Thoughts From The Divide – Looking for Inflation
While central banks have been receiving plaudits for their various facilities and maneuvers, there have been increasing assertions, à la Warren Mosler’s comparing the Fed to a kid in a child’s seat, that when it comes to inflation, the Fed is not exactly in control. In particular, we want to highlight two well-known thinkers who have taken a heterodox position on the role of central bankers in creating inflation.
”Always and Everywhere a Monetary Phenomenon”?
Hugh Hendry is the author of the first paper that caught our eye. Hendry makes a splash by asserting that Joe Rogan, who’s exploits including smoking weed with government security clearance having Elon Musk, should be made Fed Chairman. But before arriving at this point, Hendry walks through his reasoning of why inflation is not “always and everywhere a monetary phenomenon”. Hendry follows the growth of central banking reserves and notes the relative weakness of growth in commercial bank assets. However, following analysis of the Reichsbank and Thailand, Hendry concludes that “it’s the febrile world of psychology and shifting expectations that matters more than the Fed and its reserve printing;… it’s the mood of society that ultimately unleashes the inflationary genie”. With “our mountain of debt” being the pressing issue, how then can central banks hope to inflate away our woes? Answer: “Change the mood music” and embrace “majestic irresponsibility” with “Chairman Joe at the table” to force banks out of “the Dodge City of zero-yielding Treasuries” and enforced private-sector loan growth with the threat that “failure to comply and … ka-boom!”. The entire paper is worth a read as Hendry addresses potential problems and underlying dollar dynamics. Hendry also discussed his views in a brief Bloomberg interview.
“Control of Money Supply Has Moved From Central Bankers to Politicians”
Russell Napier is the second to take a heterodox position, as showcased in an interview with The Market. Having warned “for more than two decades… that investors need to position themselves for disinflation and deflation”, Napier believes we are in a shift towards inflation. While commentators (including Hugh Hendry, in the above) have pointed out that monetary expansion does not really matter, Napier argues that the recent surge in the money supply will as it was thanks in part to moves by politicians. Napier argues that “by exercising control over the commercial banking system, they can get money into the parts of the economy where central banks can’t get to”. And, what’s more, as politicians come to appreciate that, for them, “inflation is the cheapest way out of this [debt to GDP] mess”, “there will be mission creep”. The politicians’ newly found “magic money tree” will require financial repression and “capital controls at some stage” and there could be some potential issues courtesy of China. However, Napier sees “4% inflation in the US and most of the developed world by 2021” with expectations that central bankers “will be sidelined” to a regulatory role.
