After two weeks pondering money aspects of economic theory, it’s time to review where we stand in the global panorama. These are, in a perverse chinese sense, interesting times. And things keep moving under the seemingly calm surface. So this post intends to be something like the annual presidential overview in the USA: the state of the Union address.
I am aware of some facts. First, I am not the president of anything, not to mention the USA; my opinion is highly irrelevant. I hope my thinking is better rated. Second, it is a little early as it should come well after Christmas. No problem; the early bird gets the worm. And third, the world is nowadays a civilized disunion of countries desperate for economic survival, so we can hardly talk about the global picture with a “union” characterization in the concept. So I renamed the address. After the brotherly G20 communiqué, a trace of realism is what the doctor ordered.
When you write, you have certain advantages over the reader. But he can read you in the comfort of his sofa, and backtest what you say, particularly with the benefit of time. Once you assume the challenge, it is all downhill pedaling. Everything else is up to you. You run the show.
So, in use of that capacity, I determine to focus on two pressing matters.
1.- Update on money printing and its actual practical effects in financial markets (no economic theory today). We use US markets as a proxy for the rest. The situation is very similar in all the developed world.
2.- A long hard look at income distribution. Where we come from, and where it’s going to take us.
Money printing and financial market prices.
The issue of money printing has been debated in these posts to the point of exhaustion. The reader already knows what I think. He now wants to check my views against future outcomes. He’s not to blame for that, specially after reading tons of material -with the entirely opposite views- sustaining Saxonomics, Helinomics, Abenomics, and now Draguinomics. I lack the institutional back up to enhance the credibility of my line of thinking. Time will tell. In the meantime, I am 100% certain of the validity of my thinking in this matter. For what it’s worth.
I keep on gathering evidence wherever I find it. Not trying to prove anything. Just checking the validity of my thinking daily. Doing my homework, I stumbled upon a few charts included in a Tyler Durden post in Zero Hedge last saturday. Correlation is certainly not causation. But if you look at them for a while, they certainly seem to fit the wording I have used in past posts to characterize the incidence of money printing in financial markets.
They also seem to corroborate Cantillon’s conclusion that money printing affects the equilibrium between asset prices and consumption pricing. Once aggregate supply became plentiful (with globalization), money creation ceased to generate consumer price inflation. Money went directly into investment assets (financial markets), with scarce and decreasing spillover into the real economy.
Globalization is not the agent of the actual economic malaise; it has simply allowed insane central bankers to continue their printing game for ever, because it effectively provided near unlimited supply of most products. After Globalization, aggregate demand is local but supply is global. Prices will remain reasonably near marginal costs for as long as supply is perfectly elastic.
Central Bankers had been taught that they were there to target an specific inflation figure, and (explicitly in the US, or implicitly in the other countries) use whatever leeway was left, to stimulate economies with as easy money as possible. Consumer inflation is undoubtedly a monetary phenomenon, but not the only variable to watch. Easy monetary policy produces other side effects. An uninflationary environment is not an ecstatic situation that allows you to write checks for free. It’s not only about inflation Mrs. Yellen!
Another way to show that it’s money debasement (and no other relevant factor) that moves asset prices. Again from Tyler at Zero Hedge, using a Citibank graph.
Market Capitalization or house pricing show a disturbing logic, when put in contrast with the main money aggregates, be it base money, or M2. In different countries. There could be other explanations of course, but according to Ockhams razor principle, this is “the explanation”. It is certainly the simplest and most direct cause-effect for achieving the actual market price level.