And even now, inflation-adjusted bonds show no signs of pricing in concerns over long-term inflation.
If so, then money-printing may well become the standard tool of policy-making for decades to come.
Like the mafia don, coming for his piece of the action, citizens may start to come and collect from governments.
Stock market underperforming? F*ck you, pay me.
Business gone bust? F*ck you, pay me.
Lost your job? F*ck you, pay me.
And this has the potential to seriously disrupt the normal function of the market, or dramatically undermine the value of a unit of currency.
Whereas in the past, commercial banks lay at the center of the financial universe, having to be savvy enough to determine who was creditworthy or not, now central banks have taken on that role and because the money is “free” (they just need to print it), the pressure to be circumspect is dramatically reduced.
But greater intervention by central banks and the government across the economy isn’t without some benefit.
For instance, low rates means that governments can borrow more cheaply to fund new infrastructure, from roads and bridges, to schools and hospitals, but that also leaves the levers of power more susceptible to private capture.
The problem with sprawling macroeconomic management is that it also makes politicians particularly susceptible to lobbyists and other interest groups.
As it is, governments around the world are deciding which industry sectors should receive wage reliefs and tax breaks and which ones should be allowed to fail.
But if the money is free, why not give it all away?
Why not rescue all companies, protect obsolete industries and save shareholders all in one fell swoop?
In some ways, the world is already there.
Moral hazard has been tossed into the dust heap of antiquated concerns, and stock markets have become divorced from traditional metrics of valuation.
And with interest rates so close to zero, central banks are increasingly looking like the debt-management arms of the governments that they are supposed to be independent from.
This has had a profound effect on the very essence of what money
is (what qualifies as money), and more importantly, what it represents.
Make it rain, why not? (Photo by Viacheslav Bublyk on Unsplash)
According to a report by JP Morgan Chase, growing concern over inflation has seen the price of non-yielding assets such as gold and Bitcoin soar, because the cost of holding them has declined tremendously.
Gold and Bitcoin ETFs have also experienced strong inflows over the past five months, as investors see the case for an “alternative currency.”
The Bloomberg Dollar Spot Index has declined about 1.7% over the same period, furthering debate over whether a prolonged period of dollar weakness is at hand.
Central banks were held independent precisely to avoid the politicization of the economy through the monetary system, but the world has crossed that Rubicon.
And the current course threatens to finally derail an experiment with currency debasement that has now stretched for almost fifty years, since the United States abandoned the gold standard.
The challenge for policymakers now will be to create a framework that allows the business cycle to be managed and financial crises to be fought without a politicized takeover of the economy.
Central bank independence was already under pressure well before the pandemic, but the coronavirus may be just the push needed to upend current monetary structures and the fiat currency system.
Haven’t we been here before?
In 18th century France, Scottish economist John Law, who in seeking to revive the French economy noted,
I maintain that an absolute prince who knows how to govern can extend his credit further and find immediate funds at a lower interest rate than a prince who is limited in his authority.
In credit, supreme power must reside in only one person.
Law posited that paper money would revive French trade, and with it, French economic power and in that, the royal government gained doubly.
Consolidation meant that the French state’s onerous debts were magically transformed into shares in the newly created French central bank and at the same time, the monarch gained the ability to print as much money as he wanted — the monetization of debt.
That experiment with printing money and inflating asset bubbles led to the world’s first stock market bubble and indirectly, the French Revolution.
Law’s bubble and bust ultimately set back France’s financial development, putting Frenchmen off paper money and stock markets for more than a generation.
And the printing of money never solved France’s fiscal problems, with the reign of Louis the XV and Louis the XVI sustained hand-to-mouth.
Eventually sovereign bankruptcy, led to the French Revolution.
Because if the money is free, the price
does matter — it eventually reflects inflation.