If the Money’s Free, Does The Price Really Matter?

Unprecedented monetary and fiscal stimulus have created a unique situation where the the distinction between government debt and cash money are becoming less apparent.

How could this impact our view on what money is and what does that mean for cryptocurrencies?

Thomas Sawyer had the unfortunate privilege of having grown up wanting for nothing more than his parent’s love.

The fourth generation scion of a wealthy shipping family, he had spent the better part of his childhood with various nannies before going off to boarding school in the English countryside at age six.

Audiences with his parents were precisely that — orchestrated, and somewhat aloof.

For a child who had lived his life in the very lap of luxury, Thomas could not have felt poorer.

So when Thomas grew up and his parents had passed on, the real tragedy was his inability to shed a tear at their funeral, nor recall a story that they had read to him at bedtime, or even a bed they had tucked him into, in their sprawling 17-bedroom mansion in Bedminister, New Jersey.

As the family’s lawyer read out the substantial assets that had been left in his sole name — Thomas was an only child and it’d be fair to say his parents found that a single heir would suffice for their purposes — he stared out of the window of the lawyer’s office looking disinterested.

“Mr Sawyer?”

“Yes?”

“I’m sorry sir, I’m just checking to make sure that you understood what I had just said.”

“What was that now?”

“Your property in the Cayman Islands, do you want me to run through that…”

Thomas raised his hand to interrupt him,

“Tell me Franklin, what would it take for me to give it all away?”

“Pardon me sir, but how do you mean ‘give it all away’?”

“Which part didn’t you understand? GIVE IT ALL AWAY. Every last cent. All the damn properties, the stocks, the company, everything. I don’t want anything to do with it, and it means nothing to me.”

“Sir, I do believe we’re getting a little ahead of ourselves here, perhaps you’d like to take a break.”

“I’d like to take a break from this money, is what I’d like to do.”

But Thomas Sawyer soon got what he wanted, giving all of his money away to a charitable trust, Sawyer moved into a tiny 1-bedroom apartment in Newark and learned how to live within a budget.

While there were times that he thought he might have regretted his decision, Thomas soon realized that money is more often than not a barrier to genuine relationships.

We’ve Broken Up With Money

And as the world enters a new epoch in our relationship with money, unprecedented fiscal and monetary policies adopted by central banks to bolster economies battered by the coronavirus pandemic, are recasting the complexion of the entire global financial system.

From policies inspired by the economist John Maynard Keynes in the 1970s to Milton Friedman’s austere monetarism of the 1980s, so too does the coronavirus pandemic mark a watershed in economic thought that typically occurs only once in a generation.

With policies that no so long ago would be considered heresy, supersized levels of state intervention in the normal machinations of the financial markets will create new risks.

The unimaginable scale of government borrowing, and the seemingly limitless proclivity to borrow even more has seen the International Monetary Fund predict that developed countries will borrow a combined 17% of their GDPs to fund some US$4.2 trillion in spending and tax cuts, designed to prevent an economic apocalypse.

And while governments are borrowing more, much of that debt is being monetized, something which Japan is familiar with, but is a novel development for the rich nations of the U.S., United Kingdom and the European Union.

Paying Your Own Way, Literally

Combined, the central banks of Japan, the U.S., United Kingdom and the European Union would have created new reserves of money worth some US$3.7 trillion, much of which is being used to buy government debt, meaning that central banks are essentially paying for stimulus using newly printed money.

The result of firing up the printing presses is that long-term interest rates will remain depressed, even while the issuance of sovereign debt soars.

And unlike any time in the past, seemingly capitalist countries are wading into socialist waters, with the U.S. Federal Reserve and the Treasury Department buying up bonds of companies from AT&T to Coca-Cola and lending directly to everyone from bond dealers to burger chains.

That intervention by the Fed and the Treasury now backstops some 11% of America’s entire stock of business debt, and in the rest of the developed world, other governments and central banks are following suit.

And all that is fine and dandy because of one major quirk that hasn’t occurred despite relentless money-printing — near absent levels of inflation.

What You Blowing up?

The absence of upward pressure on prices in the developed world means that there is no immediate need to slow the growth of central bank balance sheets or to raise short-term interest rates from near-zero.

But the problem that currently low levels of inflation creates is a distortion of the cost of servicing debt to the point that debt literally becomes “free money,” and almost inane not to take on debt.

Given the state’s tendency towards profligacy anyway, there is little incentive for governments to magically return to normal spending habits once the pandemic passes and unemployment eventually falls.

While governments and central banks may dial down their spending and stimulus packages, the new era of economics reflects the culmination of longer term trends that have been in the offing for over a decade.

Well before the pandemic, inflation and interest rates were subdued despite a jobs boom and rising asset prices.

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.

Whose Bank is it Anyway?

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.

Not so long ago, one of the chief arguments made by the U.S. Federal Reserve for not issuing its own central bank digital currency was that central banks are ill-suited to serve the role that commercial banks play.

In a speech at the The Yale Law School Center for the Study of Corporate Law, U.S. Federal Reserve Chairman Jerome Powell noted,

Indeed, I would expect private-sector systems to be more forward leaning than central banks in providing new features to the public through faster payments systems as they compete to attract retail customers.

A central bank issued digital currency would compete with these and other innovative private-sector products and may stifle innovation over the long run.

And as recently as 2018, the Bank of International Settlements noted,

A greater role for central banks in credit allocation entails overall economic losses if central banks are less efficient than the private sector at resource allocation.

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.

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?

Indeed.

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.