Still Worrying About Deflation, Not Inflation
A lot of people I meet these days ask about the risk of a future surge in inflation, or even a return to “hyperinflation,” as a result of government’s efforts around the world to stimulate spending and demand — in part through large deficits, and in part through very loose and unorthodox monetary policy (including, in some jurisdictions, “quantitative easing”).
I am losing sleep over a lot of things, these days, believe meÂ — but not over the dangers of future inflation.
The Levy Institute has just released an interesting brief which makes this same point more completely, and empirically:
They first document the dramatic rise in the outstanding stock of public sector debt instruments in recent months.Â Total federal liabilities have grown by half as a share of GDP in the last year alone.
(By the way, a similar rise is visible in Canada, too. There’s an interesting summary of this in a fascinating recent presentation made by Allan Tomas, Joe Wilkinson, and Eric Boulay at Statistics Canada.Â They show that federal gross credit market debt grew by almost $100 billion in the last year, even though the actual government deficit was much smaller — reflecting the energetic interventions in financial markets undertaken by the Bank of Canada and other federal agencies.Â These interventions didn’t add to the deficit, but they did add to the total stock of gross debt.Â The Bank of Canada’s total liabilities, in particular, exploded by about 60% in the last 2 quarters — from $50 billion to $80 billion.Â Thanks to Armine Yalnizyan for passing that presentation along.Â I can forward the pdf file to anyone else who wants to see it: contact me at email@example.com.)
(Incidentally, this data illustrates that governments can do a lot to stabilize industries — in this case, almighty Bay Street — without at all “dipping into the pockets of taxpayers.”Â The government is using its financial power and balance sheet capabilities to help industries that need assistance.Â Directly, it doesn’t cost the taxpayers a dime — and it could actually make them money, through the interest spread and other income which government makes as a result of these transactions.Â Exactly the same logic applies to the proposed auto assistance package and other forms of pro-active intervention by government, which generally have nothing to do with “throwing around taxpayers’ money.”)
But does this mean that government is firing up the printing presses, and hence that we’ll soon need whellbarrows full of cash to buy our groceries?Â Some folks, even on the left, seem to think so.Â Their fear reflects a very old-fashioned view of how money and inflation works.
First, there’s no obvious link between the money supply and inflation anyway (as implied by the discredited Quantity Theory, which tried to convert a statistical identity into a causal model).Â
More importantly, what we call “money” is not remotely equivalent to the amount of currency in circulation, nor to the amount of public debt.Â Over 95% of money is the stuff that’s “printed” by commercial banks and other private financial institutions, in the course of their creation of credit.Â Swings in private credit creation (or destruction?) overwhelmingly dominate overall movements in the money supply (which is, in fact, simply a post-hoc measure of how much business and circulation is going on in the overall economy — not a policy instrument that we can somehow control).
Total credit is declining rapidly, not growing, because of the private financial crisis.Â Real spending is also falling, largely because of the credit freeze, but now also because of the independent collapse of consumer and business confidence.Â That will drive prices lower, not higher, despite the new aggressive interventions of governments and central banks.Â The Levy brief makes this point strongly.
The reason we’re in a recession today is because our privatized money-printing machine failed miserably and now is contracting.Â Hundreds of billions of dollars of “privately-printed” money are disappearing around us, as a result of “deleveraging” (that is, bankers who go bust, borrowers who go bust, and/or still-living bankers who pull in their loans).Â That’s a major factor driving the retrenchment in personal and business spending that is driving us into recession.
In any event, a rebound in inflation (within limits, of course) would be an unambiguously good thing in my books.Â It is much easier for industries and companies to restructure in an environment in which their nominal revenues are growing (rather than staying stable or worse yet falling).Â The auto industry’s plight is proof positive of that.Â It would help companies, consumers, and governments like to work off their debts — especially improtant now given the painful balance-sheet problems that are hammering private sector spending today.
Unfortuantely, it’s going to be a long long while before we get that rebound in inflation that I would welcome.Â And just as unfortunately, the long-run mindset of central bankers has not changed much — despite the spectacular collapse of what was pompously called, until just a year or so ago, the “New Consensus in Monetary Economics” (NCM).Â They are still of the view that controlling inflation at low and stable levels is the best thing they can do for the world.Â And hence as soon as private credit creation starts to rebound, and the real economy starts to grow again, rest assured that the central bankers will be rapidly and firmly tightening their rein on the whole credit machine.