Oliver Hartwich has a thoughtful piece on how the EU is using monetary policy to circumvent restraints on the use of deficit financing in what is a de facto Keynesian stimulus. He is right in regarding the resulting transfer from the frugal north to the profligate south as being theft. Dan Hannan describes it more colourfully as
The European Central Bank is .. transferring money from North to South without openly saying so. Robbing Peter to pay Paul is one thing; robbing Pieter to pay Paulo another. Pieter becomes resentful. Why, he asks, should he work longer hours so that Paulo can retire early? Why should his government be punished for thrift so that Paulo’s can be rewarded for profligacy?
This monetization of debt has been underway for a few years now. Until recently most decent economists would have said the upshot will be inflation. Indeed, Anna Schwartz said this a couple of years ago in one of her last public appearances at the Mon Pelerin meeting in New York.
But on conventional measures this has not really happened. Money supply has not led to inflation as measured by CPI or GDP deflators. There is the familiar equation of money, its velocity of circulation, the price level and the quantity of goods and services sold (MV=PQ) but in the face of a stagnant Q, an expanded M has not brought an increase in Prices.
The possible explanations are that prices have increased but we are not measuring them or that the velocity of circulation has fallen (we are stuffing our money under mattresses or in bank accounts). It is likely that the inflation in the 1920s prior to the Wall Street crash was disguised in asset price inflation, especially in shares, which once prices collapsed led to a massive fall in velocity as people repaired their liquidity levels (exacerbated by the US authorities’ squeeze on money supply).
Oliver suggests something similar is currently taking place when he says
What we will see, however, is the continuation of a pattern that has already emerged over the past few years. Prices in all sorts of asset classes will go up because that is where the smart money flees as it tries to avoid being devalued by monetary activism. Property in prime locations, vintage cars, precious metals, rare wines, paintings and sculptures – in short: everything with a limited supply – will increase in price.
And yet this does not appear to have happened. Of the assets mentioned, gold has been falling over the past year or so; real estate prices have also markedly dropped in most places and especially in the “positional goods” of natural scarcity; art prices have also fallen from their 2008 levels.
One explanation is that people are desperate to avoid losses and are therefore placing their money in secure deposits which invest in government bills and governments are obligingly printing more of these bills. Hence the savings are being used to finance government consumption – forget about all the “shovel ready” income enhancing investments, the money all around the world is being allocated to those who the government think will return them to office and finds its way into low income groups’ pockets and thence to the poker machines.
The result is the great stagnation as money that previously would have gone into investment is siphoned into consumption. When will this end? Can it continue indefinitely?