How do you print money and not cause inflation? Easy. Choose the definition of inflation that suits your needs – the one that includes only those items whose prices are not increasing that fast – and ignore price rises everywhere else. Like, for instance, asset price inflation.
Just because you can’t see inflation in the official figures, it does not mean that central banks have discovered the Holy Grail of creating money out of thin air with no negative consequences.
If you look at the UK housing sector, for instance, you will see that the rise in London property prices cannot be justified by simply a “recovery” – no matter how hard the government is trying to push that idea.
Home prices have exceeded their pre-crisis peak – yet wages have barely budged (in fact in some sectors there is downward pressure on salaries; job advertisements that have been running for half a year or more for the same position, only with lower salaries advertised every couple of months, are not uncommon).
The number of people on so-called “zero hours” contracts – where they are not guaranteed a number of weekly hours but aren’t paid a retainer fee either – has increased as the “recovery” still feels pretty much like a recession.
The number of self-employed people in the UK has also increased – this makes the unemployment figures look lower, but sadly it is not due to a spurt of entrepreneurial spirit; the jump in self-employment actually shows that there are not enough “real” jobs to absorb the available workforce.
ASSET PRICE INFLATION TAKES OFF
But while the real economy is still struggling, some shares have powered ahead. A look at price/earnings ratios (used to measure how relatively expensive or cheap the shares are) for some stocks reveals some serious froth.
As Paul Young notes on basicsmedia.com, Facebook‘s p/e ratio is above 90, LinkedIn has a “massive” p/e ratio of over 700, Amazon‘s is 557 and Netflix‘s is 187.
Asset price inflation is also obvious in the bond market, especially in emerging market debt – an ominous development, as it means that poorer, developing countries are more than ever at the mercy of developed countries’ central banks.
Turmoil in emerging markets started with the Federal Reserve’s announcement almost a year ago that it would start scaling down the pace at which it prints money, as capital had begun to retreat.
It seems to have eased now, as investors still believe money-printing can go ahead without negative consequences, since central banks only pay attention to consumer prices, which have remained low.
Asset price inflation in emerging markets isn’t new. The International Monetary Fund (IMF), in its most recent Global Financial Stability Report, says that capital flows to emerging markets have quintupled since the early part of the new millennium.
“Since the global financial crisis, portfolio flows to these economies—especially bond flows—have risen sharply,” the IMF warns.
GREEK BOND EUPHORIA
The latest example of this trend – money being chased away by lax monetary policy in developed countries, leading to asset price inflation everywhere else – is Greece’s return to the debt markets with a bang (Greece, which sparked the eurozone debt crisis in 2010, was downgraded from developed to emerging market by MSCI last year).
Last week, it issued five-year bonds for the first time since it gained the dubious fame of achieving the world’s biggest debt restructuring in 2012.
The Greek bond issue was massively oversubscribed, with 20 billion euros from over 500 institutional investors pouring in. Greece ended up selling 3 billion euros worth of bonds at a yield of 4.95% – more proof that too much money is sloshing around looking for increasingly risky bets.
But the ebullience of asset prices is not replicated in the real economy. Demand for goods and services has been sluggish in both developed and emerging markets.
And there are no signs that it will pick up at a meaningful pace any time soon, as a lot of employees have either seen their jobs disappear or, the lucky ones who still have their jobs, have had to put up with stagnating salaries.
Companies prefer to reward their CEOs with millions of dollars worth of bonuses or buy back their own shares rather than invest in expansion and thus create new jobs.
This, coupled with a fall in commodities prices (also due to sluggish demand) is why consumer price inflation – the kind of inflation that central banks look at to decide monetary policy – has remained at low levels.
On the surface, the central banks’ money-printing policy has worked: they supposedly averted an economic meltdown by printing money, all the while keeping certain prices stable.
But maybe it is time for central banks to widen the official data they look at to include asset price inflation. Doing so would open their eyes to the fact that so many people have become poorer since the start of the crisis – with only a handful of rich people becoming richer still.
Surely this was not the purpose of the easy money policy – nor is it the best basis for a sustainable recovery. So, in a sense, quantitative easing has failed. It’s time to go back to the drawing board.