Trillions of dollars in bailouts and bank stocks are still not back up to where they were before the real estate bubble popped. True, they have recovered somewhat, as has the rest of the market, since the March 2009 plunge to the basement, but they are still way off their pre-bubble days.
Now, with all those trillions of dollars poured into the “bailouts” of the big banks, big insurance companies, big auto companies, many observers fear inflation. Most of these observers are outside of the corridors of power (NY and DC), but they are well aware of the scary Fed charts showing the enormous growth in the money supply.
But, why is there no inflation? Sure individual commodity prices are fluctuating, such as corn and some grains, gold and some other metals, petroleum. But petroleum, after a brief pop has retreated back well under $100/bbl. Gold dropped below $1500 for a couple of days, but has bounced back to around $1511.
Let’s back up a bit. Gross Domestic Product declined over the past couple of years. Our Wikipedia reference above tells us “GDP = private consumption + gross investment + government spending + (exports − imports)…” It’s a weird metric. As we have pointed out, debt is not wealth, so in our opinion, government spending shouldn’t be counted, since a good deal of it is borrowed.
But with those trillions of govt spending, why did GDP decline? It all goes back to the collapse of the real estate bubble. Those bailouts poured money into the financial institutions and car companies, allegedly to help homeowners and auto workers. Who did they really help out? Why didn’t that money show up as inflation, since increasing unemployment showed that private production wasn’t increasing, the added “money” should have chased few goods, resulting in higher prices.
Here’s the answer: the money ended up in the stock market. Yep. Has anyone noticed the stock market isn’t slumping any more? That means the pension funds, college endowments, and hedge funds have returned to their previous heights.
A little-noticed phenomenon in the face of property values plunging, was “silent bank runs.” As panicked depositors electronically withdrew their money, especially in the U.K., those banks and their correspondent banks in Europe and the US were also threatened. Not only were their assets declining in value, their deposits were disappearing.
The US, UK and Euroland have frantically pumped “money” into banks to make up for shrinking property values/assets. Also shrinking are other bank “assets,” known as “sovereign debt.” That’s money some countries owe banks in other countries. Greece is the well-known example right now, but many other countries are lined up to create their own crisis. Greece owes billions of Euros to French and other European and US banks. As this mess unwinds, expect more economic confusion and chaos.