The 25 per cent increase in the US M2 money supply this year and similar stimulus by other central bankers (10 per cent in China and 11 per cent in the EU) have caused investor euphoria to levitate share and real estate values far above levels we would have seen in their absence. It’s a game of chicken, to see how close one can come to timing a downturn whose inevitability looms.
The fundamental problem that Powell faces is easily illustrated. Imagine that every dollar was instantly worth two. Ignoring mechanics for a moment, this money-doubling helicopter drop, as Friedman termed it, would immediately double the nominal prices of real assets such as shares and real estate.
MMT further cynically ignores its implicit taxation of dollars held globally, thereby endangering the privilege. Powell recently said: “The kind of troubling inflation that people like me grew up with seems far away and unlikely.” Rather than wistful soothing, pointed economic countermeasures are more the order of the day.
Back in the US, an explosive divergence between disposable personal income and gross domestic product growth due to Covid-19 payouts adds more stimulus fuel to the fire, even without the blatantly regressive student loan forgiveness promised on the campaign trail.
One might predict that shares, bonds and real estate will tumble, but this is too simplistic. More broadly, comparative advantage will shift from real to financial assets, debtors to lenders, and from young to old, given demographic-risk-preference profiles.
Deft central bank braking that gently nudges yield curves upwards could rein in rampant investment in overvalued assets and the phantom profits they have been generating. Braking too hard risks yet another market collapse.
Has a collapse begun already? Perhaps, but new market highs could come first if investors divine ongoing monetary largesse. It is inevitable that central bankers will abandon the Covid-19 fight in their inflation fright. In doing so, they could cause markets to collapse, as they have before. As I rightly warned you last February and in 2007, consider selling soon.
Gary Biddle is Professor of Financial Accounting at the University of Melbourne and Visiting Professor at Columbia University, London Business School and the University of Hong Kong, where he served as dean