“Ahhh! There’s a money flood in the world economy! We’re all gonna drown in a sea of hyperinflation!” That’s what a lot of people think. And not just cranks on the internet – although there’s plenty of them – some economists sign-up to this mentality too (I was speaking with one last night who was surprised I thought otherwise).
The assumption is that the QE programs – and their equivalents elsewhere in the world – have unleashed a torrent of money into the world economy. If this did happen, inflation would, of course, start climbing. But this isn’t happening and inflation isn’t rising – yes, some people will point to the rise in energy and food prices, as well as the increase in medical costs; but these are largely exogenous, that is, external**.
Energy and food prices – while speculators may be pushing them up some – are largely due to weather conditions beyond our control – while the rising medical costs (in the US) are almost certainly due to Charlatan Obama’s pathetic excuse for a health care bill (price inflation is what happens when you structure your plan around the needs of insurance companies…).
But by and large the core CPI in many countries is simply not rising – indeed, in my own it is falling rather worryingly. The reason is that access to credit is drying up. Far from QE and its ilk pumping too much money into the economy, there, in actual fact, isn’t enough. People can’t/don’t borrow because their credit-ratings are bad. In simple terms: let’s say that you’re on the dole or facing unemployment; are you likely to go and take out a big loan for a TV or a car? And even if you want to, is the bank likely to give it to you? Probably not. And as unemployment rises and incomes fall, an increasing amount of the population lose their creditworthiness.
This is very irritating for the banks. You see, banks love lending – as can be clearly seen if we remember the recent boom/bust – because they earn loads of money from interest payments. If there are few lenders, the banks profits go down – making the directors very unhappy.
The real solution to all this, of course, is to try to make people more creditworthy by providing employment through government spending – but that doesn’t look like its on the cards at the moment.
Instead, some very shadowy ‘automatic’ economic levers are coming into play – if the banks can’t get satisfactory profits from loans because these are drying up, they have to figure out some other dodgy way to increase their revenues.
And sure enough it looks like banks are figuring out new ways to bend the rules and suck profits out of people that have already burdened themselves with too much debt.
Yes, the bankers are a shady bunch, who rarely think in the long-term. They sit around, hungry for short-term gains, not thinking about anything but. Bryce Covert writes:
It’s no surprise that banks want back in the high-risk business. Despite the cushy goodies they give away to wealthy customers, the heart of their profits is made off of those who are drowning in debt and unable to pay it back. Consumer advocate Elizabeth Warren made this clear in an anecdote she recounted in the 2006 movie Maxed Out. She describes going into a room of banking executives with statistics that prove that if they screened out customers least likely to pay they could cut bankruptcy losses in half. “Then a fellow in the back said ‘Professor Warren,’ and everyone got quiet,” she says. “‘But it would cut those people off, and that’s where we make all of our profits.’”
And so this thirst for profits has led the bankers to jack up the interest-rates on credit cards that were issued before the recent financial reforms came in – this week they’re at 14.73% and, depending on your credit, could go as high as 59.9%!
The Obama administration tried to counteract this with its financial and consumer protection reforms. But, at the time, many pointed out that these were inadequate and that profit hungry banks would find ways to bend them. And that is precisely what happened.
These reforms – even if they were more adequate than they proved to be – were only a plaster on a much bigger wound. Banks need to extend credit to people to turn a sufficient profit – if they don’t, they’ll engage in dodgy activity. People too need access to credit - for a variety of reasons; some consumer, some entrepreneurial. So, until the population becomes more creditworthy by increasing their income and employment prospects, any other reforms will slide like water off a ducks back. And this isn’t just a lesson to be learnt in the US…
** A quick retraction (let’s see how smoothly I can get away with this without losing readers…). For some time now I’ve been insisting that the energy and food rises were not exogenous (i.e. external to the economy at large) and were, in fact, inflationary. I’ve been writing that these were largely due to speculators awash with QE funds gambling on these goods to turn a profit.
I’m not the only one saying this – and its certainly in keeping with a certain type of economic theorising. In the past few days I’ve changed my mind on this. This wasn’t a whim – in fact, I’ve changed my entire understanding of how the monetary system works; my previous understanding was a muddled, semi-Friedmanite understanding of the system – and I’ve now switched to the ‘Chartalist Theory‘ or ‘Modern Monetary Theory‘ (MMT), which is far less hazy and far more satisfactory.
Frankly, I – like so many contemporary economists – didn’t understand how the modern money system works. I assumed, like so many others, that QE and its sister programs were simply undertakings to print money. This is far from the case – I understand this now and my subsequent analyses will reflect this new enlightentment.
In my defence, this was not an easy transition – indeed, I’ve spent many hours weighing up the merits and demerits of the two theories (not to mention interrogating one of the key modern architects of MMT via email – who, being a major economist, probably had far better things to be doing). I don’t change my mind often – but when I do, I change it utterly. I only hope that such flexibility and self-criticism can be appreciated by readers and is not thought of as flakiness.