Free Money: The end of inflation and the start of deflation

Will the magazine cover indicator strike again?


This cover of The Economist on the week of July 25 2020 speaks volumes. The “Free money” headline is an eye-catching snapshot of the current madness in, if not the global economy then certainly, some major economies such as the U.S.

It was Paul Macrae Montgomery who first recognized that there was often a link between magazine covers and the end of trends in the financial markets. What he had discovered was that the same social mood which drives the stock market also drives the sentiment expressed in culture. One of the most famous examples is the “Death of Equities” headline on the cover of Business Week in 1979, just as the Dow Jones Industrial Average reached its nadir having declined for over a decade in real terms.

With major economies, led by the U.S., having printed money (inflation) like there’s no tomorrow over the last few months, will the sentiment expressed by this cover mean that the trend of “free money” is now ending (deflation)?

Some might say it has only just begun. The proponents of Modern Monetary Theory (MMT, aka, the Magic Money Tree) suggest that a government like the U.S. can print as much money as it wants essentially because it doesn’t have to borrow in another currency. Exactly 300 years ago, in 1720, someone else had that idea. John Law printed as many French livres as he could in order to keep up the pretense of wealth and his Mississippi Scheme. It didn’t end well.

Some say legendary, some say legendarily notorious market analyst, Martin Armstrong, has an interesting thesis based on his Pi cycle work over millennia. Essentially, taking a long lens, it boils down to this period in history being one whereby public sector power and influence starts to wane, and private sector influence starts to wax. The sub-headline on The Economist cover, “When government spending knows no limits,” might speak to that. When large-degree cycles change it takes decades for things to fall into place, but the magazine cover indicator may be hinting that government borrowing and spending is, already, reaching its limit.