John is out of the office this week, so today guest writer Tim Price gives us his view on modern monetary theory (MMT) and inflation.
It is increasingly clear that while coronavirus has been something of a game-changer, it has also simply amplified trends that were already obvious prior to the spread of the disease. One of those trends is that government spending and related indebtedness had already become insupportable throughout the world.
Now, the system can only be perpetuated – and only then in the short term – by means of explicit financial repression. Handily for fiscally incontinent governments, they now have the perfect stalking horse behind which to continue their predations upon savers and investors: the convenient arrival of Modern Monetary Theory (MMT).
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Why inflation is welcome at first – right before disaster strikes
Analyst and financial historian Russell Napier, in his latest The Solid Ground advisory, takes Stephanie Kelton to task for her recent contribution to the MMT genre, The Deficit Myth: “Having previously described financial repression as a policy that is designed to ‘steal money from old people slowly’, it is very clear why MMT proponents would prefer not to mention the implications for savers from their policies”, writes Napier.
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“What politician would endorse a policy that is designed to destroy savings, given the socio-political devastation that such destruction has wrought historically? Perhaps, more importantly, what savers would choose to subject their savings to such theft when it would be possible to move money out of a jurisdiction pursuing a MMT/financial repression policy?”
The mechanism by which financial repression operates is to keep interest rates below the rate of inflation. In other words, the aim is to inflate the debt away. At first, this may even seem welcome. As Jens O. Parsson wrote in his 1974 book, Dying of Money – Lessons of the Great German and American Inflations: “Everyone loves an early inflation. The effects at the beginning of an inflation are all good.”
He continues: “There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays.”
However, things soon change. “That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad.” Parsson outlines the issues: "The government may steadily increase the money inflation in order to stave off the later effects, but the later effects patiently wait.
“In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.”
Incidentally, in something akin to the media equivalent of Gresham’s Law, good luck trying to pick up a (non-pirated) copy of Parsson’s book. It is listed as “currently unavailable” on Amazon, though you can, it would appear, secure a hardback copy on the site – for the best part of £400.
How to have the last laugh in this economic environment
We have, of course, had explicit state-sanctioned inflationism for the past decade or so, in the form of policies such as quantitative easing (QE), and a whole host of “boosterist” alphabet agencies dreamed up by the Federal Reserve, America’s central bank.
But coronavirus, and the haphazard and arbitrary government responses to it, have accelerated us towards the next phase of this global monetary experiment. Stockmarkets noticed the first wave, and the precious metals markets now appear to be acknowledging the second.
From Ludwig von Mises’ Human Action (1949): “But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs.
“The crack-up boom appears. Everybody is anxious to swap his money against “real” goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.
“It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.”
It is not too late to try to inflation-proof your portfolio. The recent run by gold and (more lately) silver is probably due a pause, but not necessarily a full-blown reversal – not least because the monetary adventurism behind it shows absolutely no signs of abating.
We will maintain our exposures: to gold, to silver, and to sensibly-priced precious metals miners with little or no debt.
And because we can’t be certain as to what the future holds, we will continue to supplement those holdings with unconstrained “value” equities outside the world of bullion, and with funds that are quite simply uncorrelated to the stock and bond markets (especially the latter).
We intend, in other words, to try and have the last laugh. Not that there’s really that much to be laughing about.
• Tim Price is manager of the VT Price Value Portfolio (pricevaluepartners.com) and author of Investing Through the Looking Glass: a rational guide to irrational financial markets.
