In the past, David and I have written about how money supply is rampantly expanding, and how this benefits the spenders and the speculators while punishing the producers and the savers (in a relative sense of course). We’ve been called conspiracy theorists for pointing out systematic problems with paper currencies.
Today in The Australian we find some more people who agree with us: Rupert Murdoch, Veteran Reserve Bank economist Peter Jonson, Warwick McKibbin (former Reserve Bank Board), and Bob Gregory (Professor of economics at ANU and another former Reserve Bank Board member). It’s good to see this issue make the front page. Shame it wasn’t there 15 years ago.
“Rupert Murdoch had warned G20 finance ministers that money printing by central banks had exacerbated inequality…”
“Mr Murdoch is saying what a lot of people including central bankers are saying in private and increasingly in public,” said Warwick McKibbin
Here’s the latest US money base* graph. The massive injections started in August 2008, the numbers ran right off the old graph scale. It was a temporary liquidity injection to tide us over difficult times. It took 90 years to grow the US base money to $800 billion. Now six years later the money base of the US has grown by 500% to $4.5 trillion. No one is pretending the money base will ever return to what it was. Instead officials try to manage the market and the money supply with repeated warnings of “the end of tapering” and markets leap or dive depending on the phrasing. Stock investing is not about company valuation anymore, as about predicting the bureaucrat. Markets have become bets on what interest rate committees will do.
The bank bailouts in 2008 and this little-known graph are what underlie both the Tea Party and the Occupy movement. People know something is wrong. It’s long past time to discuss it.
US Money Base, 1918 – 2014
Central banks are printing money (with digital wheelbarrows). Like temperature data, officials can adjust inflation figures to hide the effect of the extra dollars (look up hedonic adjustments, and changes to the weighting of “fixed” baskets). Like temperature data, there doesn’t need to be an overt conspiracy, just a systematic culture that rewards bureaucrats who think of reasons to reduce CPI. Which government minister will reward the senior bureaucrat who finds that inflation figures are biased low, and need adjusting upwards? Which government has an incentive to expose hidden inflation, and pressure the central banks to put up interest rates and make voters pay more in mortgage repayments?
If you or I print money, it’s counterfeiting and a crime. When central banks and large financial institutions do it, they’re saving the economy.
Money begets money
Ultimately the winners are the ones who get to spend the newly printed money first — that’s borrowers and speculators. To borrow, you need collateral, so wealthier people can borrow more. The commercial banks create new money for them to spend on assets, and because lots of people with newly created money are bidding up the price of the assets, those asset prices go up. Which means more collateral, so repeat.
As prices inevitably rise, the savers lose purchasing power, and political power too. So shareholders and property owners grow wealthier by borrowing. (As long as they don’t make a hash of it. Some of the biggest investors of all nowadays are the investment arms of banks, who are extremely well informed because they lend money and know everyone’s balance sheets, and are the ones choosing how to lend against various asset classes and when.) Some of their wealth is gained through taking smart risks, and is well deserved because it allocates capital to more profitable enterprise. But some of it is gained at the expense of workers who earn by the hour or year and get pay rises that are pegged to the CPI (which doesn’t grow with shares and property). There’s a balance between favoring risk takers or low risk producers who save for a rainy day. If the balance swings too far towards the risk-takers, the workers payrises don’t keep up with the money printing. Pensions likewise. Inflation steals from retirees too.
Feel like your income isn’t keeping up with expenses like it used to? Could be.
Did you get your share of the new money?
A new study by the US-based National Bureau of Economic Research written by eminent tax economist Emmanuel Saez, released on Monday, found the rise in wealth inequality in the US is “almost entirely due to the rise of the top 0.1 per cent wealth share”, noting that share had grown from 7 per cent in 1979 to 22 per cent in 2012 — a level almost as high as in 1929. “The bottom 90 per cent wealth share first increased up to the mid-1980s and then steadily declined.
“The increase in wealth concentration is due to the surge of top incomes,” the authors said.
Borrowed money has just as much political influence as hard-earned cash does. So it’s a deep problem for any Democracy — when voters vote themselves the contents of the Treasury they’re voting for hand-outs and indirectly for governments to make manufacturing money easier. Who represents the worker anymore? All sides of politics support borrowers. It’s time the West started talking about the downsides of having a group of bureaucrats set the price of money while others create money out of nothing. There is no free market in currencies, only managed, fixed rates.
For comparison, here is the graph back in the pre GFC days. The tiny slowing of the exponential climb in 2007 set the scene for the collapses of 2008. That’s the problem with debt-based paper money — it has to constantly accelerate or we get a hangover.
US Money Base, 1918 – 2008
Back in 2009 a reader suggested this graph above should be a log graph so that the changes in past years were not compressed and invisible. To deal with that I published a graph of month-by-month percentage growth in the money base, so I could capture the scale of the proportional change. I haven’t had time to update it, and the spike has come back down since 2008. Some recent year-on-year figures have been as “low” as 25% and 33% growth — that’s way back to World War II levels — but without the world war. The scale of the GFC interventions is not like anything that’s been done before.
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Some of this money has found it’s way into higher monetary aggregates and the curve on the M1 and M2 have shifted up a gear since 2008. The quickening continues. The problem exposed by the GFC is far from over.
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* Our money system has two layers. Base money is the money created by the central bank. It is the “base” on which the commercial banks create bank money (the money in our bank accounts, called “credit” by the banks). There is usually about 10 to 20 times as much bank money as base money in existence. You might think of base money as like the gold in a gold-based system, and bank money as like bits of paper or computer entries that represent gold. One of the constraints on the creation of bank money by commercial banks (which they do by lending) is the amount of base money they have, so, theoretically, this recent expansion of base money should show up in broader monetary aggregates in the future–but not necessarily.