Absolutely No One Is Responsible for Anything!
Posted January 12, 2022
The latest inflation data is out and it confirms that you are not insane. The official data is showing the highest increases since 1982, the third straight month over 6%, and it all seems to be accelerating, hitting sector after sector, without exceptions. I just finished slogging through half a dozen articles on the Department of Labor data and not even one mentioned the astonishing increases in the money supply over the last two years.
That’s strange to me. To be sure, there are plenty of alternative explanations bound up with supply-chain breakages, huge shifts in aggregate demand and spending habits, pandemic-related closures, and labor problems and shortages that are driving up wages to amazing levels not imagined two years ago.
Whether and to what extent that these “real factors” vs these monetary factors are driving the increases in prices is not possible to discern with any precision. But it is helpful to engage in certain counterfactuals. What might have happened to prices in the last two years in absence of the monetary helicopters dropping newly created dollars all over the country.
I suggest the result would have been: dramatic increase in savings, huge pullback in productivity, a recession much deeper than the numbers are currently showing, and a fairly dramatic deflation in prices that would have made more goods and services available to more people at much lower prices. Yes, and this would have led to vast bankruptcies too.
Perhaps that sounds too brutal. Maybe. Sadly with economics, we have to face tradeoffs. Sometimes you have to trade short-term losses for long-term gains. If we had not avoided the consequences of the shut downs but rather faced them squarely, we would be solidly on the road to recovery right now. It could have been fixed, more or less.
Instead we live amidst incredible dislocations and economic anxiety, embodied most presciently by the inflation that people despise.
Who Is to Blame?
The chairman of The Fed is being called upon to account for what is happening. I can give you the bottom line: he will naturally presume that none of this is his fault. None! And every Senator will go along and pretend that he is not the problem. He is the solution. He will raise rates in 2022 several times, he will say, and then promise that doing so will not tank the economy.
Right. This is the world in which we live. No one is responsible for anything. Nothing. Everything that has happened to us is just stuff that happens, the trajectory of history, just purely a thing that goes on that no one actually did. No one shut the schools. No one closed the businesses. No one shut down travel. No one imposed mandates. You will not be able to find a single soul on the planet earth who will take responsibility for the collapse of the world we knew only two years ago.
The exchange between Rand Paul and Anthony Fauci crystalizes this dynamic. Rand called him the architect of lockdowns. Fauci protested that he was merely following the advice of the CDC. See how this works? No one is responsible.
Certainly Jerome Powell did nothing but follow the advice of others and go along with what Congress called him to do. He had no choice!
But I’m also thinking about a possible future in which inflation gets not better but dramatically worse. I will once again urge you to look carefully at this chart on M1 Velocity. Velocity is the pace at which money changes hands. It reflects money demand. When velocity rises, it puts pressure on inflation provided everything else stays the same. If it falls low, it creates deflation or falling prices, provided everything else stays the same.
What’s actually remarkable right now is that we are experiencing the highest inflation in many people’s lifetimes even with velocity at rock bottom. This, my friends, is the only thing saving us from something close to economic chaos. Velocity is not anything that The Fed can control. It is controlled by our own spending habits and our money demand. Have a look at where we are today:
Question: how fast can this turn around? The answer: in a matter of weeks. It’s like a spring that someone is holding down until they stop holding it. Or a pot of water boiling with a lid on it. Choose whatever metaphor you want, what happens to this line will determine the future value of the dollar as it relates to goods and services. We are experiencing historically high inflation now even with velocity crawling toward zero. This only needs to move a bit to change outcomes.
This is why I’m not at all sanguine about the future of prices, despite the seeming softening of inflation in the energy sector and a few other spots. I get that everyone right now needs good news, and that’s why every diminution in price pressure yields excited op-eds about how we’ve been saved. I’m not sure about that. In fact, I doubt it very much.
Remember too that inflation can take many forms, among which is a flat-out shortage of all kinds of goods and services. Look around today and that is what you see. There are plenty of other explanations but we don’t really need them. Price pressures alongside regulatory impositions not to raise prices (those are very real!) will end in shortages and long lines. It’s the nature of economic law, which works whether we want it to or not. No amount of political maneuvering can change that.
The Fed Should Close Its Doors
I will close with an observation about the remarkable announcement that PayPal will build its own stable coin. Stable coins make clearing much cheaper, faster, and with near-zero risk. They actually invade The Fed’s only market monopoly which is on check clearing. The counterparty risk, the expense, and the time that The Fed’s antique system requires has made it ridiculously outmoded.
This is why stable coins have such a huge market now, and why PayPal simply cannot be stopped in its efforts to jump into this market. At this point, and surely in a few years, The Fed knows where it will be. Essentially it will have watched as market forces invade the one market service that it provides. It will be outmoded and irrelevant.
The Fed is headed to be the new Post Office. Antiquated, annoying, pointless, only there because it has always been there and no one seems to have the courage and will finally to pull the plug. Yes, it still exists. And yes, The Fed will still exist. But history will have passed it by.