Time for the weekly economics update.
I’m going to spend the time today talking about some pretty basic stuff, but it’s material that none of our politicians seem to want to cover, and none of our wonderful mainstream media wants to pay attention to either.
So I guess that means it falls to me.
Let’s start with the basic economic equality:
MV = PQ
This is a tautology, or something that is true no matter the interpretation. The reason is quite simple — “PQ”, or “price times quantity”, is otherwise known as GDP (in nations where GDP is defined as the goods and services sold, not produced.) We can thus rewrite the equality as:
MV = GDP
and it works just as well.
“M” is the amount of money and credit in the system, and “V” is the velocity, or the number of times each unit of money or credit is used in a given time period (in this case, per year.) Since GDP must be purchased with funds of some sort, this equality must be true.
Now let’s look at the next aspect of things — all money in modern economies is in fact debt. That is, for each unit of currency or credit, someone has gone into debt for the exact same amount. This too is a tautology in these nations. (Whether it should be is a different discussion!)
Therefore, we can measure the total amount of money and credit (that is “M” by looking at the amount of debt in the system.
Now let’s take the next step. For each unit of production (GDP) in the system to be purchase some number of units of money (or credit) must be used. If the ratio of units of credit and currency (in whatever units you wish to use, say, dollars) to GDP (in units of production) then the economy is in balance and neither inflation or deflation is taking place.
If the units of currency and credit are increasing faster than is GDP, inflation is taking place. It requires more units of currency or credit to buy each unit of GDP — it must by definition, since the equality at the top of the page must always balance! That is, we are simply changing the divisor when we emit more money and/or credit into the system. If this “stimulates” the production of more “stuff” (that is, makes GDP go up) then that’s fine provided that GDP rises at least as much as does the new money or credit that is emitted.
So what do we know about the last 30 years?
We know that debt, that is moneyness, has risen much faster than GDP has.
This is where the “MMT” clowncar brigade goes off the rails. They try to claim that government borrowing is somehow “special.” They’re wrong, because all units of credit and currency are fungible — once they get into the economy exactly how they got there is of no consequence at all. That is, one $20 spends the same as any other $20, whether it was first spent by the government on social programs or by someone who borrowed it to buy a car.
The government at all levels — Federal, State and Local — spend more than it taxes provided that it limits same to the growth in economic output, and it prohibits private entities (e.g. banks) from lending against nothing. That is, provided “One Dollar of Capital” is enforced at all times and government controls its spending to match deficit or surplus against change in GDP there is neither inflation or deflation in a monetary sense.
What most people call “inflation” is an increase in the price of things you buy. But notice that nobody counts the price of all things. Specifically, stocks tends to be left out, as do houses and most capital goods. It’s called the “consumer price index” for a reason, and when it comes to the biggest single piece (houses) the government uses “owners equivalent rent” instead of actual house prices.
Well, the reason doesn’t matter. The impact does, however — low interest rates translate into lower payments which means lower rents. Therefore, in times of low interest rates house prices are understated and in times of high interest rates house prices are overstated! That’s exactly backwards in terms of how it should be, and this is not the only distortion.
Even using the government statistics, however, the consumer price index over the last 10 years has risen a little over 30%. Median family income, on the other hand, is only up about half that — 17% or so. In other words, in real terms, which is all that matters (how much “stuff” can you buy) family income has actually declined.
Now here’s the bad news.
If we chart the difference between debt (“moneyness”) growth less output (GDP) growth as a percentage of GDP to determine monetary inflation, this is what we get:
That, my friends, is the truth. That little spike downward is what freaked Bernanke out but in order for what he did to “work” we would have to move toward establishing an even higher imbalance — a higher high — and to do that someone would have to borrow all that new money!
That isn’t going to happen folks. The fact is that this excess credit creation has to come back out of the system and those who wrote that unsecured credit must be forced to eat it.
Those firms will collapse. That’s not bad, it’s good.
More to the point, it’s necessary, and if we don’t do it and keep trying to insist that we can lard up more and more of the economic deficit on the government through ever-higher deficits, we will become Greece.
There is a limit to this stupidity, and we’re there.