MacroVoices #265 Steven Van Metre: The Last Deflationist Standing

Episode Summary

Executive Summary: Macro Voices episode 265 centers on a debate over whether the post-pandemic macro backdrop is inflationary or still fundamentally deflationary. Guest Stephen Van Meter argues QE traps reserves inside the banking system, suppresses velocity, and creates a liquidity trap that ultimately pressures yields and CPI lower unless sustained credit growth returns. The hosts contrast that view with signs of speculative asset inflation and examine markets, rates, oil, gold, and commodities.

Main Topics: Deflation vs. inflation regime debate: The interview frames the core macro question: whether the economy is transitioning to secular inflation or remains trapped in disinflation/deflation due to weak credit creation and trapped liquidity. How quantitative easing really works: Van Meter argues QE is an asset swap that traps bank deposits as reserves, lowers yields, and does not directly create broad money; money creation happens primarily through bank lending. Liquidity trap and velocity of money: The guest explains that rising reserves and weak lending reduce money velocity, suppress CPI, and can eventually lead to deflation unless lending growth or persistent fiscal stimulus breaks the trap. Treasury yields, dollar strength, and bond market expectations: The discussion links rising yields to consensus inflation expectations and bond shorting, but Van Meter argues yields will ultimately reverse lower as the system rejects higher rates. Oil, gold, and commodity price action: The hosts review crude oil after the OPEC meeting, the rebound in gold off support, and the setup in copper and the Bloomberg Commodity Index, using technical levels to gauge near-term direction. Equity market momentum and technical levels: Patrick’s chart review focuses on the 50-day moving average across major indices, showing new highs in the S&P 500, potential Nasdaq breakout, and strength in Europe and Japan. Behavioral signs of inflation in assets: Eric argues that NFTs, digital collectibles, and virtual real estate demonstrate money chasing speculative assets, supporting his view that a behavioral inflation wave is underway.

Key Arguments: Van Meter’s central claim is that QE is disinflationary/deflationary because it swaps assets inside the banking system rather than creating spendable money in the real economy. Broad money growth depends on bank lending; without loan expansion, fiscal transfers and QE mainly recycle money through the banking system. The Fed uses QE to lower rates, support the dollar, and encourage borrowing; however, the same process traps liquidity and crushes velocity. A liquidity trap exists when money demand outpaces money supply growth, leading to disinflation and, if prolonged, outright deflation. Treasury yields have risen because the market is crowded into the inflation trade, but the monetary system will eventually reject higher yields and force them lower. Fiscal stimulus alone is not enough to create durable inflation unless it translates into meaningful consumer and corporate borrowing. Eric Townsend counters that asset-price mania, NFTs, and virtual real estate show real-world evidence of inflationary behavior and money chasing scarce or speculative assets. Patrick’s technical analysis suggests many risk assets are reacting to their 50-day moving averages, implying the market is in a momentum-sensitive but still constructive phase.

Data Points: Macro Voices episode: 265 - Episode identification Recording date: April 1, 2021 - Episode recording date S&P 500 level: north of 4,000 - Opening market wrap; new all-time high Dollar index level: around 93 - Dollar index straddling resistance/support WTI crude support/trigger levels: 34-day moving average near $62; 21-day moving average near $62.55 - Levels Eric cited for confirming next leg higher WTI crude inventory draw: 876,000 barrels - Weekly U.S. crude inventory change Cushing crude inventory build: 782,000 barrels - Weekly Cushing, Oklahoma stocks Gasoline inventory draw: 1.7 million barrels - Weekly gasoline stocks Distillate inventory build: 2.5 million barrels - Weekly distillate stocks U.S. crude production: 11.1 million barrels/day - Production ticked up 100,000 barrels/day Gold support level: 1680 - Referenced as key support by guest Ola Hansen and the interview discussion 10-year Treasury yield threshold: 1.75% - Discussed as a possible resistance level on yields Chicago Fed National Activity Index: -1.09 - Cited as recessionary despite prior stimulus Money market proxy: money multiplier (M2 / monetary base) declining - Used as evidence of a liquidity trap; no exact value given Bank credit growth: 0% year-over-year - Loans and leases in bank credit at all commercial banks Mortgage applications: about 25% below recent peak - Used as evidence consumers are rejecting higher rates Stock chart level: 4,050 to 4,100 - Patrick’s near-term S&P 500 upside targets Crude oil upside target: above $75 before year-end 2021 - Eric’s longer-term crude view Gold congestion zone: 1,680 to 1,750 - Patrick’s key technical range Potential gold breakout level: 1,760 to 1,770 - Threshold discussed for confirming reversal Bitcoin round number target mentioned: 100,000 - Referenced jokingly in the chart discussion; not a formal forecast

Pivotal Quotes: "QE traps money in the financial system." — Stephen Van Meter: Explaining why he sees QE as disinflationary rather than inflationary "What you actually want to get out of this trap is you want lower commodity prices, lower food prices, lower interest rates." — Stephen Van Meter: Describing the policy/macro conditions that would restore lending and prevent a liquidity trap from persisting "I really feel like ... what I see in progress is a crack up boom in motion, a melt-up." — Eric Townsend: Opening market commentary on the S&P 500 and broader asset-price strength

Implications: If Van Meter is right, the market’s inflation consensus is premature and long bonds may still have upside as yields eventually fall. If Eric is right, speculative asset inflation is already broadening. Listeners should watch lending growth, not just fiscal stimulus, for the real inflation signal.