An intriguing post on the collapse subreddit1 recently lead me to thinking about the nature of the crisis we’re currently presented with and how it is best understood. In the post a regular user of the subreddit which largely concerns itself with speculations surrounding the collapse of global civilization, criticized the increasing prevalence of what they referred to as ‘crypto libertarians’ and ‘inflation alarmists’. The user then went on to point to the usual villains of these groups opprobrium, quantitive easing and the general monetary policies of the Federal Reserve. With the dollar well placed as the world’s premier global reserve currency and with the specter of 2008 still fresh in the public imaginary, it’s useful perhaps to engage with the generally US based focus of ‘inflation alarmism’ however certain aspects of what is under discussion are generally applicable to a wider range of economies.
The main concern of ‘inflation alarmists’ appears to be largely based on increases in the money supply, such as those seen in rounds of quantitive easing where the central bank purchases long-term government debt and other assets such as mortgage backed securities2, eventually, according to a particularly perspective of monetary flows, leading to significant price increases in the wider economy culminating in runaway hyperinflation3 where the general price of goods in the economy skyrockets eventually placing many goods out of the reach of the general public.
In places where the underlying fundamentals of a country’s economy, such as the supply of goods and services, appear to be in question or there are questions around the ability of a central bank to maintain the value of the currency, investors and companies can require additional costs to mitigate the risks of accepting the currency, pushing up prices. These increases in prices can cause individuals to hold onto commodities and other goods that appear to be holding their value as the value of the currency depreciates. In response typically governments print more money in an attempt to stabilize prices and increase liquidity however rather than prompting a normal resumption of economic activity this often leads to further price increases and capital outflows largely due to the fundamentals of the economy, specifically the GDP, still remaining out of sync.
A common data point brought up in conversations about inflation in the US has been the increase in the total money supply not yet taken up by assets this is referred to as M2 Money Stock, since February 2020 the M2 money supply has increase from 15.4T dollars to 20.1 in April 2021 a 30%4 increase. Seen over the course of the history of the US 23.1% of all US dollars ever put into the money supply has been created in the last 14 months. By looking at the federal reserve balance sheet5 it appears a large portion of this can be attributed to quantitive easing whereby the federal reserve has increased the number of assets on their balance sheet from around 4 trillion US dollars to 8 trillion as of June 16th.
However the commonly assumed reason why usually inflation alarmism should not be the default response to quantitive easing however is that the patterns of quantitive easing previously witnessed by the US economy do not quite fit with the disastrous picture of hyperinflation described above. Rather than dramatically increasing the money supply in the general economy most of the money provided during previous rounds of quantitive easing had previously been used to write off toxic assets and bad loans and to repair banks balance sheets restoring them to profitability6, as the fundamentals of the economy revived less quantitive easing has been required and the liquidity provided to banks has slowly been returned to the federal reserve in the form of interest paid on the initial purchase of bank debt.
Whether this still holds true in 2021 is somewhat of an open question, as the last few months have seen the stock prices reach all time record highs amidst scarcities of numerous everyday goods7 due to the restrictions levied on certain productive industries to stem the rise in COVID infections and broader supply-side shocks. There’s also been a substantial increase in the value of financial assets with the S&P 500 increasing by 23.7% from its highest point pre-pandemic, additionally were this measured from the lowest point during the pandemic this would be an increase of 83.4%, a truly remarkable rise given still relatively sluggish return to ‘normal’ productivity. Alongside this the total market capitalization of all US companies has increased by 30.3%8. Consumer price inflation, the target of inflation alarmists, however has not risen in tandem these asset price rises, with the consumer price index rising currently around 4.2% from 20209 as such there’s little sign of the runaway inflation that alarmists typically point to. Instead intervention appears to have largely forestalled or stabilized the financial markets, propping up the value of mortgage backed securities and other financial assets.
I do however believe there are still lessons to be drawn from the concerns of inflation alarmists, in a similar fashion to 2008 the current crisis has seen significant increases in the wealth of billionaires while 80 million people lost their jobs10 and the number of Americans classified as living in poverty rose by 8 million the highest in 60 years11. When considering why it’s worth noting that the significant number of the financial instruments which have seen an increase in their value due in part to these patterns of QE are already held by the wealthiest people in US society.12
The increased amount of wealth held by billionaires regularly leads to beneficial outcomes for corporations such as increased subsidies being offered by state departments to multinationals13, the increasing acquisition of SMEs by large business entities and the passing of legislation that reduce the liability of companies to their employees14. This regulatory capture, not only improves the standing of these companies but also provides the base for the acquisition of yet more wealth and the enshrining and deepening of wealth inequality.
With a number of different central banks considering interest rate rises to stave off potential spikes in inflation15 and signal to investors a return to normality, inflation alarmism appears at this point to be somewhat overstated, even though at this moment in time there still particular factors on the horizon, specifically issues concerning freight and logistics which could create the kind of exogeneous shocks that could undermine a potential recovery16 again perhaps these issues once again end up exposing the same questions around the fact that the tumult in the economy does not fall upon everyone equally with carrier companies, like Maersk making around a significantly higher sum than they have in previous years. Even whilst the portion of those profits accrued by the majority of workers in the field has seen little sign of significant improvement.17
Despite this being more of a general commentary on inflation concerns and the veracity or lack thereof of the claims made under the general umbrella of inflation alarmism the another objective is to acknowledge what bottlenecks currently exist that could potentially create the scarcities that lead to supply and demand problems. These were covered in far more detail in a recent interview with Nathan Tankus the author of Notes on a Crisis18.
A separate but also linked question is also situated around devising better tools for economic intervention not only in terms of alternative ways of using tools like quantitive easing but also broadly investment strategy. This has been covered to a great degree by Frances Coppola in ‘The People’s Case for Quantitive Easing’19 and in a useful paper by Common Wealth, ‘Low Interest Rates and the Productivity Puzzle’20