I concluded yesterday’s article with a note of caution:
we should strictly talk here of such a swollen, but partly immobilized supply of money being potentially inflationary, rather than ineluctably so the instant it is augmented in this fashion.
This point is worthy of extra emphasis in our present circumstances when all too many pundits are pulling up simplistic chart overlays which purport to show that we need have no fear that central bank hyperactivity engenders any risk to our material well-being since generalized consumer price rises (in the West, at least) have been relatively hidebound compared to the vast efflux of ‘liquidity’ provision experienced since the collapse.
One answer to this charge is simply to pose the counter-factual: how much more elevated are prices today above the market-clearing levels they would have – and probably should have – reached absent such an effusion? While empirically irresolvable, this is no mere quibble for if – as was proven by its implosion – Bubble levels of activity included much that was horribly misdirected and, hence, Bubble Era prices were, in many cases, higher than they sustainably should have been, the policy-makers’ success in not only restoring such average levels but exceeding them can only have introduced a greater degree of falsity into the economic matrix which we must take to be our guide in all the exchanges we make.
Indeed, such distortions must be even more severe than they first appear since we must recognise that while it is easy to parrot the news that the general price level is higher or lower than once it was, the single number by which we are accustomed to measure that state hides a world of complex interrelations. In practice, this means that the monetary inflation has not only outweighed the credit contraction in aggregate, but that it has exerted its pressure not so much in propping up values among the main casualties of the credit contraction, but in boosting others – possibly much further in relative terms than they otherwise deserve.
A further refutation works with reference to the mindlessly mechanical usage of many macromancers who spend their days seeking nothing so much as a time series to be set against another, regardless of their provenance or compatibility so as to offer up a sage-sounding divination from the accidental pattern of their overlay.
Just because we can measure an economic quantity (or, more correctly, statistically estimate it according to the available means and subject to certain preconceived prejudices about what exactly it is we are to reckon and why), this does not make it anything other than a crude yardstick of the seething foam of individual decision making whose shape, expanse, rigidity, durability and evolution is the reality we are trying to capture.
Nor does the physics-envy scientism of much economic calculus stand too close a scrutiny. Yes, ceteris paribus, more money chasing the same number of goods should imply higher prices, but the truth is there is very little paribus to much of that ceteris – not least in the intensity with which that ‘chase’ will be conducted, or in the distinction made by the ‘chasers’ (themselves a highly variable population) between different classes of available goods.
As a concrete example of this, consider the fact that the collapse of the credit available in certain (highly-variegated) areas of the economy has meant that less transactional substitution is taking place, with money therefore being made to do more and more of the work, in these dark days of trepidation, for which credit used to suffice when skies were an unblemished azure. Add in a greater penchant for holding financial wealth in the form of money – the addition of whose wonderful optionality in a world of radical uncertainty is something of a no-brainer given the vanishing opportunity costs which have arisen thanks to concerted official action to suppress less risky bond yields – and we have another dampener in place, as mentioned above.
To give this some small degree of context, note that the total of currency and demand accounts held by the non-monetary sector in the US has risen no less than 60% since the pre-crisis year of 2007, with the household component rising 150%, and the non-financial corporate one, 300%. Obviously, not all of this increment represents a precautionary store of wealth – an instant snapshot of a game of pass-the-parcel must show someone in possession of the package, no matter how keen they are to be rid of it – but, doubtless, some good proportion does constitute a ‘hoard’, especially that part held by businesses. This component has risen from 1% of total financial assets (and effectively 0% in QI’09) to a sixteen-year high of just over 4%.
Put another way, in the 18-months to end-September, a sum equivalent to two-fifths of cumulative after-tax profits has been squirreled away by American CEOs desperate for a little clarity of vision instead of being laid out to buy more plant and equipment, to conduct more R&D, or to hire extra workers.
Note, too, that this factor is one which is ironically reinforced by the very same subdued rate of overall price rises to which the naysayers seek to draw attention. That this will prove to be something of a double-edged sword as and when either conditions – or simply perceptions thereof – change, is something to which far too little attention is devoted by those who like to assume what is past (or, in this case, present) must unfailingly be prologue.
Whatever the private sector may or not decide among its members, historically, the most violent and destructive agent of inflation has been Leviathan himself for , in the typical practice, we find ourselves most readily in a situation of blithely turning debt into money when the borrower is the state. Readily able to persuade themselves that the purchase is ostensibly a social service, if all too often a disguised and thoroughly venal buying of votes, the acolytes of the Beast are typically the least considered and most unrepentant of debtors. Indeed, if they ever do entertain any doubts as to their conduct, they have an entire body of Unholy Writ to insist that their studied indifference to the bourgeois values of good housekeeping is, in fact, a blessing to all.
Even this evil is not always a self-fuelling one. If, for example, the bond which is issued to bridge the gap between tax and spend is held by individuals or collectives unable themselves to create the money with which to buy it, we may deplore the redirection of scarce resources into the least efficient and most conflicted of hands, but we cannot call it ’inflationary’: to buy the bond is to deny oneself the ability to purchase other things and to allow these to be conferred upon the welfare case, the defence contractor, or the traffic warden in one’s place.
If, however, the bond is bought by a bank—whether central or commercial—or is pledged as collateral for a loan from one of these, and the resulting dole, once having been disbursed, finds its way back as a demand deposit onto the books of either that same bank or one of its many sisters, the treasury’s deficit has now been monetized in exactly the same way as was the credit granted in the course of the private arrangement we discussed above. No deferral of a claim upon other goods need result from the bond issue, so, in effect, two units of money are chasing what previously only one could – clearly, an inflationary situation, once more.
Likewise, though the pretence is maintained that the government does not simply ‘print’ the currency which comes into our hands, the modern practice by which the central bank issues the relevant notes against the purchase of government bonds makes the distinction a highly academic one. The subterfuge becomes all the more flimsy in the usual case wherein the monetary authority subsequently returns the bulk of the seigniorage gains to the fisc – an act which reduces the ‘cost’ to the exchequer of issuing such happily perpetual liabilities to near zero, even in times when term interest rates have not been almost completely ‘euthanatized’.