The FED is toying with the idea of injecting money directly into consumers’ wallets

This article is about the FED toying with the idea of issuing a digital currency. This is equivalent to allowing ordinary consumers to have an account with the FED, and not just the commercial banks and the Treasury.

There is a big difference between “base money” and money that consumers can spend. Increasing reserves, and encouraging commercial banks to swap their Treasurys for these reserves, which is what QE amounts to, does not create consumer spending power and does nothing to increase demand. This has been proved beyond all reasonable doubt by the experience of the BoJ over the last three decades.

However, if we can all have balances at the FED, and then it starts pressing the button to start electronic money printing, we will at last see some actual inflation. This is precisely what Lacy Hunt says in his latest quarterly report. He doesn’t think it’s going to happen. I suspect that Trump, Biden and Powell (as well as Mnuchin and Pelosi) have different ideas. Hunt states:

The second risk would bring a rising inflationary dynamic into the picture, potentially becoming much more consequential. General disappointment with trying to solve economic underperformance by more indebtedness may crystalize along with the realization that debt will not work any better in the U.S. than in Japan, the Euro Area and many other countries. As this dissatisfaction intensifies, either de jure or de facto, the Federal Reserve’s liabilities could be made legal tender, or a medium of exchange. Already, the Fed has taken actions that appear to exceed the limits of the Federal Reserve Act under the exigent circumstances clause, but so far, they are still lending and not directly funding the expenditures of the government in any meaningful way. But some advocate making the Fed’s liabilities spendable and a few central banks have already moved in this direction. If the Fed’s liabilities were made a medium of exchange, the inflation rate would rise and inflationary expectations would move ahead of actual inflation. In due course, Gresham’s law could be triggered as individuals move to hold commodities that can be consumed or traded for consumable items. This would result in a massive decline in productivity, thus real growth and the standard of living would fall as inflation escalates. Lower and moderate income households would be the most adversely effected. Velocity would rise dramatically. This would make Treasury bills and inflation adjusted Treasury securities far more preferable compared to longer dated Treasury bonds.

You can access the reports here.

You can understand why the FED is thinking about this. Base money creation, which is in the power of the FED, is simply not provoking an increase in spendable money balances (M2). This chart of the money multiplier (i.e M2/base money) shows that we’re likely to lapse back into deflation if the US govt doesn’t start spending money soon, or the digital helicopter drop method is not attempted.

Miller and Mogdiliani falsely fingered

Robin Wigglesworth in the FT blames Miller and Modigliani for the stock market bubbles we’ve seen in recent decades. In my view this is total nonsense. They proved that funding costs would not be reduced by replacing equity with debt in the absence of distorting taxes favouring debt. Of course, politicians, egged on by greedy CEOs did precisely that. The consequence was a rush of companies looking to gear up to the hilt, with predictable consequences as far as resilience in the face of an economic downturn was concerned. This is equivalent to people blaming Ronald Coase for the disaster which was the privatization of Russian nationalized industries. He said that in the absence of transaction costs, assets find their most economically favourable owner. But his point was that transaction costs frequently dominate, so the last thing you should do is privatize willy nilly. In fact, he made a great argument for nationalizing a lot of industries that have been privatized in the UK. He must be spinning in his grave.

Nick Clegg: Facebook Shill

Nick Clegg is now engaged in special pleading for his employer, Facebook. I am not sure he’s exactly a shill, because his affiliation is printed at the start of his article. But the idea that if the EU enforces higher standards of transparency and responsibility on Facebook et al. we’ll all soon be without videoconferencing, Internet shopping and “social media” (presumably equated to Facebook) is nonsense. I presume that Nick is on the phone every day lobbying his former colleagues in government, pushing the same message. What I can’t understand is what is going through the mind of someone like that, and how the marginal benefit of getting more money on top of what is already a good income can offset the pain of the cognitive dissonance he must be experiencing, unless he is very, very stupid indeed.

And yes, I know that a shill is someone who conceals his links to the cause he’s promoting, but I just liked the sound of the phrase.

Wrap

There will be more stimulus: Mnuchin and Pelosi have finished the political theatre. All equities up. Energy particularly. All govt. yields up (except Germany: the market thinks that the EU is going to crash?). Commodities very strong. Even copper is up. Nat Gas up and seems to be less volatile. There seems to be a slight swing towards growth and away from value, except for the megacaps. Bitcoin seems to be catching a bid. Overall, risk on. Until tomorrow.