There is an article in the July-August number of Foreign Affairs on the magic of easy
money. The author, obviously knowledgeable, as writers in the magazine tend to
be, discusses the huge expansion of the money supply and expresses perplexity
at how it is that prices have not been rising accordingly. Recently I saw a similar puzzlement expressed
in an article found in The Atlantic.
Talented financial writers note that we are flooded with money without price
inflation. They find it even more remarkable in the absence of increased
production of goods and services. You could understand prices not going up if the
production was rising just as quickly, but the current case consists of much
more money chasing after fewer goods and services. How can that be? We don’t
know, they say; it’s a mystery, but it is how it is, and apparently
we can print unlimited money without price inflation resulting.
What they are missing is that the extra money is not chasing
goods and services very hard. The velocity
of money has slowed way down. People
aren’t spending. At least, not quickly. This is a behavior that characterized
the Great Depression. The Social Credit Party recognized the congruence between
the low velocity of money and depression and tried to use their “funny money” to
raise the frequency of economic transactions. The value of their money was programmed to decline by a fixed
amount each week. One had to spend it to get rid of it to avoid the erosion.
The drop in the velocity of money is one indicator that we
are in a depression. I don’t think that we may be sliding into it; I think we
are in the early stages already. It will last for several years, and damage
will be high.
I do not want to imply that the velocity of money is an
independent phenomenon. It is dependent on individuals making decisions about whether
to spend. The question each person has is which do they want more --- the money,
or the goods and services? It appears that right now people have become
inclined to choose money more readily than they were before the pandemic. I
attribute it to their uncertainty about the future.
We might view the velocity of money as nothing more than the
velocity of goods as Henry Hazlitt
argued --- a function of decreased demand. Decreased demand tends towards
economic slowdown: why produce what people don’t want?
My expectation is that once people begin to feel more
certain about the future, or at least more certain about the probability of
some plausible futures, particularly in regards to a decreased likelihood of
outliers they today view with alarm, they will once again be wanting to buy
more. And they will be operating with more cash. The M1 money supply has grown
with the government having created cash out of credit. The result will be a run-up
in prices. The chickens will come
home to roost.
My guess is that we are already in a depression (a lengthy
and deep slowdown in production) which will tend to be a deflationary depression
that will turn into an inflationary depression. People are going to get hurt.
And it will last for several years at least.
Most of the readers of this blog are Americans. I don’t know
why, but the preponderance of hits comes from the USA, albeit not in the
numbers that used to be obtained when I posted frequently. I am out of the
habit and probably should have a set time each day to say something here. To
you Americans, thanks for coming, but I want to comment now on the current state
of federal politics in Canada.
The State of Canadian
Federal Politics
Until the Liberals were elected with a majority in 2015, we
had a competent Minister of Finance, Jim Flaherty. The Conservative Party of
Canada supported lower taxation, less intrusive government, and reduction in
trade impediments. That government planted the seed that yielded the harvest of a
robust economy for which the current Liberal government under a seemingly
juvenile Prime Minister and none too capable Minister of Finance have taken
credit. The Liberals, who really are not liberals, have until recently had wide
popular support among Canadians. Not hard to be popular when you are buying
their votes. In the 2019 election, the Liberals were reduced to a minority,
with four other parties holding seats. Today, the Liberals only need the support
of one of the three larger opposition parties in order to govern. During the
pandemic, polls have been showing that if an election were called, the Liberals
would trounce the opposition.
Enter the revelation of evidence that has led many of us to
conclude that our PM and Minister of Finance are probably crooks. The Finance
Committee of the House of Commons and the Ethics Committee have been
investigating a series of transactions that have sunk Liberal popularity.
Further, the Conservative Party of Canada has requested inquiries of four
Parliamentary officers: the Auditor General, the Procurement Ombudsman, the
Ethics Commissioner and the Lobbying Commissioner. The CPC has also
asked the RCMP to determine if a criminal investigation is warranted.
Recently, the leader of the Bloc Québécois (one of the
opposition parties) has demanded the resignation of the two villains and the
Chief of Staff of the PMO (Prime Minister’s Office) under threat of making a
motion of non-confidence in the House, which presumably he thinks will be
supported by the other opposition parties.
At the same time, the party that is the Official Opposition
by reason of their large holding of seats in the House of Commons, the CPC, is
in the midst of selecting a new leader. It appears to me that at least two of
the four contenders are highly eager to become Prime Minister, and both have
stated their desire to topple the Liberal government soon.
My guess is that the winner of the next election is likely
to be the Conservative Party of Canada. They are falling into the same trap
they did in 1930. The outgoing Liberal PM, Mackenzie King, made a deliberate choice
to not win the 1930 election because he was afraid that the winner would be blamed
for the depression. He was right. The new Conservative PM later moved away from
Canada to the UK, and there were no more than four people to see him off at the
Port of Montreal when he left. The
Liberal Party, coming to power again in 1935, had a half-century of almost uninterrupted
power. I see the same thing happening again. I am not a CPC member, but their
official policy position is closer to what I think is good for this country
than any other party’s…..by a long shot. They will be blamed for the current
depression and their ideology will be blamed, which is even worse.
The NDP has no money with which to mount an effective
election campaign, so maybe the NDP will keep the Liberals in office. Better
yet, maybe the CPC will have the wisdom and the restraint to let the Liberals
reap the whirlwind. I do hope so.
