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During the past few years, the activist strain of central banking has spread around the world like wildfire, but the impact of this change on the future course of the global economy is very unclear. The number of countries involved now covers the developed world, the multitude of interventions in the financial market has expanded dramatically, and the amounts involved are exponentially higher than they were in 1979 when the Chrysler bailout began the process. Back then, the US Treasury guaranteed a $1.5 billion loan to the automaker, but the government demanded and received $2 billion in concessions from labor, the company, and other stakeholders.
Now, 14 years after LTCM, we know that the previous quarter century was just child’s play. The central banks have to pay a lot more for optimism today. Loans aren’t enough; now they must give the money away. Printing presses are running flat out (I know this is different than Zimbabwe, but…) and the developed world monetary base is almost three times higher than it was at the start of 2008.
All this money sloshing around is nothing but kindling. This is enough to start one hell of a large inflationary fire, but probably not until we have a deflationary panic first – which will add even more kindling to the pile.