Whither Inflation?; A Peak at the Meltdown of Retailing*

Whither Inflation (an ongoing discussion)?

The Federal Reserve, the Bank of Japan, the European Central Bank, the Bank of England, and other Central Bankers have been working in parallel to stimulate their economies. To do so, they’ve printed enormous amounts of fiat currencies: U.S. Dollars, Japanese Yen, Euros, British Pounds, Chinese Yuan, etc. Although the world is awash in paper money, that money hasn’t found its way into hoped-for consumption and production. The historical norm of 3{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} GDP growth isn’t even close to being realized. Instead, the money has found its way into global equity markets and, in doing so, has increased inequality by increasing the wealth of those who own shares.

The principal reason for printing money has been to avoid a feared recessionary and deflationary spiral. Central Bankers believed that money-printing would last only a few years until economies regained their footing, returning to a post-WWII economic cycle of increased GDP growth and modest inflation. The inflation target was 2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}, a goal that nevertheless hasn’t been reached. Money-printing has required governments to borrow from the public and, accordingly, has created enormous national deficits. Modern Monetary Theory speculates that these deficits can continue indefinitely and, in fact, that governments can freely print-and-spend in their own currencies to stimulate their economies and provide direct benefits to their citizens – including, for example, by giving them a guaranteed annual income. The fear of the doomsayers has been that money-printing and deficit spending will lead to a vicious inflationary spiral. It will drive up interest rates and choke off economic growth. It will lead to a deep recession … and worse.

Those bad things haven’t happened.

Nevertheless, despite the best efforts of Central Bankers and free-spending governments, there is and has been little inflation and only modest economic growth. Money-printing has had only limited success – although, importantly, it has augmented GDP growth and boosted employment when many believed the world was headed for a deep recession … or worse.

The poster-child for low interest rates and massive deficit spending has been Japan – it’s been doing this for 30 years – and yet has seen only mediocre growth. Importantly, despite its best efforts to create inflation, it has seen no inflation. It also has not experienced an increase in interest rates or a deep recession … or worse.

How have Japan’s massive deficits not sparked inflation? How will the rest of the world, awash in fiat currency, avoid inflation?

There are multiple possible causes of inflation, each depending on a variety of complex economic circumstances. In short, no one really knows: It’s a mystery (to quote from the movie Shakespeare in Love.) People don’t call economics “the dismal science” for nothing! Perhaps the most common theory is that inflation is triggered when the aggregate demand for goods and services in an economy rises more rapidly than an economy’s productive capacity. This can happen when a central bank increases the supply of money. This ordinarily revs up an economy’s consumptive engine and demand outstrips supply. Another is when prices of production inputs increase. This can happen with wage increases or when there is a shortage in the supply of natural resources (oil was a factor in the inflationary 1990s). But economies, and the interrelationship among economies, are complex. Devining causation often is a hindsight exercise.

Central bankers have printed money with abandon, and yet there is no inflation. When Germany printed Deutsche Marks in the 1920s, the result was hyperinflation. When Zimbabwe printed dollars in the early 21st Century, there was hyperinflation. When Venezuela printed Bolivars during the current decade, there was hyperinflation. That hyperinflation resulted from an inability of those nations’ citizens to purchase necessities produced in other countries. In essence, the money-printing nations’ currencies became worth-less in comparison to the value of the currencies/products of other nations that were not printing their own fiat currencies. These were each single-nation, internationally-uncoordinated money-printings. There are no examples of hyperinflation in a coordinated, globalized economy. In fact, there are no examples of inflation of any sort in a coordinated, globalized economy. And for good reason. There never before has been a coordinated, globalized economy. Never before have products and services been interchangeable on a global basis. Never before have nations coordinated their currencies, their production modalities and their money-printing.

This time is different.

Yes, that’s right. The unspeakable has been said. It’s economic heresy to say that “this time is different” because things are never so different. There’s always a precedent. History is long and filled with examples. Human nature means that human beings always will react similarly.

But this time IS different.

No one has witnessed a similar confluence of complex economic interrelationships. Economic history reveals no precedent.

It therefore is pointless to look at previous economic cycles and draw conclusions. Analogues exist, but they are of little value. It may be true that the current U.S. deficit of $21 trillion

(that’s $21,000,000,000,000 – count the zeroes)

cannot possibly be repaid out of revenues. It certainly seems correct that at some point – whether at $21 trillion or $50 trillion or $100 trillion or $1 quadrillion – the only way to wipe out the U.S. deficit will be by a U.S. government bankruptcy – or perhaps by coordinated national bankruptcies (Whatever that might mean? Who can know? It’s a mystery!). How many years might it take for countries to get there? One? Ten? Fifty? A hundred? Nevertheless, as long as GDP growth continues, even at a low rate, and as long as there’s general prosperity, there will be no reason to concern ourselves with potentially unsupportable deficits and possibly unrepayable debts, no reason to pause in stop the money-printing, no cause for concern about inflation. The Japanese don’t care about their unsupportable deficits and unrepayable debts, and those who view the Yen as a safe-haven currency (and there are many who do) certainly don’t care. Massive U.S. deficits and an unsupportable a huge national debt are not currently troubling either Democrats or Republicans either.

Central Bankers therefore will continue to print money. Governments will continue to deficit-spend. Countries are likely to justifiably pursue MMT to a fault. In short, paraphrasing Stein’s Law, the current fiscal environment will persist until … it ends.*


* Herb Stein was the Chairman of the Council of Economic Advisers under Presidents Nixon and Ford and father of actor and comedian Ben Stein. Stein’s Law says that “If something cannot go on forever, it will stop.”

A Peak at the Meltdown of Retailing

Through early March 2019, a host of large retailers, including Dollar Tree, Abercrombie & Fitch, Kohl’s, Gap, J.C. Penny, and Tesla, have announced almost 5,000 store closings. Closings far outweigh openings. For all of 2018, there were only 5,500 store shutterings compared to over 8,000 in 2017. This will have significant knock-on effects, and not only on Amazon, Costco and Walmart.

Finally (from a good friend)

Bob, a 70-year-old, extremely wealthy widower, shows up at the Country Club with a breathtakingly beautiful and very sexy 25-year-old blonde woman who knocks everyone’s socks off with her youthful sex appeal and charm and who hangs over Bob’s arm and listens intently to his every word. His buddies at the Club are all aghast. At the very first chance, they corner him and ask, “Bob, how’d you get the trophy girlfriend?” Bob replies, “Girlfriend? She’s my wife!” They are knocked over, but continue to ask. “So, how’d you persuade her to marry you?” “I lied about my age,” Bob replies. “What, did you tell her you were only 50?” Bob smiles and says, “No, I told her I was 90.”

*┬® Copyright 2019 by William Natbony. All rights reserved.

No Comments

Sorry, the comment form is closed at this time.