“A formidable set of difficulties is encountered when we ask what there is left of the notion of monetary neutrality for a society which has once, for whatever reason, been thrown off the rails of steady advance, or for one which, like our own, has never really succeeded in adhering to them.
Does it… imply the maintenance of the situation existing at the moment, or the restoration of some previously existing situation, or the attainment of some situation never hitherto obtained?”
Sir Dennis Robertson, A Survey of Modern Monetary Controversy, 1937
“Mr. Harrod… pins his faith chiefly to a policy of government borrowing, initiated at the very onset of the recession, to finance both a carefully prepared plan of capital works and also if necessary the maintenance of consumption… so soon as the transition is effected, the borrowing policy is to be reversed. It is not easy to square this programme with the pessimism of Mr. Harrod’s central analysis and indeed in the end he admits that he feels bound to contemplate the possibility that the government debt may on balance continually increase.
After all, he consoles us, there are worse things than debt, alias the ownership of claims to income by poets and other worthy people; and fortunately it will be possible to combine the apotheosis of the rentier with his euthanasia”
Sir Dennis Robertson, Harrod: The Trade Cycle, 1937
Much to everyone’s relief – if to few people’s real surprise – the official Chinese numbers for the fourth quarter ‘improved’ from the previous trimesters’ mini-slough, with GDP accelerating from 7.4% yoy to 7.9% and industrial production ending the year at a 10.3% rate which was the fastest in nine months.
As usual, these data came with any number of attached caveats. Was it really possible, for example, that heavy industry grew at just under 10% in 2012 as a whole, while only using 3.8% more electrical power? Could this be done while rail freight actually dipped by 1.5% over the year or container traffic at the nation’s two biggest ports of Shanghai and Shenzhen only managed a combined 2.1% increase?
It does seem a touch problematical, doesn’t it?
Then again, what we do know – as we laid out in our last weekly edition [Material Evidence 13-01-25] – is that both fiscal outlays and credit provision grew markedly in the final quarter. Nevertheless, what we must look askance at is what supposedly resulted – the credibility-stretching 22% gain in profit and 15.6% jump in revenues (neither figure annualized) enjoyed by the SOE’s between the last three months of the year and the prior three. In yuan terms, we are asked to accept that QIV’s increment to revenues was the greatest on record; that to its profits, one not beaten since the first half of 2009 when the economy was roaring out of the post-Lehman slump.
What is also noticeable is that gross urban fixed asset investment for the year amounted to a massive Y34 trillion which, while computed on a different basis from the GFCF component of the number, represents a record high 70% of GDP. Moreover, the marginal extra UFAI undertaken in 2012 versus 2011 amounted to Y6.3 trillion (or +21%), which was a cool 136% of the Y4.9 trillion in declared extra nominal GDP (+9.8%), a surproportion only previously in evidence during the great reflation between June’09-June’10 – an episode to which much official hand-wringing has been devoted for having sown many of the troubles of misplaced investment and widespread peculation which so plagues the economy today.
Furthermore, the past twelve months’ cumulative CNY1.46 trillion positive trade balance was the largest since September 2009 and its YOY growth of CNY440 billion accounted for almost 10% of incremental GDP, the largest such contribution since 2007 despite the intent to focus henceforth on domestic, not foreign, sources of growth.
So, even if we take the Chinese numbers at face value (and all we have to say here is ‘Caterpillar’), the much vaunted ‘rebalancing’ would seem to have been postponed, once again, for reasons of short-term political expediency.
Any more confident analysis of China is being complicated by the fact that not only are the various institutions which comprise its leadership giving off conflicting signals – not least the obvious clash between the schedule of eye-wateringly expensive infrastructure schemes and the financial authorities’ moves to limit local governmental abuse of Off Balance Sheet platforms – but it is almost certain that we must wait until the formal handover of power in March for any major new policy initiatives to be given a more concrete form.
In the meanwhile, the market’s attention has been turned out past the Diaoyu/Senkaku islands towards a formerly slumbering Japan.
Not that the simmering territorial dispute is to be too lightly dismissed – not now we have Chinese militarists issuing nuclear-tipped warnings to the Australians not to run with the US ‘tiger’ or the hated Japanese ‘wolf’, or while Japanese foreign officials criss-cross the sea lanes seemingly intent on marshalling all of China’s fractious neighbours behind them – but the immediate focus has been the Bank of Japan’s capitulation to the Abe government’s threats to pack its governing council with Yes men and to rewrite the law defining its powers if it did not throw its weight behind the latest attempt to deprive the archipelago’s many pensioners – as well as its other purchasers of imported stuffs – of a living income.
Not that this is how the matter is being presented, of course, as the dark forces of global Keynesianism exult at the prospect of yet another New Deal being launched somewhere in the world. After all, it must be about time that oneof them actually ‘did what it said on the tin’ and restored prosperity by means of a clod-hopping bout of fiscal-monetary intervention to a people from whom it was taken by an earlier series of similarly ill-judged interventions from on high.
Given the already heated political situation in the region, the timing could be better, particularly with regard to a yen whose 10-week decline has only been exceeded (benignly) in the reversal of safe haven flows once the Lehman crisis began to abate and (less happily) during the Sakakibara episode in 1995 which arguably set the stage for the global instability of 1997-98. Already, Japan’s neighbours and export competitors – the equally growth-scarce Korea and Taiwan – have begun to make noises about the policy implications, while the Bundesbank’s Jens Weidmann has also expressed hopes that this does not mean a return to the dark days of competitive devaluation.
But, more fundamental than this is the very question of what the Bank and the LDP think they can achieve. Does the country really need any further, grandiose, state-financed spending programmes even if it could apparently bear to spend Y200 trillion (sic) on disaster-’toughening’ schemes, according to Abe advisor Satoshi Fujii? Can the country really be languishing so badly under the crushing burden of nominal interest rates which have barely inched above the giddy heights of 1% at the short end and 2.5% at the long these past fifteen years? Is the fall off in exports really either attributable to – or curable by – developments in the level of a real exchange rate which at its most unfavourable lay only 0.5 sigmas above its stationary, three-decade mean?
For now, the system has held together, with JGBs rallying under the same old QE rationale that has kept US yields from backing up in the face of yawning deficits. Given the presence of a non-price-sensitive buyer, wielding an inexhaustible cheque book, one would have to be truly foolhardy to short the bonds in one’s own currency though it is quite another matter if you come at them from abroad and later hope to spend the returns in your own, foreign domain.
It would not, however, be too wise for the authorities to flout the wishes of their long-suffering citizens, especially not when they have such a deep, vested interest in seeing neither their money, nor the banks and government debt which provide its backstop undermined. At a massive 115% of GDP, M1 money plays a bigger role in the economy than it does in most other developed nations (c.f., the ~50% in the Eurozone, or the ~20% which prevails in the US). As such, it makes up 55% of household financial assets and over 70% of financial net worth, with another 25% of the total exposed directly or otherwise to government debt.
For their part, banks hold over Y400 trillion in JGBs to back up their customers’ deposits, a total which is perhaps eight times larger than their equity capital (meaning a 180bp back up in 10-year yields would effectively wipe them out, if properly marked to market), while other financial institutions hold as much again. This is clearly not a country where one should knowingly tinker with people’s faith in either of these instruments – cash or bonds – in the pursuit of a serially failed and oft-vitiated nostrum.
Perhaps that is why the BOJ seems to have both postponed the onset of its Fed-like QEternity programme to 2014 and to have hedged about the wider terms of its abasement with a number of caveats. Even though it has committed to covering not just the deficit twice over this year, but actually the entirety of government outlays, its outgoing governor did publicise the valid objections of board members Kiuchi and Sato, while reserving to the Bank the right to ‘ascertain whether there is any significant risk to the sustainability of economic growth, including from the accumulation of financial imbalances‘ and to attempt to hold the government to its pledge to ‘flexibly manage macroeconomic policy but also [to] formulate measures for strengthening competitiveness and [the] growth potential of Japan’s economy‘ while ensuring it will ‘steadily promote measures aimed at establishing a sustainable fiscal structure with a view to ensuring the credibility of fiscal management’.
Good luck with that, we would be tempted to say, but the more fundamental point is not whether we gaijin think (along with the likes of Kyle Bass) that all this must soon break apart, but rather when Japanese banks, Japanese insurers and pension providers and, above all, Japanese individuals lose faith in their own money. Here, we might note that they have been quiet net sellers of JGBs for a few quarters now, their actions only being offset by the increased absorption of the BOJ itself. One thing is for sure; the ‘end to deflation’ will not be a gentle or controllable affair, if and when it comes, nor will its impact be limited to Japan alone.
An Inflationist’s Charter
Beyond the fact that most of the biens pensants have uncritically accepted that Japan is finally ‘doing the right thing’ in acting in this manner and aside from the rather incongruous paranoia they nonetheless seem to share about whether perfidious Nippon will steal a march on them as the yen falls under the programme’s influence, renewed mutterings have emerged regarding the advisability of moving towards some form of NGDP targeting everywhere else within their purlieu.
Though there are a few rags of respectability to this concept, to most of those who espouse it these serve only to clothe the stark nakedness of what is, at root, yet another inflationary nostrum. After all, what is the point of being a member of the clerisy if you do not have some blinding wheeze to advocate as a means of extracting the world from its present mess without first having to face the reality that indebtedness is too high, capital has been misallocated on a grand scale, and that – by and large – we have all been seduced by both easy credit and the promise of unearned welfare into living just a little too much for the pleasures of the moment given the paltry gains concurrently being made in our real incomes.
The scanty raiments of reason associated with this canard are those which seek to limit fluctuations emanating from the monetary side of the economy not just by controlling an ‘M’ (upon whose exact composition, naturally, very few agree!) but also the rate at which it courses through the system (its ‘velocity’, if you must). Given that even the later Hayek mused aloud about whether this might not, in fact, be advisable (though most of those citing him conveniently forget to mention that he immediately went on to express grave doubts as to how exactly such a programme would be implemented), the idea has had a certain fatal allure even for those who generally would not endorse any more intrusive forms of monetary engineering.
But, even if we concede this point – arguendo – to the fractional free bankers, if to no others, the ugly truth is that the kind of automatic, bottom-up, self-governing mechanism which the likes of George Selgin argue their system would comprise is not at all what is being envisaged at present. Instead, the likes of incoming BOE governor Mark Carney – a man conveniently escaping the worst consequences of the bout of Dutch disease allied to a housing bubble to which his policies have contributed in his own land – do not just want to stabilize NGDP, but to target its growth AND, moreover to move it back towards the trend it was following before the Crash.
For example, in the US, the 1984-2008 log trend ran at around 5.5% p.a.: currently, we find ourselves some 15% below that trajectory trend, while growing at approximately 4% pa.
Ergo, to get back on trend in, say, three years’ time would require a growth spurt amounting to 45% – or almost 10% p.a. What sort of money growth do you suppose we are talking about to achieve THAT? And how much will arrive simply in the form of higher prices and not increased output, given that this is the sort of growth rate last seen in the Great Inflation of 1970-80?
For comparison, the UK faces a similar arithmetic, finding itself 16% below the pre-Crash trend and growing at less than half the prior pace, which means a 12% per year burst is needed, faster than was achieved during the booming 1980s when the RPI index ended up rising at a double digit rate. Then there is Europe. How are we to assure that the sorely-afflicted Latins reap the main benefit of any ECB largesse without blowing the still-affluent Teutons through the roof, especially given the fact that a three-year return to trend would have to double the pre-Lehman speed of increase?
Laying aside the question of what distortions and inducements to further capital wastage would occur were such at thing to be attempted on the necessary scale and quelling all doubts as to the advisability of even seeking to return to a trend which was artificially boosted by the nitro of the largest, arguably the most damaging, credit bubble in history, the very concept of NGDP suffers from problems of accuracy of measurement, representativeness, and timeliness.
NGDP under-represents the total flow of money in an economy by a good 50-60% by focusing only on the arbitrary Keynes-Kuznets final spending components and hence by ignoring activity in the more volatile, higher-order goods sectors whose smooth functioning are intrinsic to the very business of continued wealth creation and income generation.
Thus, even if we were to embark upon some semblance of this folly, the least we could do is to gauge our success with reference to the development of the more timely and accurate measurement of overall business revenues, not NGDP. Taking either sales themselves or, where not so readily available, an adjusted gross output measure as a proxy for these, it is also notable that the biggest present laggards in the US are to be found in residential construction, finance, non-food retail and – yes – government, while manufacturing has not only been growing faster than before the crash, but now lies only 4% or so below trend. Extractive industries are, of course, blazing the way forward as America’s energy revolution takes hold.
Thus, it could be argued that, however painful the process is for those who either work to a foreshortened, political timeframe or else who itch to earn some fleeting glory by ‘making the most of a good crisis’, the US is sluggish only in the areas which were responsible for the worst of the pre-crisis excess and conversely is doing pretty well, thank you, in the formerly neglected ones wherein tomorrow’s prosperity may be rebuilt. Pray tell how we are going to encourage this commendable re-orientation by lumping them all together and inflating the hell out of asset prices in order to make their aggregate rise more rapidly?
When Tomorrow Comes
In his recent allusion to this argument, there was a good deal of belated merit in what Raghuram Rajan had to say about why ‘stimulus has failed’. While it is always heartening to see one of the nomenklatura express such good sense in public, it never comes without a certain sense of frustration for, as readers of this publication will know only too well, we have been travelling – largely unaccompanied – this same road to Damascus for many a long year now.
That said, indulge us while we rehearse the main line of reasoning, once more, in the interests of clarity.
When large scale borrowing takes place beyond people’s ex-ante willingness to save (i.e., to abstain from complete, much less beyond-income, gratification), the builders and the buyers, the fabricators and the food shoppers will eventually find they are working at cross purposes and basing their (often unconscious) estimates of future income and outgo on premises which run into conflict with one another and to schedules which cannot be synchronized as they should.
Such borrowing may arise of its own volition – especially under the promise of a technological or territorial ‘New Era’ – but, ultimately, it must rest on the willingness of the commercial banks to create sufficient means to underpin it and they, in their turn, are no less dependent on the central bank and its regulatory peers committing sins of omission, if not of outright commission, in allowing such a pervasive and prolonged departure from the desirable norm as will eventually end in a general ruin.
Borrowing in this manner means that more are ‘bringing spending forward’ than are postponing it. Thus, as a group we end up anticipating and alienating too much of what is, after all, an uncertain future income stream in order to indulge ourselves today. Worse yet, this communal Rake’s Progress means that we are all but ensuring that our future income will indeed fall short of what it is we – and our lenders – expect when we mortgage so much of it to them in the present.
Activity of this kind is bad enough when the borrowing is mainly directed at over-consumption of ephemeral goods and services – whether by governments or by private individuals – but at least such a ‘simple’ inflation (to use the Austrian parlance) can be easily recognised for the evil it is and can be hardly less easily dealt with. In principle, the same should apply when the objects of desire are more durable, even if the dangers here are compounded (a) by the monetary authority’s reluctance to countenance any action to prevent the rise in such politically-sensitive things as house prices and (b) by the high loan-income ratio and higher loan-to-value leverage often extended upon what always seem such sturdy forms of collateral.
In contrast, when the borrowing is devoted to building out industrial capacity – when it represents ‘cyclical’ inflation, as we would say – the scope for error becomes much larger even as it is insidiously less apparent. This is because the market for the planned new output lies not only further out into an unknowable future which is very unlikely to reflect the current pretensions of even the most confident of prognosticators, but because that market is only indirectly linked to the final consumer and is therefore all the more highly contingent upon the actions of others – whether suppliers, customers, competitors, providers of complementary goods, and users of similar resources, not to mention regulators, politicians, and warlords.
Again, while the problems increase the ‘higher’ such an enterprise lies ‘up’ the productive structure, away from the ultimate storefront, it is often here that the longest and largest financial commitments must be made, making the receipt of any false signals, in the form of overeasy credit conditions and overbouyant equity markets, not only more decisive as to its to its inception, but all the more perditious once ground has actually been broken.
When ‘tomorrow’ finally comes – as it progressively, day by day, must do – we are then all too apt to find that increasingly onerous degree of debt service to which we have blithely been contracting leaves us too little left over to spend on the consumables so called into being, meaning that the scale and composition of the capital stock laid down when we earlier availed ourselves of all that temptingly easy money can not hope to find a retrospective justification.
One way or other, a recognition must now be made of the magnitude of our error and if not blame, at least responsibility, must be apportioned where it is due; losses must be realised; and titles transferred as quickly as possible not only in order to make a fresh start at the earliest possible juncture – one which will ipso facto be based on a much more sober reckoning of our wants and means – but so that the effort to escape or to procrastinate does not itself forge a chain with which to weigh us further down. Write-offs and write-downs are much more salutary and far less invidious than the determined application of transfer politics by the horde of economically-illiterate careerists who populate the chambers of the legislature.
At this point, we are poorer than we assumed we would be and we may even be absolutely poorer than we were before we strayed off the path of intertemporal co-ordination which is illuminated by the beacons of self-regulating, time preference-determined ‘natural’ interest rates. Though it may seem callous to call now for a ‘liquidation’ of our mistakes, it is the attempt to camouflage this wherein the most pressing dangers lie. The so-called ‘secondary depression’ which are told to avoid at all costs is one thing (and it is still not proven that, only assuming a core quantity of money supply is assured, Pigou – or ‘real balance’ – effects will not cause this to blow itself out so long as prices are sufficiently flexible downwards in the slump to increase that unshrunken kernel’s overall purchasing power), but the progressive petrification of the whole spirit of free enterprise which is its alleged preventative is quite another.
Pricing out Recovery
Alongside the clamour for more monetary monkey business, much lip service is also being paid to the need for ‘structural reform’ and, in the Austrian sense of increasing responsiveness and removing barriers to initiative – what Fritz Machlup called an ‘Auflockerung’ – this is indeed a necessity. But this is not something which will be enacted by governments eager to extend corporate welfare to failed Wall St. Banks, uncompetitive French car companies, needlessly duplicated Chinese steel manufacturers and the like. Nor are they and their central banking friends likely to aid the requisite process of ‘recalculation’ – of working out what one should pay for something today and what one is likely to get for it or the things fashioned from it, tomorrow if interest rates are being falsified, taxation is volatile (upwards, at least), and exchange rates are subject to sudden wrenching shifts.
At bottom, to be coherent, interest rates should correspond to the price ratio between present and future goods and the eagle-eyed entrepreneur is the man who can recognise an arbitrageable disparity between the two in specific instances and hence can put something which is currently being undervalued to a better, alternative use. But, if he judges the spread between current inputs and his expected, risk-adjusted output is too narrow to be worth his effort, he will not be willing to provide an income to those selling the first, or employment to those who might otherwise make a living by transforming them under his guidance into the second.
Yet much of the thrust of today’s rabid Rooseveltianism is conspiring to keep this critical spread overly compressed and entrepreneurs understandably coy to embark upon major new undertakings.
- Raw inputs cost too much because of easy money, ZIRP storage arbitrage, green rent-seeking, and welfare-subsidized consumption
- Labour remains expensive due to dole-encouraged withholding and the high ancillary costs imposed by an overweening and unaffordable state apparatus
- Expected returns on capital – outside of those to be gained by gaming the capital markets, that is – are depressed by the anti-capitalist thrust of taxation and the regulatory and legal flux to which entrepreneurs are being subjected to an unnecessarily elevated degree
- The prospective flow of sales receipts is also being diluted by the presence of so much state- and bank-supported, sub-marginal deadwood in the market.
One of the features of a slump in which can be found the seeds of a subsequent regeneration is that the inputs to a more sustainable and inherently profitable production process can be had cheaply. To this end the irrational fear of the bogeyman of ‘deflation’ is itself the root cause of the process by which the aptitude for change and the appetite for risk can become quasi-permanently suppressed.
Bankruptcy breaks up unviable capital combinations and frees up willing workers for the business of founding new industries and of identifying and satisfying new tastes, a point that Ludwig Lachmann was every ready to extol. ‘Capital’ is a concept; it is a dynamic, it is not an inert, physical lump of easily-stilled mechanisms. In the right hands, yesterday’s failed crop can become the fertilizer of tomorrow’s harvest as long as its owners are encouraged to realize their losses and to sell it on to those with a better vision of how to utilize it at a price commensurate with the new endeavour’s chances of success.
Sadly beguiled by their own theoretical cleverness, those setting policy today are so fixated on the idea of forcing people to buy things just to be rid of the excess money which is being forced upon them and so dead set against anything actually costing less than it used to, no matter how ludicrous the previous valuation or how commercially wrong-headed the purpose to which it was being dedicated, that their own efforts at ‘stimulus’ are forestalling this act of revaluation and release – this recapitalization of the decapitalized – and so are turning them instead into the greatest mass sedative ever prescribed to the mercantile classes.
The Big Freeze
In our Austrian narrative of a ‘cyclical’ inflation, fiduciary (unsaved) credit is preferentially funnelled towards investment in new capacity and expanded business. This soon leads to an unlooked-for degree of competition for resources with the earners of increased wages who are mostly still unsated in their demand for the existing array of consumables, items which the expansionists are either not planning to provide just yet, if at all. Such a conflict of desire can only end up in widespread over-extension; in the appearance of large quantities of ‘frozen’ capital; and hence in disappointed creditors and investors amid a general disco-ordination of plans.
In contrast to such an overheated condition, much of today’s unsaved credit is being directed at ensuring that zombie companies can display the barest signs of animation so as to enable their bankers to justify the ‘evergreening’ of their loans. Working on a cash basis, possibly too unprofitable to pay tax, certainly not amortizing their debt and probably bleeding capital by eating into their depreciation allowances, such ICU-institutions do little more than clutter up their lenders’ balance sheets, cling on to experienced and diligent staff, occupy prime property, burn electricity, and buy in stock – and so deny their more vibrant, self-reliant counterparts, whose innate abilities are greater but who have to operate on a fully commercial basis, the room and the means to grow.
Every great efflorescence of life, every great evolutionary advance in the long and violent history of dear old Mother Earth has come in the wake of a mass extinction. Without the Alvarez meteorite, after all, we hairless apes would probably not be here to debate the finer points of how our policies are only serving to maintain the economic dinosaurs in command of their niche, far beyond their natural span.
Making matters worse, the remainder of the credit inflation is being monopolised by incontinent states and their skulk of rent-seeking jackals, elites whose intrinsic capital efficiencies are vanishingly small (if not actually negative) and whose activities are therefore particularly likely to contribute to capital consumption.
Here we are faced with the awful irony that, in their manful attempt to lighten the load of indebtedness, central banks are helping generate ever more debt. Whereas the money they are creating is supposed to be a final means of settlement which extinguishes debt at the completion of a contracted period of service, it is instead giving rise to more of that which must, one day, be settled. Hence the source of that widely-shared and intensely pernicious confusion of what are static accounting identities in the macro reports with the dynamic process of economic life. We do not need someone else to borrow in our place if we choose to pay down our debts: if we sell without buying in order to discharge our obligations, our satisfied creditor now has both the wherewithal and the available wares to buy in our stead. Even if we find, alas, that we cannot fulfil our contract, to substitute another claim for it by transferring it to some larger, less constrained entity such as the state is to fall for a sunk cost fallacy. We took and used the present goods over which command was given us by our lender and we turned out not to be able to replace them: thus they are irrevocably lost, no matter what anyone cares to scribble in the pages of their accounting ledger.
Unable as we are to see this, we will continue to invest in negative productivity and purposely to select against the fittest. Instead of a classic Austrian overheating, we now have an Ice Age: instead of a credit bubble, we have a debt black hole.
Just as in Japan, we have transferred private actor difficulties into public sector ones where no legal framework exists to resolve the resulting problems. Worse than this, we now face a classic ‘public choice’ trap, to introduce the concept elucidated by the late, great James Buchanan.
Once we decide to move private liabilities onto the public balance sheet instead of swiftly excising them in the crisis, not only are the protocols for later resolution sorely lacking, but the incentives are almost entirely absent, too. Being ‘public’ debts which no individual entity can be said to have incurred, there is too diffuse a sense of responsibility for them – if not an outright tragedy of the commons. Since there are no identifiable culprits for the evils they entrain, outside the hated ‘capitalist’ caricatures of popular invective, it is all too easy for the economic illiterates in parliament to pretend that they were in no way responsible for the debt the incoming regime has inherited (even if often in great part from its own former time in office).
Wedded to the state’s arbitrary ability to impose financing charges on third parties (and the fact that pressure-group politics will see the regime’s court favourites and swing voters militate not to bear any concentration of this cost) is the fact it runs completely counter to political ambition to say “we will do less - less intervention, less spending, less feather-bedding – than the losers you just ejected”.
Given a further boost by the almost universal faith in half-fdigested Keynesian nostrums (exemplified perhaps by the recent apoptheosis of the dreadful old Leftie patriarch, Robert Skidelsky), we are about to discover that by saving the banks, we are destroying the pension and insurance companies upon whom the average man is no less reliant. As a result, many of our present day states are fast approaching the limits of budget credibility and so have no choice but to resort more and more to seigniorage in order to survive. Some would, indeed, already have exhausted that reservoir, too, were it not that such infernal devices as TARGET2 allow them to draw heavily upon the reputation and good-standing of their neighbours.
That this policy has not yet led to a resurgence of old-fashioned, shopping-basket price rises (even if, in contrast, its malign, if seductive, effect on asset prices is not to be denied) is largely down to luck.
An increase in the supply of money leads to higher prices only to the extent its recipients’ desire to hold it does not increase in due proportion. What we have seen in the past four years is that, largely, it has. Firstly, higher degrees of credit have lost much of their superficial sheen of ‘moneyness’ since the collapse, meaning that the parties to an exchange are now far less willing to rely upon the ready negotiability and unquestioned fungibility of lesser IOUs as a means of settlement than they were during the boom. Secondly, the banks themselves have not been able to throw off so many of their more dubious accommodations into the ask-no-questions-tell-no-lies underworld of a now-moribund ABS market. Adding to the squeeze, as we have already set out, they have encumbered their balance sheets with a host of low-grade borrowers at the same time that both regulatory capital requirements and wholesale market funding possibilities have become a good deal less conducive to blind expansion than they were in the Blue Sky days of yore. Thus, a greater proportion of a money supply which is having to ‘do more work’ than has been the norm is being generated ‘outside’ the commercial banks rather than ‘inside’ them – i.e., by the central banks through their vastly expanded range of operations.
This, too, is a case of lowest common denominator lending, since what these central banks prefer to monetize above all is government (and quasi-government) debt. In this way they are temporarily satisfying people’s heightened need for money by removing the worst constraints from those closet Jacobins who, we have argued above, are the very people obstructing the process of recuperation and regeneration.
With a nod to the ideas of Axel Leijonhufvud, what this also may imply is that the income-constrained recipients of welfare (personal or corporate) are the agents least likely to cling on to any of their dole, while the still-healthy who receive it at one remove are fast becoming Ricardian equivalence hoarders – knowing, as they do, that, as the only obviously identifiable sources of wealth and with very little patronage to shield them, Leviathan will soon come ravening after them. So, with the associated opportunity costs eradicated by the central banks’ flawed attempts at stimulus, they are clutching tight to their caches of sterile silver ahead of the day when they fear they must render it up wholesale to an aggressively insistent Caesar.
Beyond the Impasse
Thus we have the paradox that, on the one hand, we must be grateful that the central banks are finding too few takers for the snake oil of inflation to do its corrosive work because the supposed solution it offers is not only arbitrary and dishonest, but because it also confounds accounting and so destroys capital and wastes further resources – progressively the moreso, the more rapid and variable its rate of propagation. That it also tends to favour the least savoury elements of society (i.e., the plutocrats and the politically-protected), means that any stay of execution is further to be welcomed on moral, as well as on material, grounds.
On the other hand, the maintenance of ZIRP – and its extension across the maturity spectrum is doing little to help and much to harm. Some say it counter-intuitively promotes saving as those who still can set more current income aside to make up for the lowered returns they receive on their nest eggs. If only this were so, for even though this is something the mainstream perversely insists on decrying, it is actually the wellspring of our well-being. Your author, however, doubts it does much to promote saving in any productive sense: instead it serves to keep capital locked up in dead undertakings and so slowly bleeds the rest of us dry, therefore destroying real savings, not adding to them and continuing the recession, not curtailing it.
At some point, this dangerous impasse will have to be resolved, either in an admission that macroeconomic means have failed and that renaissance must at last be sought – as we have long argued – in providing a more conducive microeconomic milieu (an epiphany which will be a long time coming since it implies the headlong retreat of the Provider State militant) or, alas, in a ‘flight to real values’ and a conflagration of financial claims to wealth amid the rubble of a monetary collapse.
But perhaps we must not be too hasty in calling for the turning point to arrive. Japanese experience teaches us that the stand-off can be maintained for nigh-on a generation if the benefits of slow price declines (not ‘deflation’, please) become widely recognised and if people further accept that if the state is to subsume their unserviceable private debt contracts while not taxing the skin from their backs in order to do so, they must volunteer to surrender up a good part of their income to it by continually adding to their holdings of its obligations (both dated – JGBs – and perpetual – currency). Of course, it helps if the people in question are both productive and thrifty enough to have no need for external finance and possess a high home-bias in their investments and so are not overly susceptible to sudden reversals of sentiment on the part of the hot-money crowd.
As for the rest of us – who are not necessarily endowed with such commendable attributes of forbearance – whether we further resist it or no, everything points to the conclusion that the Mighty Ozzes at the central banks have not yet lost their will for the struggle and that the creeping ‘euthanasia of the rentier’ and ‘monetary policy à outrance’ will be further prosecuted, no matter how high the cost or how exiguous the results.
Such is the curse of the Platonic arrogance of our masters and their willing enablers.