Deflation is the market call of the establishment. They argue you can print cash but it doesn’t create inflation if no one wants to borrow it. It may be created but it is stuck in the banking system who hoard it. Apparently, no one wants to borrow it either, though I’m sure most of us will consider that getting offered it to borrow is not exactly on the table. So while it might be that folks don’t want to borrow all this new money, the truth is, it is not available, certainly not at near zero interest rates, if at all.
Even so, if the government prints money and the system warehouses it, there is sense to the argument that there will be deflation.
High unemployment, a population ground to a halt by circumstances, a general lack of demand and copious supply, all should lead to hard times and deflation.
Hard times, deflation, it is synonymous, isn’t it? It may well be but there are plenty of countries suffering hard times with high inflation and you can bet your bottom dollar that those countries have got their population driving money supply through fractional banking creating money supply.
So how do these countries create inflation? Firstly let’s acknowledge that they do because if you believe the economists of the West, Japan can’t manage it, the EU can’t seem to produce it and we are told it is a terribly hard thing to do so. That is so incredible to me I have to resort to sarcasm. As Brazil, Argentina, Venezuela and Turkey manage it, why can’t the EU or Japan? Or is it simply not true? Maybe Brussels and Tokyo need to have a chat with the Ayatollahs in Iran for a steer on how it is done.
So how do these talented central bankers do it in places like Angola, Congo, Sudan and Libya? Well I can let you into a secret, it’s all very clever. They print money and hand it out willy-nilly. Of course they hand it out to their mates first, in this case themselves and government employees, then they hand it out to their populations, obviously with political strings attached, like not creating a fuss about going hungry.
Now that is nothing like what the U.S. and Europe are doing right now is it? Oh wait.
So the world is busy printing money to fund massive fiscal deficits, to pay government workers. Then they are handing out money left right and center to the unemployed, to companies, for example, to anyone in the U.K. that wants a half price burger. It’s all demand side stuff and none of it is about fractional reserve banking.
This demand is not matched by supply, but that’s a moot point. If you increase money supply and hand it out to folks without an attached liability you get inflation.
But you may say, QE didn’t make inflation. That’s because the money was matched with a liability. A lot of this new money is not.
Then there is another problem. The Germans are terrified by inflation because it destroyed them in the early 1920s and was helpful to a certain landscape painter in his job spying for the government with some lunatic far right wingers. That didn’t turn out well for them or for most of our ancestors either. One of the drivers of that classic hyperinflation was the government taking industry’s fresh debt and giving them money to go build. It was a rolling time for industry and employment. but oops, up went inflation. So business kept showing up with more bonds and the government obliged with more money. They had their reasons but for the society the outcome was a spiral of inflation that soon became hyperinflation.
Well the governments of the West wouldn’t go about this crisis by handing out money in return for corporate debt now, would they? Oh wait.
So here we are with governments building stupendous deficits on a road that currently has no end in sight. Once Covid is conquered those debts will be double—mammoth. Clearly governments will make cutbacks and raise taxes on everyone to claw back that outlay and implement a decade of austerity to get public finances back on the level. Creating inflation to grind those debts into mush is simply not an option and after all, apart from the geniuses in the developing world, who can you possibly know how to create inflation to sneakily steal money from the population in such a way only a few smart cookies will spot? No, politicians and government functionaries will take the righteous path of hard grind and principled action, whatever the consequence to them. Who can doubt it?
Just one more thing. You have to laugh—in the U.K., they want to dispense with the RPI (retail price index.) This is a retail measure of inflation that runs along side the CPI (consumer price index), which is the newer more favored measure. The trouble with the RPI is that it measures inflation at a higher rate than the CPI and funnily enough has all sorts of state liabilities indexed to it, like pensions for vulnerable old people. How inconvenient for the government. As such it is going to be replaced with the lower measure CPI. The punchline, if a further one is needed, is that this measure is lower for a number of reasons of which the most hilarious, if you have a twisted enough humor, is that when prices rise people switch to cheaper alternatives. This switch to cheap alternatives somehow means that inflation is less. It’s like saying prices didn’t go up, you just got poorer. You are eating burgers because you can’t afford steak anymore because it got too expensive but that’s not inflation. Just because a price went up doesn’t mean we are going to count it.
Well, when we are all eating rice and pasta because we can’t afford filet mignon or a roast joint, we may well be able to look at the inflation rate and see there isn’t much inflation recorded but the bottom line is going to be what the market thinks and that will be priced into gold, bitcoin and other inflation hedges like equities.
That being the case it is already clear that the markets don’t believe in deflation because if it did gold, bitcoin and stocks would be through the floor.
Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards in 2018.