Translated by Carla Krüger

The US government seems to be reviving the bubble economy. A possible inflation might even help o lower the gigantic domestic and foreign debt

Of course, the capacity to agree in predictions was never one of the character traits by which the economists' trade used to shine. Yet so much divergence as in the prediction of the price development for the next couple of years was rarely ever witnessed. While some warn against the dangers of a devastating deflationary spiral that would worsen the economic depression and extend it by years, the others see a wave of galopping inflation hit the world that would in the foreseeable future undermine the value above all of the dollar. The gap between the inflation rates predicted for 2011 ranges from 2 to over 5 percent, where interestingly enough mainly the extremes – either very low or very high inflation – are being prognosticated. Values between two or five percent, in other words the usual for the last couple of years, are expected by the fewest.

The immediate trigger of the insecurity is escalating state debt, in particular of the United States and the creative monetary policy that the US Central Bank Fed has chosen to pursue, since its prime rate has reached bottom and the room for maneuver for traditional interest policy is that way exhausted. Normally, central banks channel liquidity into the banking system by so-called contango deals. They are made in such a way that the banks need to deposit certain assets as security with the central bank and in turn receive cash for a certain time at a certain interest rate. What the banks do with the money they receive and at what interest rate they lend it out is up to them. In any case, they are required to buy back the assets they deposited before the end of the stipulated period.

And here precisely is the hitch in this procedure. Since the banks cannot get rid of their questionable papers that way, and tend to doctor around first of all on their ailing balance sheets, they are cautious in lending out the liquidity proferred all so cheaply by the central banks. For that reason, in the USA as well, in spite of the zero interest policy of the Fed, the credit conditions for firms and households tend to get ever worse and the long-term interest rates has risen rather than fallen.

Devolution of entrepreneurial risk

This dilemma is now supposed to be solved by a procedure that is known under the name “quantitative easing“ and in the 90s was already tried by the Japanese central bank. A central bank engaged in “quantitative easing“ appears itself on the market as buyer of company assets and other titles. The goal is to push the interest rates on these papers downward in order to directly improve the financial conditions for companies and also for private households. Other than in the traditional framework, the Central Bank tries to control not only the short-term, but also the long-term debts. If the assets bought that way turn out to be foul, however, the Central Bank, and ultimately the taxpayers also bears the full losses.

If this practice is already disputed as such – the European Central Bank, ECB, up to now rejects it -, it is mainly the order of magnitude of the purchases planned by the Fed that makes for suspicion also outside of the notoriously inflation-hysteric ECB directory. It seems that Fed chief Ben Bernanke has announced that he wants to buy papers valued more than a trillion Dollars in the course of this year. Among them in particular derivative mortgage credits – in other words precisely those assets that tread lose the credit crisis in summer 2007 – and 300 billion Dollar in state bonds. The purchase of state bonds, other than that of mortgage derivatives, at least on its surface does not bear the risk that the Central Bank in the end will get stuck with a mountain of valueless scrap papers. Nevertheless, the excitement about Bernanke's intentions in this respect was far louder than the wonder about his announcement to push a considerable part of the hyperdebts of American houseowners onto the balance sheet of the Fed. After all, direct financing of state debts by way of the printing press counts among those deathly sins that according to the dogma of the economic mainstream need to be prevented at all costs, because they inevitably lead to escalating inflation.

However, it would be wrong to put those who warn against the looming dollar inflation simply into the neoliberal drawer. Of course, the kindling of inflationary fears in order to justify higher debts, lower state expenditures, and the most lousy collective bargaining results possible belongs to the basic neoliberal canon, yet by far not all inflationary fears articulated come from that corner. Just as natural it is that not all those who warn against a deflation and propagate “quantitative easing” can be ranged in a progressive school of thought. Thus, for instance, the European entrepreneurial association Business Europe, the European counterpart to the BDI, has pushed the ECB to follow the example of the Fed and to pass to a direct purchase of corporate bonds, above all such with a bad rating. That of course would mean nothing else but to devolve the costs of possible firm insolvencies to the public authorities, while the gains in the case of success continue to be appropriated privately. Many bankers as well would of course be in favour of “quantitative easing”, especially if the central banks happened to be interested in assets that they want to get rid of. The fact that ECB head Jean-Claude Trichet is not willing to follow such councils up to now, belongs to the very few things one should not reproach him with.

Worries about money devaluation

Just as heterogeneous as the camp of the adepts of an unorthodox monetary policy is also the camp of those whom the acting of the Fed inspires with inflationary worries and who also articulate them. Among them there are of course bone-hard neoliberals such as Thomas Straubhaar, the head of the Hamburg World Economic Institute, or also Trichet himself. However, a new wave of inflation is also expected by György Soros, the hedge-fonds billionnaire who can already no long be thrown into the same pot with the simplicity of the economic opinions of the above-mentioned. Finally, especially loud warnings come from the extreme Far East. In China in turn, the interest to press by means of inflation paranoia certain neoliberal policy concepts on the United States is likely to be rather low. The only thing the Chinese are concerned with is not to lose their money (see the jW subject of March 28, 2009). And that it is a lot of money. After all, the Middle Empire has accumulated currency reserves in the amount of two trillion Dollars, a great part of them in Dollars, and invested 740 billion alone in US treasury bonds. Therefore, the Chinese prime minister Wen Jiabao became extremely clear at the recent annual press conference of the government. Upon the clarification: “We lent quite a lot of money to the US”, there followed what was surely supposed to sound like a threat: “(...) I am worried. The US should take care to uphold its creditworthiness, fulfil its obligations and guarantee the security of the Chinese assets.” Worries were also expressed in a editorial by the official Chinesse government paper China Daily: The attempt to finance the exploding state debt by launching the printing press, would not alleviate the problems, it says there; creating enormous masses of new money out of nothing would instead throw the USA into a deep hole with galloping inflation.

Let us look at the confusion a little bit more closely. Is high inflation really preprogrammed with the start of the American printing press? Are the Chinese only paranoid, or is the argument of Ben Bernanke correct that in view of the drama of the crisis the strategy of the Fed is the only means to prevent a slipping of the economy into a depression-deflation strategy?

In fact, it does not look like inflation for miles around. If prices in the Euro zone in 2008 still rose by 3.3% on average, the EU inflation rate since February 2009 has had a zero before the comma. That is hard on the edge to deflation. Spain as the first Euro country has already reported a negative inflation rate. Even US price development shows a clear inclination to slip into the negative.

In the current economic environment, this is not very surprising. Counted over the year, economic performance in the last quarter 2008 in the USA just like in the Euro zone has shrunk by 6 percent, in Japan even by double that amount. Industrial orders in the Eurozone in January lay at 34 percent under the level of the previous year. Already 4.5 million people have lost their job in the US since the beginning of the crisis. And there is very little hope that something will change to this tristesse in the short run. The OECD expects for the USA just as for the Eurospace a decline of the social product by 4 percent and 25 million additional unemployed in the industrial countries overall.

Financial capital profits

Is it not completely crazy to think that in such a context, inflation might develop anywhere? Indeed, a massively expanded monetary emission by the central bank need not automatically drive prices up. Japan as well started the printing press in the 90s to fight a continued depression and deflation and nevertheless, until today, has an inflation close to zero. The decisive question is who gets the money in the end and what he or she spends it for. Only if the money ultimately arrives at those who buy real things like rolls or cars, will it flow onto the goods market at all, and only if it leads to a significant jump in demand there, is thereneed to count with a price push caused by the demand side.

Who gets the trillions given away by the Fed? Bernanke's purchases of mortgage derivatives and bonds will profit first of all the institutes that hold such papers: banks, mortgage financiers, also hedge-funds. The idea behind this is that these will again spent the liquidity thus acquired for their activities on the financial markets. If they buy, for instance, stocks or bonds on the secondary market, their value will rise. In effect, this means that also the emission of credits for enterprises might become cheaper again. It is also intended explicitly to bring the frozen mortgage market into flux again and to lower mortgage interest rates. Indeed the fixed interest rates for 30-year-mortgage credits since the announcement by the Fed have sunk by 5.15 percent to 5.09 percent.

Only to the extent to which the liquidity flood of the Fed has as its consequence an expansion of credit volume to firms or consumers or respectively lower credits for such credit takers, will it also have a demand effect. This also concerns only a fraction of the money. It looks similar with respect to the planned purchase of state bonds. After all, the escalating US state deficit as well can be traced only to a small degree to the increase in real expenditures. The largest part results from state rescue action for rotten banks and insurers. The enormous sums that flow here serve the rehabilitation of shaky balances, recapitalization, the off-payment of creditors – again overwelmingly financial institutes – and are likely to stay overwhelmingly in speculative financial circulation. Even where money in form of boni, interest rates or dividends gets through to private citizens, it hits overwelmingly those who again save the largest part of it. The craziest programme by the American finance minister Geithner to prepare up to a billion Dollar to incite hedge-funds to speculate in what are at this point unsaleable scrap papers and to relieve them of the risk inherent in this speculation by way of state money goes into the same direction. Here as well almost exclusively the speculation cash register is filled, and even if the Fed took over directly the financing of this billion, hardly any additional Dollar of it is likely to be spent somewhere in a supermarket. The only price segments that may rise again would be diverse luxury brands, because if the plan works, at least the US American financial nobility would be well off once again.

US profits of Dollar inflation

Theoretically, you might conceive an economy, where the central bank produces money endlessly, where this money, however, flows exclusively onto the financial markets and leads there to the emergence of new bubbles. Yet quite a few things speak in favour of the hypothesis that Washington's “Plan A” consists really in reviving the bubble economy of the last years with full energy. This might contribute to a recovery of the real economy as with the booming financial markets both the incomes of the upper class as well as the credit opportunities for the vast population majority would rise again. However, hardly to the extent that massive inflationary dangers could rise from that. In fact, the USA in that way put their stakes precisely on the model of debt-financed consumption that has carried their and the world economy in past decades. That this model could be continued may seem hardly imaginable in light of a total debt of the American private sector at a level of 42 billion Dollars. Yet, on the one hand, part of these debts is after all assumed by the state now. And, on the other hand, there is of course no objective indebtedness limit. As long as enough credit money flows to finance a considerable part of the debt payments due by ever new credits, the game may continue to infinity.

Summarized briefly therefore, “Plan A” goes as follows: The American state relieves the otherwise simply bankrupt financial sector of a considerable part of its debts which the latter that way can write off without suffering much losses. These purchases are financed by higher state debts, because it is completely clear that the American taxpayer will never be able to pay up on such deficits. The Fed guarantees by its bond purchases low interest rates to the state for its debts, and by its asset purchases it contributes yet more to the clearing of the toxic weed at the financial institutes. The trilllions of Fed liquidity will get the credit machinery back into swing, bonds and stock quotations rise. Banks, central banks and private investors the whole world over regain their trust in the American productivity miracle and again only vy for sinking their money into the black hole of the US debt spiral.

Whether the US government itself believes in this plan is hard to judge. Of course, today's financial markets can be trusted to do a lot, and the US Americans these days do everything imaginable to lull foreign investors into benevolence. The over 50 billions in state tax money that they transferred to foreign banks for obligations of the AIG – of these by the way twelve billion alone to Deutsche Bank -, can only be explained in this context. In the light of a gross emission of American state bonds in a value of more than three trillion Dollar this year alone, however, another scenario as well might not be completely neglected. This would entail at least the bigger and smarter market participants considering the purchasing offers of the Fed not as a signal for entry, but as an opportunity to part with their Dollar assets without too much regret and to go running with their money. If this reaction dominates, there will develop no new bubble, but a run from the Dollar that will only be amplified by each additional money injection by the Fed.

In the case of smaller countries, this effect manifests almost automatically. Therefore, - in the case of free capital traffic – the launching of the printing press leads almost always to inflation. Because if the foreign value of a currency collapses, imports get extremely expensive, and this quite independently of the state of demand. By way of imported intermediate products and raw materials, domestic production ultimately gets more expensive as well. That depression and hyper-inflation go well together, of this the countries of Latin America and South East Asia have a sorrowful tale to tell. Yet this situation is especially sorrowful for these countries, because they as a rule hold their foreign debts in US Dollars or other “hard” currencies, and the weight of such debts becomes ever more pressing by the loss of value of their own currency.

Precisely for this reason, smaller countries need to avoid such a scenario at all costs. For the USA, by contrast, it is not threatening at all. Clearly, the United States are in the comfortable situation to be able by “inflationing” their currency to “inflate” away both their domestic debts as well as their gigantic foreign debts. The suspicion is therefore not so out of the way that the USA have this strategy in reserve – at least as “Plan B” - and will use it cold-heartedly, should “Plan A” not turn out to be realizable.

Developing countries are losers

Indeed, an inflationing of the Dollar would have few disadvanatges and very many advantages for the American upper class. The decisive advantage would be that the American economy would be rid of all debts at once and could begin quasi from zero. Among the disadvantages is that after a massive loss of value, the Dollar might lose its status as lead currency. That way, there would also disappear part of the profit opportunities for the US American banking system. Nevertheless, the economy of the country is too big for thinking that the Dollar won't play any role as investment and reserve currency any longer. Another disadvantage would be that the American upper-class in case of an inflationing of the Dollar would of course lose part of their wealth. Yet the damage will be relatively limited, because the really rich people in the USA hold their money in many currencies, mainly also in Euro that might not necessarily be affected by a Dollar depreciation. Moreover, all real estate property and all forms of productive ownership and stocks are inflation-resistent. Entreprise capital could, at least in the case of firms in the processing business, yield even higher profits again, because a declining Dollar might open the chance to begin an export offensive with cheap products without any competitors.

Losers from a massive Dollar inflation would be the American middle-class that would lead a large part of their savings and its old-age insurance. However, among the losers there would mainly be many emerging countries and developing countries, who under the pressure of the currency regime of the past decades literally starved themselves for billions of Dollar reserves. After all, as demonstrated at the latest by the South East Asian crisis at the end of the Nineties, in a system of free-floating exchange rates only those central bank will have a chance to defend their currencies who in the severe case of speculative attack dispose of sufficient reserves. As a result, the currency reserves of the emerging and developing countries between 2000 and July 2008 rose by 5.3 trillion Dollars. A large part of the huge foreign trade deficits of the USA in recent years were financed by the central banks of these countries. Along with China, also the former South East Asian tiger states - Singapore, Thailand, Malaysia and South Korea have driven up their currency reserves. Yet Russia also gets 376 billion reserve Dollars on the scale, Brazil 203 billion, Mexico over 80 billion. Even relatively poor countries such as Poland or Turkey accumulated nearly 70 billion Dollars.

A large part of these reserves is invested in US-American state debts. Overall, about half of the six trillion Dollars of US-American treasury bonds is now in foreign hands. The incentive for a country to inflation away its debts if a huge part of those damaged sits abroad should really not be underestimated. For the USA, such a policy would simply be the continuation of the expropriation of the “Third World” practiced for decades with other means. The misfortune that apart from that yet some more international finance institutes and rich private investors might snuff it should also not trouble Washington too much. After all, the latter would have it in their hands to thwart “Plan B” by continuing to diligently buy American financial papers and that way refraining from bringing the cardhouse to collapse.

It is like with a bank and an over-endebted large customer whose bankruptcy would draw that of the bank in its immediate wake. It is very probable that the latter will still get a very long credit line even if the bank manager has known for a long time that it has sunk money into a bankruptcy candidate. Yet, sooner or later, things will be finished in spite of eveything. In contrast to this big customer, the US upper class still has a master strategy for this case by way of the inflationing of its own currency in order to not even have to vouch for its own bankruptcy. However, not many words need to be lost about an economic system whose life capacity for a long time has relied exclusively on such hot air bookings. After all, it would not be a bad idea either to simply pay people higher wages and better social benefits instead of starting ever again to maintain the demand for sales and export by endlessly rising debts.