Ok so M1... TSM2... Z1... what is it?
As I stated before... you've already answered that question for yourself. Vox can write poetic and convincing lines about the esoteric nature of credit money... and he can explain how the paper just represents a claim on this or that... and none of it will change the fact that when you hear about what's going on in Cyprus... you have a primal urge to run to the bank and get all of your cash out. You want the cash.
That's because the cash you want is money. For now.
The debit card is very convenient. No question. But by now you are probably looking at it with much more cynical eye than you were a month or so ago. Good.
Now that is one way we know Vox's Z1 claim is... not the best option available. There is another way to demonstrate it as well. We'll start with Vox's own words.
"The creation of credit money always has an immediate effect on prices because it increases the applicable demand. I shouldn't need to draw any SD curves, as we can see the effect that expanded home loans had in the housing market, that increased student loans have on the price of tuition, and even in the health care market, where governments borrow the money that is used to pay for the "free" health care delivered to indigent patients. No cash is being printed, and yet credit money is being created, transactions are taking place, and prices are rising. While these effects are localized to the relevant markets I suspect the reason why economists historically failed to connect them to the broad increase in price levels that is usually described as inflation is because until relatively recently, it was not possible to obtain general, pre-approved credit for even the smallest transactions."
Ha ha! Credit creation is inflationary says Vox... we know this because price is effected. Sure... if one only looks at one side of the coin its inflationary. Vox neglects to consider all the money that is sitting in savings accounts rather than being spent. That money reduces demand and thus... offsets the inflationary effect. The Government has to take some action to eliminate the savings link before the inflationary effect is really going to be obvious .. and that is exactly what they have done... as I explained in my previous post in this debate. And I hate to haggle about every little thing but Vox is blatantly wrong about this statement about small purchase general credit claim. Historically speaking we've had credit based small purchases as long as we've had stores. The stores provided the credit... not the banks. Regardless... it was still credit being used for purchases.
But lets take Vox's standard for demonstrating inflation... price... and apply it to his Z1 claims. Shall we? Lets review the claims. Vox says Z1 is the best measure of the money supply. I say its TSM2.
In 2008 we saw Z1 begin to decline in July of 2008 and didn't start to climb again until October of 2010... and at the same time...we saw m1 and TSM2 begin to spike... and that spike has continued through today. So lets look at prices between July of 2008 and October of 2010. What were they doing?
In literally every single area... Gold... Silver... literally everything... prices went up. What ever it was you were buying... you were going to pay more for it. There is only one exception to this... and that is real estate.
What's important to note... is that this is exactly what Austrian economics says should happen. Through government interference and general banking shenanigans... we created artificially cheap credit... which lead to a bubble in real estate. It lead to a massive influx of capital that was poured into new home construction... and the fact is... people didn't actually want the new homes. We call this mal-investment.
Look this is damned important so pay attention. Its not just important to my case in this debate. Its an economic concept that is largely ignored in modern economics and if you don't understand it... you are going to get hurt. I'm not just trying to score points here. This is a big deal.
Mal-investment is what happens when a company produces something no one wants. It is the single most malignant economic force there is. It is a force multiplier for pain and misery. It not only eats up the resources to create the items no one wants... it eats up the resources required to unmake all the means of production... the opportunity costs of those working for and with the company that created the things no one wanted... and the cost of unmaking all the things no one wanted so the resources can be then applied to something people do want.
Lets say I start a company and my company is going to make busts. We're going to make busts of human buttocks out of the feces those buttocks eject. I want to make sure you understand... that according to John Maynard Keynes... this would be positive economic activity. I am after all going to employ a lot of people... obviously. And there will be production facilities... and packaging... and marketing...all of these things are job creators. John Maynard Keynes says my company is helping.
That's because John Maynard Keynes was a moron.
No one... exactly no one... is going to buy my rude product. Somewhere a whole factory... that could've been producing cool motorcycles... or personal jet packs... or something awesome like that... was occupied making poo products and dysentery My company is going out of business. All the money that was dumped into it to capitalize it was dispersed hither and yon. The factory has to be... ok well... realistically it probably has to be burned down and rebuilt completely... which takes up more resources. All of the employees have to be retrained to work in new factories. Its a nightmare.
Now lets look at how mal-investment applies to the US housing market. Jump on Google Earth and look around Florida. You'll see whole unfinished neighborhoods... where there are streets and sidewalks poured and laid... but no houses built. You can see that in places from Tennessee to Arizona. Many of the houses that got built during the boom... are now sitting empty... and slowly collapsing on themselves.
Before any of that land can be used for something people want... those empty streets or those collapsing houses have to be un-built. So not only did we spend the money to build something no one wants... before we can build something someone does want... we have to spend the money and resources to undo what was previously done. The key here though... is you have a bunch of things for sale that no one wants. You have things that are literally worth zero.
Now Inflation is like division. It cuts up purchase power into smaller pieces. But something that has no value to anyone has no price to divide. 0 divided by 100 is? Well in monetary terms... its zero. In 1900 something no one wanted cost 0. In 1950 something no one wanted cost 0. In 2013... something no one wants... still costs 0. Clear?
So... Z1 is going down... and TSM2 is going up... and prices are going up... except in the one massive area where the mal-investment bubble popped. By Vox's own metric... he is wrong.
Its really time to move along now... but before we do I really need to answer Vox's questions. Sadly some of these are less impactful now than they were over the weekend when the events were actually unfolding. I apologize for not being able to respond quickly enough to make predictions that could be reasonably judged. I simply did not have time to produce a quality response.
1) if the expected outcome is, as he suggests, inflationary, due to the central bank printing presses why has the European Central Bank not simply used the bank holiday to print the required 13.5 billion euros and allowed its customers to withdraw as much of it happens to suit them?
Not being a European Central Banker... they didn't think to inform me of their decisions... so I can't actually say. I can think of a number of reasons... but its all speculation. These reasons range from simply hating Cyprus and wanting to punish it... to hating paper money. I lean towards the notion that Cyprus was an experiment. Printing the money was not part of the experiment. I believe we had some statements to support this point of view.
2) Why is the ECB risking the Cypriot banking system, the wrath of the Russian depositors, and the fate of the European Union itself on these various schemes rather than simply printing the cash and permitting its withdrawal?
Again... the proper answer here is... I don't know. The motivations of Eurotrash Central Bankers are beyond the kin of decent moral economically non-suicidal people. I think I can reasonably say though... They just didn't think it was as big a deal as you do. They even thought to leave the Russians a nice way out. Which suggests they were well aware of the dirt nap potential before hand. I do feel it necessary to point out that there is a very important distinction between "won't" and "can't". And one can get into quite a quagmire when the two are confused. They certainly have the ability to print the money... or create the money from thin air as they see fit. To put the magnitude of the Cypriot Crisis in perspective... Remember we're talking about 16 billion euro. Now that sounds like a lot of money. Until... one considers that the current public debt for the EU which is 14.9 trillion euro. So... I'm not quite certain the Central Bank is terrified of that .11% increase in public debt. I just thought it would be nice to demonstrate just how small these numbers are to central bankers. Do you realize we're at a stage where 16 billion euro is nothing? Again... this supports the claim that Cyprus was an experiment. For more perspective... the FED monetized 204 billion dollars in the last 2 months alone. So see... 16 billion just isn't a big deal.
3) Imagine an American analog, where a bank with billions in deposits but already emptied of all its cash was simply shut down without the usual FDIC shell game of "transferring its deposits" to another bank. Would this be a deflationary action?
The question of can't vs won't is a big one. Because the answer to that question is critical to Vox's case. The deflationist position... at the risk of over stepping Vox here... is that the Central Bankers have their hands full just keeping things at par and while they would like to inflate... they are doing everything they can and they just can't get it done. Vox has elaborate and well reasoned explanations for why they can't. I concede that. Vox asks... Can they break the credit link?
Sadly... The most well reasoned explanations must bow to observable reality.
I must quote Vox here...
"The narrower sense of fiat money is clearly the sense Mises was using the term when he declared "most of those kinds of money that are not commodity money must be classified as credit money" and questioned whether fiat money had ever existed."
"So, we recognize that while fiat money can potentially exist in theory, the question of its actual existence, in the United States or anywhere else, is not settled."
So... According to Vox and Mises... fiat money has likely never actually existed.
Given that... we must conclude therefore that both Zimbabwe and Wiemar were credit money systems. So hyper-inflation is not only possible in a credit money system... it has happened. In fact... it has happened 56 times.
And thus the question of "won't" vs "can't" is answered... and Vox is reduced to a physics professor standing on an airport runway explaining why something must be lighter than air to fly. Boeing be damned.
In the next installment... I will be explaining how hyper-inflation works... and why it is inevitable.
*** The title is a reference to a short story. Bonus points to anyone that spots it. ***