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"He that gives
good advice, builds with one hand; he that gives good counsel and example,
builds with both; but he that gives good admonition and bad example, builds
with one hand and pulls down with the other."
Francis Bacon
The
growth in the MZM and M2 money supplies are very strong, almost remarkably so
given the very slack growth in employment and GDP.
So why do we not see any serious inflation in prices? Or real gains in
employment for that matter.
As an aside, I think some of the more 'modern' and aggressively modified
measures of price inflation, like chained CPI, do not measure price inflation
at all, but the consumer behaviour of product
substitution under increasingly trying circumstances as people cope by
reducing their standard of living. That is a measure of gradual deprivation,
not inflation.
I would like to see a system where no social policy is passed that the
leadership of a country does not accept first. If there is to be austerity,
pension cuts, reductions in medical services and food, let them accept it
first for the good of the country and an example to their citizens. I do not
say this out of meanness, but charity. For the double standard with selective
justice is the slow and silent killer of oligarchies.
The velocity of money tells part of the story. Please note that those charts
below are based on much longer timeframes to show that they are a trend, and
not a short term affect of the collapse.
The 'velocity of money' is a calculation that shows the relationship between
money supply and real economic activity as a ratio. It is falling to new
lows. Some might even use the word 'plummet.' There is lots of new money, but
not so much real activity.
The standard economic answer would be that the US is in a liquidity trap, and
the recovery will have lags in employment gains. The money is added, and then
recovery follows, with employment showing the longest delay. The standard
remedy would be to create more jobs, artificially if necessary. But that is
not much different than unemployment insurance and programs like food stamps.
It is kind, and sensible, but not sustainable.
A liquidity trap is described by Keynesian economics as a condition in which
injections of money can support zero interest rates, but fail to generate
real economic activity.
I think the current situation in the US and UK in particular involves a
serious policy error in the failure to address the problems and imbalances
that caused the financialization of the real
economy, and its subsequent collapse under the weight of malinvestment
and corruption.
Aggregate demand is not stimulated because sufficient money does not reach
consumers, as it passes through a corrupt and broken financial and political
system, being diverted largely to insiders at 'the top.' Nothing could be more clear than looking at the statistics regarding income
inequality.
Any gains by the large middle and lower classes will tend to be short term
and illusory, involving more household balance sheet problems and debt until
the system is reformed. Some of this has to do with a policy bias that
considers the vast mass of the people as consumers, but not as workers.
Merely adding more financialized money into an unreformed
system will further compound the problems, and ultimately force a more
significant crisis and change. This is true whether done does
it via more debt issuance or flashier gimmicks like modern monetary totems.
The underlying social tensions can only be ignored by the comfortable for so
long. As a corollary, applying austerity without reform is insanely
self-destructive. The proof of this is forthcoming.
Japan has been able to hold their system together for a protracted period of
slack recovery due to their demographics, their industrial policy position in
the world economy, and a largely homogeneous and communal society that cares
for its own. The US and the UK will have a shorter half
life I am afraid.
The situation is Europe is a bit different, and likely to result in serious
dislocations in their organizational fabric fairly soon if some of the
problems there are not addressed. The monetary union without fiscal cohesion
is inherently unstable. Only fraud allowed it to last as long as it did.
There is a possibility that the current policies in the US may succeed if
austerity if not applied, and something happens in the currency war to affect
the balance of trade. I am not optimistic So let's see what happens.
The UK may provide a good counter example to the US Some new school of
economic thought may find some useful data from that, if they can free
themselves from the 'say for pay' mentality that currently impairs the
public policy discussion in a disgraced profession.
 
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