What strikes me most about the Corona Crash is how easily Congress authorized $3T+ in stimulus and
no one batted an eye. No backlash in the press. No excoriating conservative commentary. Nothing. And the same in Europe with their own bailouts.
One well-known observer thinks all this money printing will cause the US dollar’s value will plummet. That’s another way of saying we’ll have inflation.
For these and many other reasons, Stephen Roach, the former Morgan Stanley chairman and currently a Yale University senior fellow, is now forecasting that the dollar will decline 35% against the currencies of its major trading partners, and that this plunge could happen “soon” and “at warp speed.”
But that’s been said before and nothing happened.
Twelve years ago, as the Global Financial Crisis was unfolding, everyone complained about TARP – the
Troubled Asset Relief Program – a $700B liquidity injection designed to keep the banking system from collapsing.
President Bush’s own party members rebelled against it and Hank Paulson, the Treasury Secretary
physically begged Nancy Pelosi to approve it. Then came QE2 and QE3 and plenty more complaining.
But despite all the concern, inflation never came.
The lesson central banks and Congress seemingly learned in 2008-2009 was that deficits don’t
matter. Seems reasonable since there has been no uptick in inflation in nearly a dozen years since then.
Modern Monetary Theory has gone global. Since nothing bad happened last time, let’s double down this time!
So why no inflation in the last dozen years after all that global money printing?
The Fed, the European Central Bank and the Japanese Central Bank have been trying mightily to induce a modest 2% inflation rate. You would think flooding the economy with near-zero interest rate lending would cause some inflation, but nope.
Not so for Zimbabwe in 2008. Robert Mugabe tried printing his way to a better economy, the result of which was the largest denomination paper note ever printed, the $100 Trillion dollar bill. That’s not a misprint. One hundred trillllllion dollars (in the voice of Dr. Evil).
Don’t laugh. I have a hundred-pack of these notes. And hundred-packs of the 1 billion, 10 billion, 50 billion, 10 trillion, 20 trillion and 50 trillion dollar notes that came before. (I’ve used these as party favors!)
As Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon, in the sense
that it cannot occur without a more rapid increase in the quantity of money than in output.”
So, if central banks are increasing the money supply like gangbusters, but inflation remains stubbornly low, then there must be a corresponding deflationary offset caused by increased productivity.
Alan Greenspan made a similar comment when he was the Fed Chairman and concluded that new technology – computers and software – were causing offsetting deflation that wasn’t accounted for in econometric models.
I think he might be right.
While in Corona Quarantine, I sit in my comfortable Nest-controlled house, and my essentials, and plenty of non-essentials, magically appear on my doorstep, courtesy of app-driven delivery services. Nest’s Eco mode even reduces my air-conditioning expense without me lifting a finger, which I can control from anywhere on the planet now that I am allowed to leave.
Funny story… My wife and I were in Budapest last year when our neighbor Clementina rang our front doorbell. From my hotel room, I opened the Ring app on my iPhone (which didn’t exist until 2007) and told her we were in Budapest. She wanted to borrow our folding chairs for a party she was hosting that night. No problem. Using the Lift Master app on my iPhone, I opened the garage door for her … from Budapest. She took the chairs and I closed the garage door.
What’s the deflationary impact of all that software, Internet and MedTech stuff? Hard to say, and that was Greenspan’s dilemma, but the first IBM XT I bought in 1984 cost $4,995 at Computerland …in 1984 dollars. You can’t buy a personal computer that expensive today … in 2020 dollars … and it’s literally 10,000 times more powerful.
Now if the deflationary headwind ever abates, lookout Zimbabwe, here we come!