Magic money is blinding us to the dangerous reality of inflation
- Signs of inflation are everywhere, from stocks, bonds and real estate to goods and services. Yet analysts and fund managers continue to argue that asset inflation is nothing to be feared
There was once a magic money tree that bloomed in never-never land. It bore fruit of golden apples and silver pears all year round. No one wanted for money as they could pluck gold and silver from the tree whenever they wished while the bank of never-never land tended the tree carefully.
But, in time, the tree bore more apples and pears (“funny money”) than the supply of goods, and prices began to rise. The people of never-never land had, by that time, lost all sense of the value of money and the monetary system began to collapse.
But there are disturbing straws in the wind as the damage from the Covid-19 pandemic (and Donald Trump’s trade wars) on the goods supply chains begins to drive up prices, even while central banks and governments continue to hand out free golden apples and pears by the cartload.
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Inflation is the one thing that advocates of modern monetary theory do not like to talk about. It could destroy the delicate and vulnerable equilibrium in a theory which claims that central banks can print money indefinitely (provided they have a universally acceptable currency).
As former Bank of England governor Mervyn King noted recently in an irreverent essay published in The Spectator magazine, “MMT is neither modern, nor monetary, nor a theory […] the ability to print paper (or, today, electronic) money has always raised the question of when to stop.”
There is nothing new about the idea of creating money, he said, noting: “From Roman emperors through Henry VIII and the Weimar Republic to present-day Zimbabwe and Venezuela, rulers have shown all those clever central bankers struggling to get inflation up to their 2 per cent target how to do it.”
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“Unfortunately, they didn’t stop at 2 per cent but ended up in hyperinflations in which prices doubled in a day – equivalent to annual percentage inflation in the many trillions. Needless to say, in such situations the economy tends to collapse.”
The argument advanced by apologists for unprecedented monetary easing and MMT is that it is better to tolerate runaway asset inflation than risk a global recession or even depression when the Covid-19 pandemic has severely damaged output and employment.
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“Essentially, it is down to unprecedented levels of monetary and fiscal support, ultra-low bond yields, historically low interest rates, [rising] corporate earnings, and [the fact that] institutional and retail investors have large reserves of excess cash,” Green argued in a note.
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This is correct as to the cause of asset inflation but what about its effects? Tobias Adrian, director of the International Monetary Fund’s monetary and capital markets department noted in a blog: “Financial stability risks have been in check so far, but we cannot take this for granted.
“As the apparent disconnect between exuberant financial markets and the still-lagging economic recovery persists, it raises the spectre of a possible market correction should investors reassess the economic outlook or the extent and duration of policy backstop.”
Monetary excess anaesthetises against a sense of reality. As King said: “There are no magic money trees.” Or, as Hans Andersen observed: “The emperor has no clothes.” We need to be aware that, for every asset, there is a corresponding liability.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs
