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A couple of weeks ago, when I wrote that the battle between savers and borrowers had "already been won" by borrowers -- not via high inflation, but via low interest rates and restricted credit and modest inflation -- someone posted "what about the large majority of the population without savings or debts?". At the time I replied that most people were on the side of borrowers or savers, even if they had no personal borrowings or savings, simply through association.
However, it's now becoming clear that the impact of QE (and, remember, since this is virgin territory even for economists, this is a period when it's important to spot what's happening now, rather than try to find non-existent parallels in the past) is also hitting the "non-borrower-non-saver" community.
It's becoming increasingly clear that QE is creating price increases in areas that will hit those who have a higher proportion of their spending in "non-discretionary" areas. Basically, all of this helicopter money has to go somewhere. As the "deflationists" argued (citing Japan in the 1990s), this is not like the late 1960s and early 1970s, when there was still strong pricing power amongst organized labour. The deflationists also argued that, with bundles of spare capacity, you could chuck money into the economy without having an inflationary effect, because demand was still weak and supply was still plentiful.
That turned out to be correct, as far as it went, but wrong in a much more important way. Because QE didn't work through the economy this way, it had to find another. And the way that it found was equities and commodities and "basics"; oil, gold, and food.
So, savers are screwed by low interest rates, but the "subsistence" economy is screwed by a faster increase in the cost of basic living (heating, food) than in the level of "headline" inflation.
The emerging economies have spotted this, and are acting accordingly. Brazil, Thailand and Taiwan have instituted capital controls to stop that nasty QE stuff working its way into their economy and causing all the wrong kinds of inflation. China and India already have systems in place to stop it.
Now, this doesn't go down well with the likes of Germany, Britain and, most importantly, the US. If the US can export inflation by its QE2, it solves a lot of US problems. But if the QE2 has to do all of its work at home, then it still solves the US problems, but it creates a lot of new problems as well.
The US, of course, could argue that this is a global problem that merits a global solution. The emerging economies, meanwhile, could equally argue that this is a western world problem that the western world should solve on its own, without instituting high basic commodity inflation in countries where high basic commodity inflation frequently leads to riots in the streets and changes of government.
This, neatly, creates the first tangible link between the current crisis and the threat to what we term liberal democracy. While the current view is that such a threat will come from Greece and/or Portugal (possible Spain), when the people realize what sacrifices will be required, and decide "no thanks". However, it's quite possible that political unrest will start in countries that fail to stem the inflows that will come with QE2, unless capital inflow restrictions are introduced (or, perhaps, which can't institute such inflow restrictions because they have few natural resources and rely entirely on trade). And, for every country that does introduce restrictions, that means more inflows in the countries that do not. Democratic systems do not cope well with mass street riots because the price of bread (and, these days, petrol) has doubled.
This is all a very odd situation, with nearly a trillion new dollars sloshing around, looking for a home, while credit remains tight and fixed-interst savers get bugger all. It's one of the reasons that at the moment I am actually a fan of trends, because trends can work very well when you have bubbles popping up all over the place (look at the art market, for example). Anything which can be bought for cash could become the next fad. Anything that is tangible could become the next place where the hot money runs. It's all very well for commentators to say "this is what people/governments should do." What's harder is to work out what they will do.
It looks to me that it will be a case of increasing imposition of capital inflows within emerging economies, which will mean that the QE money will be more focused on the US and its main trading partners. Clearly, emerging economies can't protect themselves completely by stopping capital inflows. This is a global economy now and the more you have an international economy, the less effective such controls would be.
But the major impact of QE will be on the likes of the UK, Canada and Mexico -- posibly even more so than on the US itself. Not because the US will receive less of the QE boost, but because it will receive less of the QE boost relative to the size of its total economy.
Interesting times. Personally, I'd like to punt futures on anything wood-related -- that being one of Canada's main exports. Paper futures, anyone?
___________________________
However, it's now becoming clear that the impact of QE (and, remember, since this is virgin territory even for economists, this is a period when it's important to spot what's happening now, rather than try to find non-existent parallels in the past) is also hitting the "non-borrower-non-saver" community.
It's becoming increasingly clear that QE is creating price increases in areas that will hit those who have a higher proportion of their spending in "non-discretionary" areas. Basically, all of this helicopter money has to go somewhere. As the "deflationists" argued (citing Japan in the 1990s), this is not like the late 1960s and early 1970s, when there was still strong pricing power amongst organized labour. The deflationists also argued that, with bundles of spare capacity, you could chuck money into the economy without having an inflationary effect, because demand was still weak and supply was still plentiful.
That turned out to be correct, as far as it went, but wrong in a much more important way. Because QE didn't work through the economy this way, it had to find another. And the way that it found was equities and commodities and "basics"; oil, gold, and food.
So, savers are screwed by low interest rates, but the "subsistence" economy is screwed by a faster increase in the cost of basic living (heating, food) than in the level of "headline" inflation.
The emerging economies have spotted this, and are acting accordingly. Brazil, Thailand and Taiwan have instituted capital controls to stop that nasty QE stuff working its way into their economy and causing all the wrong kinds of inflation. China and India already have systems in place to stop it.
Now, this doesn't go down well with the likes of Germany, Britain and, most importantly, the US. If the US can export inflation by its QE2, it solves a lot of US problems. But if the QE2 has to do all of its work at home, then it still solves the US problems, but it creates a lot of new problems as well.
The US, of course, could argue that this is a global problem that merits a global solution. The emerging economies, meanwhile, could equally argue that this is a western world problem that the western world should solve on its own, without instituting high basic commodity inflation in countries where high basic commodity inflation frequently leads to riots in the streets and changes of government.
This, neatly, creates the first tangible link between the current crisis and the threat to what we term liberal democracy. While the current view is that such a threat will come from Greece and/or Portugal (possible Spain), when the people realize what sacrifices will be required, and decide "no thanks". However, it's quite possible that political unrest will start in countries that fail to stem the inflows that will come with QE2, unless capital inflow restrictions are introduced (or, perhaps, which can't institute such inflow restrictions because they have few natural resources and rely entirely on trade). And, for every country that does introduce restrictions, that means more inflows in the countries that do not. Democratic systems do not cope well with mass street riots because the price of bread (and, these days, petrol) has doubled.
This is all a very odd situation, with nearly a trillion new dollars sloshing around, looking for a home, while credit remains tight and fixed-interst savers get bugger all. It's one of the reasons that at the moment I am actually a fan of trends, because trends can work very well when you have bubbles popping up all over the place (look at the art market, for example). Anything which can be bought for cash could become the next fad. Anything that is tangible could become the next place where the hot money runs. It's all very well for commentators to say "this is what people/governments should do." What's harder is to work out what they will do.
It looks to me that it will be a case of increasing imposition of capital inflows within emerging economies, which will mean that the QE money will be more focused on the US and its main trading partners. Clearly, emerging economies can't protect themselves completely by stopping capital inflows. This is a global economy now and the more you have an international economy, the less effective such controls would be.
But the major impact of QE will be on the likes of the UK, Canada and Mexico -- posibly even more so than on the US itself. Not because the US will receive less of the QE boost, but because it will receive less of the QE boost relative to the size of its total economy.
Interesting times. Personally, I'd like to punt futures on anything wood-related -- that being one of Canada's main exports. Paper futures, anyone?
___________________________
