The Miseans argue that those closest to the source of the additional liquidity are, thereby, able to benefit from it. They obtain the additional liquidity, and are able to spend it, before the effect of this increased liquidity results in higher prices. Roberts' argument that increased supply of money tokens does not result in higher inflation, is really a reversal of the Monetarist argument. They argue that it must result in inflation, because they assume that the velocity of circulation is unchanged, whereas, Roberts argument is that there is no inflation, because the increased liquidity is simply compensated by a fall in the velocity of circulation. Both fail to take into account the wider economic conditions prevailing during which these changes in liquidity occur.
For example, take the 1970's. During the 1970's there were repeated economic crises and recessions. According to Roberts' argument, “it is changes in prices and output that drives money supply.” Then, in the 1970's the reduction in output, during those crises, and the, at least, slower pace of growth, should have resulted in reductions in money supply. Although, some slow down, or even decline in social productivity might be expected to result in the value of commodities not falling as fast as they tend to do over time, or even rising as a result of loss of economies of scale, any such change would be minor. So, the result should have been that the increase in liquidity was minor or even negative. Was it? No, of course, not. Money supply increased rapidly, and instead of simply being absorbed in a slow down in the velocity of circulation, as Roberts assumes, it was instead absorbed, as Marx suggests, by a rise in the other of those terms in the equation, i.e. the nominal prices of commodities. Inflation rose, during the 1970's, and early 1980's in double digits rising at its highest to well over 20%, in the UK, and to around 15% in the US.
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| In the 1970's, M2 increased despite economic slowdown and recessions, inflation soared. In the 1980's, M2 declined, and inflation fell sharply. From the mid 90's, M2 rose, asset prices rose until the Tech Bubble burst in 2000. M2 rose again from early 2000's, asset prices and commodity prices rose, until the 2008 bubble burst. |
In fact, look at the chart above. On each occasion there is a contraction of money supply in the years preceding a recession. During the recession, the money supply increases sharply!
The difficulty with Roberts' argument is that, once additional liquidity has been put into circulation, it is difficult to remove it. Friedman himself saw a correlation between money supply and prices only after a two year lag. In the 1980's, it required a very sharp rise in official interest rates, and curtailment of liquidity, with the consequence that it led to a deep recession. The reason for that is that, the job of the central bank is to protect the interests of the ruling class. When prices rise workers are led to seek higher money wages. The higher money wages squeeze money profits, if firms are not able to raise prices. So, central banks tend to increase money supply so as to accommodate those higher prices. So, although additional liquidity does not result in an immediate rise in prices, it always does so eventually, as this liquidity feeds into circulation.
Increasing nominal interest rates cannot deter firms from increasing investment in a period of rapid economic expansion, because what firms are concerned with is not nominal interest rates, but real, i.e. after inflation interest rates. The consequence of this currently is dramatic. Take a large corporation able to issue 10 year bonds with a 2% coupon. In other words, a company might issue £1 million in bonds, which will cost it £20,000 a year in interest. Suppose that, as a result of higher interest rates, it rises to 4%, so that the company would now face an additional bill for interest of £20,000. However, given the rapid pace of growth of economies as they rebound from the lockouts, and as the masses of liquidity flows out into circulation over the coming years, and results in higher inflation, how much would this doubling of its interest burden actually deter it? If the increased economic activity resulted in a rise in the company's profit from £100,000 to even just £150,000, the additional £20,000 of interest is covered 2.5 times over by the additional profit. If inflation increases by 10%, then the money profit will rise to £165,000, whilst the interest on the bond would remain at £40,000. So, unless interest rates were raised very significantly, as a result of central bank action, it would be unlikely to deter economic activity.
What it would do, however, in current conditions, is to crater asset prices. The price of revenue producing assets is determined by the capitalised value of their revenues (rent on land, coupon on bonds, dividends on shares). The price moves in inverse relation to the change in interest rates. So, if interest rates were to go, as above, from 2% to 4%, whilst this would have little impact on deterring economic activity, it would have a dramatic effect on asset prices, essentially halving them. In other words, the Dow would lose around 17,000 points, the FTSE 100 around 3,500, property prices would fall by half, and so on. This is a major problem for central banks, as they see economic activity growing rapidly, causing inflation to rise, and leading to pressure for market rates of interest to rise, whilst any such rise, will crater the asset prices they have spent the last thirty years, and particularly the last ten years, trying to keep inflated.
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