I'm
skeptical of all of the soft sciences. I'm especially down on
economists, be they Keynesian or Austrian. If they were merely stupid,
they would get maybe half of their predictions right, but these fellows
manage to get nothing right. When the NYT started touting inflation, I
braced for deflation.
The
solons tell us the increased money supply from the stimulus packages
will chase fewer goods and so increase prices. So how can the increase
of money lead to deflation? Turns out that the explanation is pretty
straightforward. In short, the new money is invested in a lot of
worthless stuff, and that worthless stuff is not worth any money. The
"fiat" money (quoting Austrians) as conjured into existence by our Fed
disappears as easily as it appears.
Let
me explain. New money is created when the Fed buys bonds and other
investment instruments from banks and other large investment companies,
paying with dollars that the Fed has just created. The "Q.E.s" merely
accelerate and magnify the process. The banks and other financial
institutions invest this money by lending for mortgages or building
projects or by buying assets like stocks, real estate, and other bonds.
The
result is that all sorts of assets including stocks (equity investments
in American companies don't produce much anymore), bonds, bitcoins,
gold and other commodities, real estate, and the art markets have all
been bid up to dizzying levels. This fiat money is seen as wealth by
the investors. More importantly, there is a "wealth effect," which
means that people feel they can spend money as their investments
increase in price.
As
you might expect, only a small amount of this new money is distributed
to the nobodies. They might get wages as construction workers or, as we
have recently seen, COVID-19 stimulus checks. (Thomas Lifson of AT has
detailed that a lot of this money is invested in the stock market.) In
the last year, their productivity and wages have been low. Despite
government checks, their income really has not changed much. The net
result is that there is not much increase in the money circulating on
consumer markets, where people buy the needs for their daily
living. The CPI has been flat.
Inflation
has happened only in the investment markets. This new money is in part
from the creation of the Fed and in large part due to the price
amplification resulting from the frenzy as individuals and institutions
invest their money and bid investments up to dizzying levels. Everybody
feels richer and is spending more money.
I
called this bid ask money. It is priced at the most recent market
clearing transaction by two anonymous individuals who exist somewhere on
the planet. The thousands or sometimes millions of current owners of
these assets have no say in the price that shows up on their
screens. None. Their wealth is determined only by that latest bid and
ask.
The
bid ask money of the nobodies is invested in IRAs, pension plans,
insurance, stocks, and housing. They feel rich right now, and many
continue to spend.
But
what happens when markets collapse? People will realize that these are
bubbles and head for the exits. Tax increases or minimum wage
increases could cause even more unemployment and business
closures. What happens if China, Japan, and the Gulf Arabs lose
confidence in U.S. treasury bonds driving up interest rates, smothering
commerce and new projects?
The
mega-banks, investment firms and insurance companies might well
collapse. (I never understood why their failure should cause me
problems. I sat on the board of our credit union in Grand Rapids for
most of the '90s. In principle, we were just like Goldman Sachs, but in
addition, our board got a really nice dinner once a year.) As Big
Finance implodes, our government economists will chase along, always
worsening the problem with even more insertions into the capital
markets, always with borrowed "money." My little co-op credit union
with its $150 million of saved money will have to step into the
breach. Projects funded will not be grand, but they will be well
chosen. In the background, bid ask money shrinks to nothing.
But what happens to the nobodies?
How
rich or willing to spend is the man who bought the Dow Jones
Industrials at 33000 when it falls to one thousand, where it was forty
years ago? When there are no jobs? Or when he foresees that a house
will lose half its price in the next year?
Less
money in the hands of the nobodies sounds like deflation. The official
recognition of deflation occurs when buyers have less money to pay for
as stuff and force merchants and other suppliers to lower their
prices. Debtors will not be able to service their loans, and
bankruptcies will accelerate. New investments will shrivel, and only
those likely to succeed will be made. Jobs will be harder to find.
That
being said, a deflationary spiral is not necessarily bad. Japan had
its investment bubble burst nearly 30 years ago and has muddled on in
deflation since. The USA had periodic deflationary periods during the
nineteenth century, when it had its greatest period of growth. Some of
the most durable businesses in the twentieth century were started during
the Great Depression, also a time of deflation.
The
good news is that economists will be disgraced but, unfortunately, not
jobless. These racketeers will conjure yet more self-serving fiction to
explain their failures.
