The Great Reflation

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The Great Reflation

According to Tony Boeckh, the underlying force that creates bubbles — and bursts them — is the ebb and flow of money.  Boeckh was chairman and editor-in-chief of BCA Publications, publisher of the highly-respected Bank Credit Analyst from 1968 until 2002.  In his new book, The Great Reflation,1 Boeckh focuses on the importance of money flows, whether from debt or from monetary easing. 

Today, as he points out, governments around the world have successfully "reflated" the global economy.  Now, the question is what bubbles will this create and how will it all end?

The Trends editors have discussed "the great reflation" before in looking at the broader "debt super-cycle."  In late 2008, we described why this reflation strategy would succeed short-term and why it would result in the V-shaped recovery now taking place.  We've also discussed the longer-term risks as the government tries to compensate for a lack of private consumption and investment by relying on government spending.  Going forward, the biggest risk will come if the government keeps spending and tries to raise taxes. 

Our present discussion of The Great Reflation will highlight the underlying realities that got us to this point where we are, and the most likely scenario that lies ahead.  To do so, we will examine Boeckh's fundamental arguments in the context of what we've learned from other sources.

Let's start by looking at how we got to our present situation.  In the wake of the late 2008 financial panic, the Federal Reserve and U.S. Treasury, in concert with foreign central banks, reflated the economy "artificially" and got it restarted.  But in saving it, they did not cure its long-term ailments. 

As we've previously discussed, this was no isolated response to an isolated crisis.  Boeckh makes the point that about two decades after World War II, the monetary system in the U.S. began to founder.  That led to a period in the '60s when a process of money and credit "inflation" began, which continues to the present day. 

Initially, this was characterized by a period of high "Consumer Price Index (CPI) price inflation," which lasted from the late '60s until the early '80s.  That was followed by a period of asset inflation coupled with relatively steady CPI prices that began in the early '80s and continued through to the present. 

That period was characterized by a series of repeated boom-and-bust cycles, in which bubbles were repeatedly created and then burst...

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