EMILE WOOLF – ECONOMIC PERSPECTIVES 66
We are well into the protest season. The long run-up to the election period has been characterised by one protest after another – no-deal Brexit, climate change, arms sales, Tommy Robinson, police brutality, capitalism, Trump’s visit, fracking, Catalan, Hong Kong and Eritrean sympathisers, and so on … and on. I’m not knocking the protesters, but neither am I participating. Some of them have understandable grouses; others are off the scale of any sanity test.
One regular target today, of course, is society’s tolerance of billionaires in the midst of poverty. This theme looms ever-larger in the current pre-election debates. It is proving immensely popular amongst rabble-rousing populists mainly because such a handy weapon is accessible to any TV debater feigning faux-outrage at the very notion of someone having a billion pounds. After all, the injustice of it is both implicit and obvious. No further elaboration is needed.
By now I am quite accustomed to grappling with this one since it is so triumphantly wheeled out by my own children and grandchildren in our domestic debates: “No one should be allowed to earn a billion pounds –in fact no one should be allowed even to have a billion pounds.”
Yes, but kindly think about it
The emotional force of these assertions is usually tempered when I ask who is the villain doing all this “allowing”? Why, in the face of such manifest iniquity, is this “allowing” tolerated? And if it is all so obvious, why don’t the protests seem to have any effect – beyond allowing the protesters to feel better about themselves?
The usual knee-jerk response is invariably to declare that it’s all the fault of “government”, which simply shouldn’t allow it. When I ask what would happen to all the money that has been disallowed and cannot therefore be paid, the response is that the government should keep it for the benefit of everyone. In the course of further judicious dialogue they come to understand, and agree, that what they are proposing is potentially indiscriminate in its incidence and confiscatory by its nature – and therefore objectionable. But this circular debate is without true resolution for one reason: the argument is focussing on a state of affairs simply considered hateful by protesters, while no attempt is made by them to understand its causes.
So here we are again
I agree with the protesters – paying out billions, to anyone, is obscene. But how did all that money come into being in the first place? The idea that any legitimate commercial enterprise can generate funds in such stratospheric volumes is improbable if you are talking about real money. But please remember that when governments are contemplating what to do about systemic financial failure that their own policies have caused, they move into panic-mode and behave irrationally, repeating the very mistakes that led to the present mess. At such times the most readily accessible remedial lever is that of the printing press or, more accurately, the computer key.
Let the magic commence
So government, through the agency of its Treasury, instructs the central bank to “buy” large swathes of first-class securities from other financial institutions -bonds issued by government itself (treasury bills) and bonds issued by insurance companies, pension funds and commercial banks. The sellers of these instruments are paid in new money, conjured up by the central bank electronically.
debunking the Keynesian mantra
The economic case for this curious process is that the entry of large quantities of new money will cause interest rates to fall, thereby reducing the cost of government’s own borrowings while encouraging businesses and individuals to enter into more debt, at the same time stimulating aggregate demand – which has always been the Keynesian mantra for economic growth, and which I hope I managed to debunk in my last essay.
But whether this monetary expansion actually achieves any of these things and, if so, at what cost, is not germane to our protest about billionaires. There can be no doubt, however, that what it has undoubtedly achieved is the injection of a huge amount of money, conjured out of thin air, into the money supply. It is also plain that while this new stuff can’t possibly be real money, logic tells you that deliberately inflating the money supply will cause prices to rise – relatively speaking and not necessarily all at once, but it must happen, as night follows day.
How relative price rises are triggered
Those changes in relative prices occur because the change in money supply has a specific injection point in time, and therefore has a specific flow path through the economy. The first recipients of the new supply of money are in the privileged position of being able to spend extra pounds or dollars before prices have increased. But whoever is last in line receives their share of new pounds after prices have increased.
I’m sure you followed that, but I’ll say it again: once created, the new money’s primary beneficiaries are those able to access it most easily – major companies and banks that can tap into it in the form of loans with which they can in turn make investments, and all the while the new money is filtering down through the economy.
If the currency is suspect, buy assets
But it’s obvious that recipients of fake money will instinctively wish to get rid of it by converting it into assets, mainly property, equities and luxury goods such as cars, planes, jewellery and precious metals. Yet as the new money filters through the system, relative prices will start to rise, for everyone, including poorer sections of the community that the new money has not yet reached.
Because the new money was never real, this process of relative price rises effectively amounts to a transfer of wealth from the underprivileged last receivers to the wealthy first receivers. This is why inflation is referred to as a non-legislated tax: government has seized purchasing power (rather than physical bills) from its citizens without legal approval. My preferred term is daylight robbery!
How it ends up
So think about it, but keep it simple: on the one hand we have the privileged few who now find themselves in blessedly close range to newly created tranches of undreamed of wealth; on the other hand are the residual classes of society who, despite deliberately confected statistics designed by government to confound us, find that their money’s purchasing power is relentlessly diminishing.
Where the remedy lies
To revert to Frederic Bastiat’s theory of the seen and the unseen – this deeply polarized society is what our protesters see; the process by which it comes about is the unseen, and that alone is where remedy lies.
Next time electioneers knock on your door bleating about the widening disparity between rich and poor, tell them to mount a protest – about printing money! See whether they can connect the dots.
(i) The filtering down process described above is known as the Cantillon effect, first clearly explained by the Irish-French economist Richard Cantillon.
(ii) The money-creating trick described above is called ‘quantitative easing’ and it is truly as terrible as it sounds. I shall not mention who first thought of it because, in its various guises, it has been destroying wealth for a couple of thousand years, at least!
[ECONOMIC PERSPECTIVES 66]