Nov

24

Novoeconomics, from Alston Mabry

November 24, 2014 |

The money printing has driven up prices, the prices of paper assets, including the prices of Treasuries, which has to be the largest paper asset class globally. But the money that winds up at the banks has largely then been put back to the Fed for the interest it pays. Banks haven't been lending like crazy, so that mechanism isn't pushing inflation. Meanwhile, cheap money has allowed corporations to manage their PE ratios by buying back stock, again pushing up assets prices. And for broad inflation, you need upward pressure on wages, but globally for the last decade plus there has been profound downward pressure on wages caused by China dumping tens of millions of smart, motivated workers into the global labor market every year, not to mention the other emerging Asian countries. And speaking of China, that country has served as an inflation sink for years now, via there currency/import/capital controls policies - there is inflation, and a lot of it, in China.

Stefan Jovanovich writes: 

Big Al's analysis is perfect. But he is describing the short-term credits issued by central banks to float their national Treasuries' deficits. Money itself - cash and customer's bank balances - has not been increased dramatically. I realize this can be seen as a distinction without a difference in a world of fiat money, but it does highlight the difference between the present and the 1970s. Then central banks and rich people worried about whether or not U.S. currency would keep its exchange value, whether the dollar would continue to decline to oblivion as the franc, lira and mark had after WW 1. Now there is no reason for such outright fear because currency positions can be hedged fully and there is, in effect, a monetary Treaty of Vienna assuring a balance of financial power among the largest trading nations that allows them all to quantify credit as needed. As Big Al notes, that balance does not answer the question of how a commercial truce can be sustained under a 19th century combination of steadily declining prices for metals, fuels and grains and increasing prices for land and financial assets supported by public/private finance.


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