Here are some thoughts on when and if from Australia's Quadrant Magazine:
Debasing gold and silver coins and printing fiat notes has a long history of feeding the reckless spending ambitions of rulers and governments. It has never ended well. Governments today are again creating money out of thin air. Will it end badly or are these times different? We will need to wait and see. However, as I will posit, there are reasons to believe that the outcome, while cheerless, will be relatively benign.....MUCH MORE
Governments have spent big to provide succour to the citizens they threw out of work and the businesses they closed down in their overwrought response to the Wuhan virus. To be precise, this is not stimulus spending, though it is commonly so described. I am not sure what to call it; relief spending, perhaps. Stimulus spending is a modern-day Keynesian term used to describe government spending intended to boost economies which have fallen into recession. If economies, once reopened, struggle to regain lost ground, as seems inevitable, then further government spending, particularly of a capital nature, can be described as stimulus spending. And we are likely to see plenty of it.
It is important to make a distinction between the two types of spending. Relief spending, absolutely essential in the unique circumstances of an economic lockdown, crowds out no private sector economic activity; there’s none to crowd out. Stimulus spending, on the other hand, can crowd out and distort private sector activity. But, that to one side, there is a common factor whether government spending is by way of relief or stimulus.
The common factor is that each dollar of spending without offsetting taxation (“deficit spending”) increases the money supply by one dollar. That dollar appears in the bank account of the recipient and also in the bank’s account with the central bank. In this latter iteration it is called base money, because banks, in a fractional reserve deposit system, of the kind we have, can use it to underpin lending of multiples of the dollar. And each dollar they lend becomes a bank deposit alongside the original dollar, and part of the money supply. The money supply primarily encompasses bank deposits plus the public’s holdings of cash (notes and coin). In normal course, bank lending contributes most to growth in the money supply.
Two questions arise. Will money creation or, to use literary licence, “money printing”, in the age of COVID-19, cause inflation? And also, as a related matter, will borrowing to finance deficit-spending produce burdensome government debt? While my reference point is Australia, a similar account applies pari passu across all countries with sophisticated banking systems.
A first point to make is that Australia, like other advanced countries, does not have a cash-based economy. Cash accounts for only a small proportion of the money supply. What this means, if hyperinflation were ever to occur, is that people would not be delivering wheelbarrows full of fiat notes to buy a loaf of bread, as they did in revolutionary France, the Weimar Republic and, more recently, Zimbabwe. And, precisely because cash is no longer king, hyperinflation, or anything close, is almost certainly a phenomenon of the past. Uncomfortably high and debilitating inflation is another matter and remains an extant risk.
A second point to make is that price inflation cannot occur unless it is driven or accommodated by increases in the money supply. Think of it this way. Inflation can be equivalently expressed as untoward rises in the prices of goods and services or, alternatively, as falls in the exchange value of a unit of money. Obeying the normal laws of economics, the more money there is, the lower is its exchange value and thus, conversely, the higher are prices. As Milton Friedman definingly put it in Counter-Revolution in Monetary Theory:
Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.
A third point to make is that the only effective constraint on governments engaging in deficit spending is inflation. Inflation signals that the demands of government cannot be met by the economy’s capacity to produce goods and services. This is not to say that any amount of government spending, sans inflation, is beneficial; simply that only inflation impedes spendthrift governments.
Government spending itself does not cause inflation. Inflation jumps, if it jumps at all, as a result of increases in the money supply contingent on the spending. When governments offset their spending with taxation, or by mopping up increases in the money supply by bond sales into the marketplace, inflation remains dormant. No increase in the money supply means no inflation. Can it be more complicated than that? Well, scenarios can be dreamt up in which each dollar turns over more rapidly than normal and hence produces inflation. But, in practical terms, the answer is no. Only increases in the money supply can produce, accommodate and sustain inflation. And only marked increases in the money supply can result in marked inflation....
*July 1: "U.S. Food Inflation (groceries) Running UP 5.0% Year over Year—USDA"
If interested see also:
Convexity Maven: Heaven, Hell, The Fed and Inflation
"The FAO Food Price Index rebounds in June"
Stephen Roach Repeats His Warning On the Dollar
A 5% decline over the course of a year would be very helpful for the world economy.Société Générale's Albert Edwards Says We Are Transitioning From "The Ice Age" To "The Great Melt" (-flations: In and De)
A 10% collapse in four months would be an inflation shock from U.S. imports and might cause Germany to push for a decline in the euro to protect their export industries and thus set off a competitive devaluation or if China jumps in, a currency war.
Crestmont Research Market Valuation Update
Inflation and EquitiesThat gets us back to mid-May 2020, for the rest there's the 'search blog' box, upper left.
Paul's back.
From FT Alphaville:
The Zimbabwification of Wall StHere’s one theory on why stock indices have performed so well these past few weeks, just as the real global economy has gone into a virus-induced tailspin.....MORE
Subconsciously or otherwise, investors are buying insurance against inflation.
Back in June 2008, when the ZSE All Share on the Zimbabwe Stock Exchange started to rise exponentially, some onlookers were confused. Mugabe was losing his marbles, there was death on the streets and ordinary people were in crisis. Business and the local economy reflected all that. So why should the share prices go up?...
Not yet but something to keep in mind.
In the U.S. the annualized decline in GDP is running about $4 trillion with the deficit stimulus approximately the same. So no net increase, yet.
Possibly more important than the numbers is who is raising the issue.
Mr. Murphy, in addition to founding FT Alphaville, has been watching the markets for longer than some of our readers have been alive.
And he knows more than most practitioners. In fact he could forget half of what he knows about markets and still know more than most practitioners.
So we'll take this heads-up seriously.
