Mark Spitznagel uses it effectively in his book 'The DAO of Capital: Austrian Investing in a Distorted World" I hope all analysts study this one.

When Vincent writes that the Q ratio is currently benign, that is significant.

But I do have to nit-pick at use of the term 'obscenely' - the size - quantity - of an abstract theoretical measuring tool can hardly be obscene. Vincent is picking up one of these hype terms from the 'come-on' press.

And having been to Russia many times and spent years of study, I do not think anything in its market can be 'cheap'. The whole place is a hall of mirrors - kleptocracy to be avoided. It is so full of 'black swans' one cannot find a white one in the quicksand.

Yes, I was there when the ruble was devaluated and did great cashing in my American Express dollars for more rubles and then buying suitcases full of books before the clerks changed the price labels. But the Nobel winning experts at that Ponzi scheme fund didn't do very well, did they?
Interesting graph again titled -"looks like value to me" Well, as Vincent notes, wealth is relative - and so is value.

When a 'measure' given for 'value' changes dramatically my first question is 'what is really changing, the physical item or the measuring stick? If a 'yard stick' now has more, but smaller inches in it, the measure of length in inches will increase. The common method is to evaluate assets in terms of dollars - but we should be measuring dollars in terms of assets. A brick is a brick no matter how many 'dollars' are ascribed to it for its 'value'.

Indeed, Vincent notes 5 recent cases of deflation in the nominal 'value' of specific asset classes. What is currently holding the other classes up? Why is the Relative value ascribed to these 5 changing so much in relation to other classes of assets? Do they have very significantly different supply- demand curves? Seems to me that European banks and Chinese stocks have declined in relative value for reasons.

2 - The Earnings Recession
Indeed, as Vincent notes. "Buy-side analysts often scoff at beat numbers."

Are those not created by sell-side folk? Is not this phenomena a warning that all 'evaluations' are ultimately figments of desires by those who make them. The graph is very helpful as a demonstration of consensus opinion.

3 - New Normal
Vincent writes again something I also wonder about. "how government statisticians can computet GDP growth with 2 decimal precision " etc.

I think we learned in high school physics about unauthorized added digits to right of the decimal place even when the components of a final statistic are known. But the matter of the GDP is even more wondrous. White tells us how it was concocted and for what political purpose, Mishkin tells us the current process and claimed meaning, and Coyle tells us the 'inner story' about its shortcomings as far as a measure of real economic conditions go. Vincent notes 'growth' meant 'more stuff'. That is another concept about which I wonder. Just what does 'growth' mean? More stuff? Or 'better' standard of living? Does longer life spans count? He poses typical questions about what counts and how it is measured. If a measure of 'growth' is based on monetary price, what about when many goods and services are 'free' to the consumer whose expenditures are being counted? But nothing is really 'free' - its creation (production) cost someone, somewhere, a 'cost'. 'No free lunch'.

Vincent's example of Airbnb is quite relevant.

Real costs are not only measured in expenditures spent but in losses from expenditures not spent.
Then comes GDP itself, for which Vincent states the official theory - it equals output times prices. His comment shows the problem of counting only final output and only price to the final consumer. According to "Austrian School ' economics and Mark Skousen's elaboration in his Structure of Production there are costs, assets exchanged and consumed - money spent and exchanged (especially credit granted and paid off) - much economic activity in other words, during the lengthy creation process. Building the rooms used (the ten thousand mid-size hotels that were built but not used) cost something - and the rooms that were used also cost something. And the process of matching up the renters and hosts cost something as did the arrangements undertaking by the hosts. So the industry is not free even though in GDP data its cost does not show.

Bravo again : "Monetary veil" indeed, pure abstract concept that is much mixed up.

4 - "We may not have a debt problem" -
Indeed we do not - we have a credit problem and the problem with credit is that its existence is determined by trust - There is no practical limit to the amount of credit given and taken as long as all parties trust that it will be repaid if and when the parties desire that. But, without trust, no credit. Whose credit has the strongest measure of trust? - the sovereign, IF the sovereign has the coercive power to define what credit=money is. Unfortunately throughout history we see that so many sovereigns eventually because un trust worthy. (as described in This time is Different) for modern times and the histories of Rome and medieval England as well (notorious incident when King Edward III defaulted and destroyed Italian banks). Can the USG and EU and Chinese and Japanese governments retain the people's trust? So long as they retain the coercive power to tax as much as needed.

Vincent writes: "'clients usually retort that deflation is a problem when debt is high."

What they really mean (whether they understand it or not) is they believe there will be a problem if and when credit is withdrawn ,or even no longer increased. - Withdrawal of credit (more and more the component of the money supply) would indeed be deflationary as it reduced the money supply. But deflation already exists due to the usual factors, and is only being postponed by this expansion of credit money supply. Yes, with money content being nominal credit and its counterpart debt are nominal and it would require exchange of more monetary assets in the future to cancel credit=debt if the nominal measured size of the monetary unit was smaller. This is the perennial problem that has been described ever since writing was created (including cuneiform tablets). Of course the favor of this to the debtor is equally matched by the loss to the creditor. This is why we read of 'Jubilee' years in the Bible and contemporary documents when debts were canceled as a social measure.

Vincent continues: "I find plenty of empirical and philosophical flaws with this theory, Outside of the Great Depression, there are few instances when deflation led to a contraction of real GDP. If anything deflation was the norm during the Gold Standard. The U.S. CPI dropped by half between 1871 and 1941, a period that witnessed the conquest of the West, ... et cetera .

But for starters, the dates are wrong - rather consider about 1830 and 1880 or 90. - certainly not 1941. But the 'gold standard' meant that the real and nominal value of the dollar was equal to its defined amount of gold. And this was shared by the European trading partners. The Victorian era was indeed one of the periods of major deflation in Western History - read The Great Wave. Deflation then was caused by the usual conditions. Other periods of great advances were the Renaissance and Enlightenment - deflationary epochs. In the last half 19th century the CPI, as measured later, dropped because of deflation - that is increased production, reduced cost of transport and communications with limited increase in quantity of gold (resulting in small increase in currency and credit. (Actually credit did increase periodically with issue of 'wildcat' bank notes but was consistently Then reduced when credit evaporated (see above) in another bank panic). Read John Steel Gordon's book An Empire of Wealth, and any history of money.

Also, note the fallacy in Jeremy Siegel's excellent book - Stocks for the Long Run. On page 77 he creates a graph to show 'total nominal returns and inflation' - The X axis is time from 1802 to 2002, and the Y axis is log scale of Dollars. So he shows that both dollars and gold move along the $1 dollar line together until 1930's and then gold rises a small amount, while throughout the 19th century stocks and bonds are rising - increasing in dollar 'value', This supposedly shows that gold was not a good investment - AMAZING - of course the dollar and gold were IDENTICAL by definition, so gold did not rise except for a tiny blip during the Civil War when the USG issued greenbacks, deflating the dollar - NOT increasing gold. Talk about cause and effect!!. And the 'rise' of gold on the graph since 1971 is not its rise but the dollar's fall. Same for those glorious stocks and bonds - it was the dollar that was falling - as William J. Bryant lustily proclaimed in his 'Cross of gold' rant. But Fisher made the same mistake in his The Great Wave by graphing prices of grain and other products over time against a Y axis indicating a steady ounce of silver over centuries - it was silver that was falling, not wheat that was rising.-
Vincent continues: "Philosophically, the argument that 'inflation-is -good-for-debtors-which-is-good-for-the-economy' essentially posits the 'euthanasia of the renter' as the end goal of monetary policy"

Bravo again, Vincent gets it exactly.
Inflation is 'good' for debtors and the debtors are both the ruling government class and its voters. The 'renter's class are the productive investor-saver class. Keynes himself was on record as despising the 'renter' class and wishing them gone. But in his day he was thinking mostly of 'renters' as the land lord class who lived off of the income generated by their tenant farmers, not innovative new products.

Vincent again: "But how can Keynesian economists so loudly champion credit, and so deeply scorn savings" Are they not the same thing" And how could savers never realize that they are being systematically ripped off by stealth inflation?"

There are several issues here. Saving is retained earnings. Only producers create saving. The 'credit' Keynes championed and his followers like Krugman continue to champion is generated by government. And they want it to be given then to their consumer voters. Credit given to consumers is not really 'savings' but if it is NOT spent that defeats the Keynesian purpose (theory ). Monetary assets (created by the banking system from this government credit) and sitting in a consumer's bank account is popularly and falsely called 'savings'. Keynesian theory believes that these assets when exchanged for produced assets will generate the 'demand' that they consider inadequate. But over recent several decades the financial industry has managed a massive increase also in private credit=money. Martin claims it is even greater in extent than sovereign money.

Vincent's last point - The government with its policy of financial repression in the 1940-60 period did systematically rip off the public by setting maximum interest rates allowed below the rate of inflation in order to pay off the WWII debt. People did realize this and were helpless until two genius bankers created the money market funds (The Reserve Fund) that then enabled small 'savers' to by pass the banks and S&L outfits and obtain higher interest rates. This naturally led to the collapse of the S&L industry and a government 'bail out'.

Vincent again: "But my biggest issue is with the debt burden argument. First, because it rests upon the often-repeated notion that this recovery was built on a unsustainable increase in debt."

Please again, note that debt is only the side effect of credit. The 'recovery' is only in financial assets whose nominal 'value' is based on credit. It is credit that has had au huge increase, whether or not that is 'unsustainable' is a different issue. Consider who owns the debt and why might 'repay' it had how. One aspect is that so much of this 'credit=money' is private and not sovereign, but as was shown in 2008 in UK as well as US, it is the sovereign who will have to pick up after the next mess.

But in the next paragraph Vincent writes: "Since it is impossible to disagree with the reality that the private sector has deleveraged ---

Well, I do disagree. Yes in 2006-08 the private sector did deleverage, mostly by walking away from mortgages and that generated massive additional deleverage in the convoluted chain of derivatives built in false 'values' of that credit. But since then other sections of private credit have expanded. But the disaster then came from 'mark to market' and then to loss of trust - faith - within the holders of all that paper credit. No one knew what the 'value' of that stuff really was. Then with Reserve Fund breaking the dollar that triggered more deleveraging until the Treasury stepped in. Meanwhile, in England the Chancellor had to step in and nationalize Northern Rock because the BOE could not muster enough credit to keep that bank liquid.

But Vincent continues rightly to note that sovereign governments had to create substitute leverage.
As I write this I read in today's Outside the Box essay by Danielle DiMartino Booth that world 'debt' has reached 200 trillion - call it credit and I agree.

Now we get to a central concept and issue. Vincent writes: "The notion rests upon a fundamental misunderstanding of what debt is, and how quantitate easing works. Debt is the promise to pay interest when it is due, and the principal at maturity. --- But things are very different when that security is held by a central bank.

Exactly but to continue. He describes how the FED returns the interest it receives on debt securities (less its expenses don't forget) to the Treasury.
Its check is NOT to the exact value of the coupons it has received.

But now the rub, and Vincent gets it in spades (while the world does not.) He is exactly right that the FED has no intention to repay the principal. And he is right that the FED and treasury could simply eliminate that debt - make it disappear.

But why can it do this? Lets look at the origin of the FED. The more astute of the Congressmen realized what the banks were up to. In the law they prohibited the FED from BUYING Treasury paper since that would enable to Treasury to expand the money supply infinitely - just what the 'free silver' types had been demanding for nearly a generation -and what the progressives wanted in order to pay for their programs. So the FED for years had to play its game by open market operations and discount windows and all, buying and selling Treasury paper back and forth to banks - claiming in this way to control the economy. But now, faced with the financial system imploding the FED got the idea of simply buying not only Treasury paper but private paper as well and simply stashing it on its balance sheet as 'debt'.

Think of this. When a private person or bank or business issues credit it is one side of an exchange of assets. Someone has an asset worth $100 in cash and wants something the market values at $200. The counterparty has that asset worth $200. The exchange is -Mr. A gets the asset worth $200 but also has a debt of $100 and he gives Mr. B his $100 plus an IOU for $100. Mr. B now has assets of $100 cash and $100 Mr. A's IOU - Plus of course there is some interest determined to be owed and paid - assets and liabilities on their balance sheets.

But this is not what the government and FED are doing. The Treasury is simply giving thousands of dollars of credit to the world - one way - no one is exchanging anything for that - it is pure book keeping. Sure the account books appear balanced since a 'debt' is recorded. But to whom does the government OWE that debt? no one but itself. The government is not really 'borrowing' anything from anyone. It is providing credit to everyone. But in the overall process it has replaced in the economy some private money with some sovereign money. Vincent is right that this never needs to be repaid, but because it would be repaid to itself and in the process to keep the books straight would also cancel some of that credit that constitutes the money supply. So something serious would indeed change.

But, yes, once the FED puts credit- money into the economy Americans spend it to buy Chinese, Japanese, German and other assets to import and pay them with American credit which, to protect itself, the foreign banks use some of that to buy American Treasury paper. This helps keep US interest rates lower. The Chinese also use it to buy land and stuff in Africa and of course oil.

Vincent continues with a sledge hammer. "Understanding the debt monetization cycle can change our perspective on the global economy because the amounts are gargantuan." Indeed, as he provides some real figures. His next graph tells the story for all who will understand what they see.

He continues, "This debt monetization mechanic has been fairly common throughout history.

He cites only the Weimar government example. But the same process was involved every time a sovereign ruler 'cried up' his currency and reminted it so a new coin with less weight or quality of silver was stated with the same legal value.

However, next Vincent misses the point, I believe.

His next paragraph begins, "My best explanation for this general incredulity is that we choose to deny a reality...." He discusses the question of debt needing to be paid back or defaulted on.

But I try to point out that THIS debt does not need to be paid back because it was not a result of something being borrowed from a counter party - it is an accounting statement - To whom would the government 'pay back' this debt? And it is not, nor is the Japanese debt, due to the use of printing presses. It is substituting for printing press and minted currency. It has not led to some inflation because it is preventing deflation. But it is leading to some actual inflation - just not in the items included in the CPI. Instead it is in assets.

Now we get to the 'bottom line' so to speak - What is 'in it' for us investors?
Vincent writes: "government deficits do not matter in the 'New (deflationary) Normal' in a fiat currency system, the only limit to debt monetization is inflation...."

He then discusses the option of USG fiscal stimulus by spending on infrastructure. This indeed is a very popular gambit with politicians now, including outright pork barrels.

But I wonder if "that public stimulus is a free lunch in a deflationary environment." It is one thing to pass out free credit without an exchange of assets and quite another to exchange credit for real and new assets. The 'relative fiscal restraint of the Obama presidency is entirely due to opposition by the Republican Congress.

No doubt Vincent is right in his assessment of bank and business applaud of the government launched a big infrastructure program. Already we read in Barron's recommendations about which companies would benefit most for construction. But much of this kind of project already is being financed by private bonds redeemed via tolls on the road or bridge.

Vincent is right again with his comment of central banks. But negative rates are much worse than only their impact on equities. They distort the entire price mechanism in its function for best allocation of capital. What a great chart showing the impact overtime of negative rates. But Keynes said that in the long run we will all be dead. :) I find the footnotes to be valuable as well.

OK -so much for debt, money, and credit. But I have not discussed the even more fraught theory that the economics profession believes and which drives all of this. That is the real meaning of 'value'. Topic for another time.