Guest post. Translated from the French by Tim Gupwell
Whenever monetary creation, or the famous concept of printing money, is alluded to, the idea of hyperinflation is never far away. Subsequently, reference is made to history to predict a return to these episodes that left such an indelible mark in people’s memories. The conclusion immediately drawn is that the same cause will have the same effect.
However, the crisis we are living through might well lead us to a more nuanced picture. The first thing that needs to be considered is that we are seeing an inflation of financial assets, not of the prices of consumer products. The next remark that needs to be made is that this latter type of inflation has not been seen in the United States, in Japan or in Great Britain, all countries whose central banks have not held back when it comes to monetary creation.
Of course, it can always be countered that it is only a matter of time, and that the next flurry of snow will trigger the avalanche. But is this really a satisfactory argument? Looking at it another way, it seems that the liquidities lavishly distributed by the central banks do not actually trickle down into the real economy and are notoriously used to other ends, which do not lead to an increase in consumer prices. The heavy downward pressure on wages constitutes an additional obstacle to the appearance of the dreaded phenomenon.
Inflation of commodity prices, in particular of energy prices, does not square with this theory any more. It results primarily from speculative activities and only to a very small extent from the interaction between supply and demand – which only produces a marginal increase in the prices of everyday consumption, in a context marked by overproduction. The facts are there. Inflation, as we encounter it, continues to be that of financial products, which is expected to continue. There has still been no substantial regulation of the financial sector, where the pursuit of ever higher yields continues to be pursued. For one example among many, it can be seen in the rising popularity of EFTs or trackers, financial products which seem to promise everything under the sun.
Pointing out that increasing the monetary mass and inflation on consumer product prices are not indelibly linked in the current context, does not however signify that the purchase of public debt by the ECB will, by a sleight of hand, resolve the insoluble issue of debt reduction. As the debt problem also involve private financial establishments, a pretext would need to be found to take advantage of the situation and wipe everything out by bailing these establishments out too with public funds, with the ECB ultimately taking responsibility for it all. This is an idyllic vision which is just too good to be true, especially bearing in mind what is happening in the United Sates, in Great Britain and in Japan.
In this last country, we observe the enduring phenomenon of what Keynes identified and called “a liquidity trap”, which would explain why the abundant liquidities discharged by the Bank of Japan do not manage to stimulate the economy, which is actually undergoing an endemic deflation. The prices do not go up; on the contrary they go down! Drawing an obvious conclusion from this situation, we can say that the principal danger is not that of inflation, but of its opposite, deflation.
Christian Noyer, the Governor of the Bank of France, has just pointed out that the monetary policy instruments of the ECB no longer work, to justify the banking union project. Mario Draghi first of all appeared to flirt with disaster by evoking the possibility of some European countries being affected by deflation, before clearly explaining that ‘if the risk premiums on sovereign debt prevent the implementation of policy, then they enter into the framework of our mandate”, thus justifying the possibility of restarting the debt repurchase programme on the secondary markets, which had been interrupted to allow the States to assume their responsibilities. Finally, Ben Bernanke, the President of the Fed, has declared that he is keeping a close eye on inflation in case it should fall below the optimal rate of 2%, giving to understand that a QE3 (quantitative easing) could be decided upon to reboost the economy if the danger of deflation becomes too great, without any guarantee of success judging by the results of the last two.
To predict hyperinflation would be premature: in a situation of deep crisis in the financial sector, the usual mechanisms go awry. But hoping that the ECB is going to be able to soak up the debt in this way allows for the exorcism of the alternative to the current debt reduction strategy, that of organizing a default which would strike at the heart of the workings of a financial system which the decision makers fully intend to protect.
The colossal figures which are circulating with regard to tax evasion by individuals and corporations, as well as those for the capital which is stashed away in tax havens clearly show that there is still some leeway! The approach which consists of taking from the rich and bringing the money back still makes sense, above all when one knows where their chests are hidden. It is pointless sending a squadron to the Caiman islands, when all that is needed is to take the Tunnel to the other side of the Channel…..
“No more tax havens”, Nicolas Sarkozy had declared after the pantomime staged by the O.C.E.D. Tax Justice Network has recently estimated the amount of financial assets which take advantage of these ‘offshore centres’ for money laundering: they represent between 17 and 25 trillion Euros. Wealth management is one of the most profitable sectors of activity for the banks.
There are only three possible strategies for reducing the debt. The European authorities are continually searching for a variation of the first, which could take on some of the characteristics of the second. This latter will be only be used a last resort, at the height of a new sudden twist in the crisis, if the variation in question cannot be implemented or takes too long to be achieved. There remains the third one, which could start to be executed in Greece, with a new restructuring of the debt. With the difference this time that it will not be the big banks undergoing the shock, but the ECB, the central banks and the IMF, now the principal holders of Greek sovereign debt.