One of the arguments that has spilt more ink than almost any other over the last year, at least, is are we having or going to have hyperinflation or a deflationary spiral. The argument rages every time someone mentions QE.
I want to suggest that we are having and will have more of BOTH. For the simple reason that you can have deflation in what you are worth while having inflation in what you need.
Now standard theory would say these two forces will cancel each other out and you will get the sum of both trends determining which way you go, inflate up or deflate down. Thus despite differing trends you will still only get either inflation or deflation, never both. Which is true IF the two trends are both acting on the same currency.
You can see where I am going with this. So those of you who are not convinced about the banks having created their own currency won’t be convinced by this either. But my argument, for what it is worth, is fairly simple. And IF it is correct leads to some important conclusions.
The banks are sitting on vast sums of ‘assets’ which they are counting as ‘what their banks are worth’. The worth of the ‘assets’ is counted towards capital holdings and leverage levels. If the assets lose value then the bank’s capital holdings go down and have to be replaced and their leverage level goes up, making lenders and investors edgy about the bank’s health. So it matters if assets lose value.
Rather obviously losing value, is exactly what they have been doing fairly steadily for two years. The only thing holding the banks and broader financial sector together, has been bail-out cash which has literally filled the gaps. As each dollar of debt has evaporated a real dollar, courtesy of the bail-outs, has taken it’s place. Like replacing rotten planks in a boat, you have to replace them fast or the boat sinks. If all goes well, however, you’ll eventually have a brand new boat without having inconvenienced any of your high paying passengers.
No one is going to dispute that part of the essence of our current financial predicament is the huge erasure of the worth of ‘assets’ held by the banks. IF you consider that the securities held by the banks, being promissory notes and having been traded, invested, and used as collateral, makes them a de facto currency THEN the loss of their ‘worth’ IS deflation.
IF you can go with this idea, it does readily explain how we have managed to have such titanic amounts of printing and general monetary expansion globally (US. EU, Japan, China) and yet had NO commensurate sign of inflation. The money we have printed has merely gone towards off-setting some but not all of the deflation in the bank’s debt-backed currency. It has all been sucked into the debt vortex inside the banks. It has slotted into places where the debt-money has rotted away. But it has not kept pace with the disappearance of the worth of their debt-backed currency, and thus, over all, we are seeing all the symptoms of deflation in finance.
HOWEVER, in the other currency, the high-street and wages one, different forces are concentrated. Prices of key essentials are going up because there are more people trying to buy them. Food is the key. Not only are we seeing China compete for resources and foods but we are also seeing speculation pushing all sorts of commodity prices up.
You might be tempted to ask, well if prices are going up then surely we should be seeing companies recovering, why aren’t we? The easy answer is that while prices are going up people are buying less, plus so many companies still have vast debts their profits are hardly keeping pace with what they owe. Remember corporate debt world wide, has hardly declined at all from where it was in 07-08. About 7 Trillion dollars worth.
To summarize we have two currencies at work, in two economies – the financial and the ‘real’. These two economies influence each other but are NOT serving the needs of the same people.
And this is the important bit.
Finance and its currency are suffering deflation. What they need is inflationary, lax fiscal policy in OUR currency to off-set the deflation in theirs. But this will eventually cause problems of inflation for us in our currency. All the money creation being undertaken to please the banks and meet their needs, is creating huge and very real risks of catastrophic ‘worth erasure’ in OUR currency. We are using our currency to replace their wealth. But in so doing it is risking the very basis of our own.
We must see what is going on for what it really is. and stop it.