Fifty years ago, President Richard Nixon, signed Executive Order 11615 and with it sundered the last remaining links between the US dollar and gold. Half a century on and many of the lessons of that sorry episode have been sadly forgotten while central banks now hold themselves accountable to no standard save that of their own swelling hubris. Can we really avoid the evils of inflation in such a world?
Most people associate ‘inflation’ with rising prices, but the disease goes much deeper than that. Inflation is a phenomenon wherein money becomes so abundant it disrupts relative price formation and hence interferes with the vital transmission of information about the state of the countless interactions of supply and demand, plenty and scarcity, which take place on the market. As the fever rises, mistakes accumulate, conflicts intensify, timings clash, finances become stretched, and coherence is lost. A rising price is one thing. Prices -plural- rising at varying speeds and in an ever less predictable manner is a much more dangerous pathology.
While politicians anxiously check the shifting weather-vanes of public opinion and scientists squabble over facts as well as interpretations, central banks are resolutely doing what they do best – wildly exceeding their briefs and trying to drown all problems in a flood of newly-created money. As ever, the underconsumptionists worry that a lack of demand will usher in deflation, in spite of all such efforts. Some of us, however, worry more about what it will do to supply. Here, we explain why.
In response to an FT article of January 23rd entitled, “The new kings of the bond market”, which suggested that banks had ceded their command over fixed income to exchange-traded funds and active portfolio traders, we responded with a riff on the sorry consequences of recent financial developments: a bromide which turned out to be singularly well-timed in view of the extraordinary upheavals suffered just a few, short weeks later:-