Why Prices are not Rising, and Why I Do Not Want the Liberal Government Defeated Just Yet

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.