Take a look at the central bank’s effort to prop up credibility inflation:
This represents new base money that was created out of nothing to purchase “assets” from very desperate entities that see little or no true value in their “assets” and would much rather have cash. Of course the purchases were executed at 100 cents on the dollar and reflected a mark to model valuation that is really a “mark to fantasy” valuation. This explosion in base money is reversible only if the market sees value in the garbage that resides on the balance sheets and elects to buy it back. When do you think that will occur? It would require a big burst of credibility inflation where the market believes that counter-parties are both capable and willing to honor their debts. Yeah right.
Base money is what defines the value of a currency. This is because the money we use, credit money, is based on and created from base money. Credit money is capable of expansion and contraction; all the while it can maintain stable value. However, base money is different and it must be seen as the potential genesis of credit money, in amounts that are many times larger than the entire monetary base. This expansion occurs through fractional reserve banking and the production of credit. Expanding the base “primes the pump” for future credit money expansion and monetary inflation.
So expansion of the balance sheet is a direct effort to debase or devalue the currency. It is happening big time. The funny thing is that the banks and governments are trying desperately to create credibility inflation when they have been mostly passive in the past. Why? As it turns out, the market was making its own credibility inflation and really didn’t need the help of the central banks. In fact, we had central bankers like Alan Greenspan warning of “irrational exuberance” and they were trying often to slow credibility inflation and irrational belief that debt could expand forever. They didn’t try hard enough.
Now the market’s confidence is shaken and credibility in debt to perform as a store of value is deflating. So the central banks have to put on their “buyer of last resort” hats and they have to inflate the monetary base in order to provide the liquidity sufficient to generate enough credit money to enable debt performance on a nominal basis. Nominal performance of debt allows credibility inflation. Without expansion of debt associated with credibility inflation, the global monetary system will implode is a spectacular fashion.
We have what appears to be continuing credibility inflation but is really a fraud. The credibility inflation is being provided by a central bank printing press and not by the market. The market is not being fooled and will insist on resolution of the loss in confidence, sooner or later.