In a recent The Daily Bell interview, Dr. Antal Fekete who is always a compelling figure (he consistently champions thinking over doctrinaire recitations) suggested that deflation is, “a pathological slowing in the velocity of money.” Even though Dr. Fekete perhaps misplaces the locus of this pathology, he deserves kudos for highlighting the overriding behavioral dimension of the current deflation. One of the greatest disservices done to a comprehensive understanding of deflation is that it is separated by mere prefix from its decidedly more monetary cousin, inflation. Convicted by language, the conversation becomes invariably monetized. Alas, the two are not a symmetrical pairing. Robert Prechter is another who seems to get the profound, sociological dimensions of deflation.
When people are unsure of the future, they hoard money and curtail restaurant visits, perhaps beyond the reasonable coordinates of personal budget, prudence or job security. Fear can overtake rational expectation. Should thrift break out in the aggregate, its paradox sets in. Deflation becomes a collapse. Nonetheless forbearance is not necessarily an outsized reaction in a corrupted environ. Indeed hyperinflation and deflation may occupy similar emotional registers.
The rationale for this behavior is a reaction to the pathology of Wall Street. Hardly a day goes by where the markets are not signaling, in one lurid headline after another, their unnavigable corruption. Markets are fixed. Price discovery has been erased. 401k statements become an exercise in white knuckles and blind faith. The retail investor, quite rationally, has abandoned the stock market. Without the fear of sanction or incarceration, oligarchic greed has overrun grassroots trust.
Far from making a market, the result becomes a QE command economy as plutocrats huddle with Central Bank apparatchiks, cobbling the truth-value equivalent of Soviet Five-Year Plans. So profound is the distress that they can no longer even give their money away. ZIRP manages to entice only emerging market casino players. Deep in the banker psyche, an atrophied Dr. Jekyll (not the island) must be crying ‘stop me before I steal again.’
Unfortunately Mr. Hyde has Congress all sewn up. It is an unfortunate facet of greed that it is unequipped to apply brakes to itself. Only a black swan a responsive government or a prison cell can do that. The adjective ‘blind’ is well applied.
The elite can easily forget that it needs a grubby and sweaty populace to sit astride, even as it eschews overt fraternization with the peons down below. Mass consumption, or the lack thereof, still matters. Only the American people possess the requisite scale to put on 300 million pairs of pants a day. The elite have but one pair of legs to offer up per day, per capita. This cannot power an economy even when Davos eveningwear is tossed into the mix.
Speaking of Davos, Nouriel Roubini said recently (at :46), “You are redistributing income from those who spend more to those who save more so over time the fall in the share of labor-income is going to have a negative impact on economic growth and aggregate demand.” This sounds like what the Marxists call overproduction. The good news for us is that the elite still hasn’t found a way to preserve their power in the absence of aggregate demand. Soylent Green is postponed under further notice.
We are still in control even during times when it might not feel like it. Should the People elect to curtail their first-order appetites (either through economic necessity or budding heightened awareness), the attendant sin of usury withers away. We are the turnip. Interest payments are the blood. Good luck with that.
The truth is the People may be the sanest kid on the block. Our fear is eminently right-sized given the pathological greed that parades where a price-auction once held sway. When the windshield is too fogged to afford even cursory discovery of the obstructions that lie ahead, who but a madman would attempt the drive? Unsafe at any speed! Prudent souls reduce their velocity to nil. Abysmal money velocity is also a referendum. The people are voting ‘no confidence’ in the elite. They are staying home in droves.
Deflation is the People’s revenge and may even give evidence to an awakening in mass consciousness. Why might we think this? Look at the People’s two archest enemies: government and banks. The enemy of our enemies, it turns out, is deflation. Lower prices boost discretionary income. Even better, this is nontaxable income. The government doesn’t get a slice of the money we save at the gas pump. Call it a stealth pay raise. The fiscal implications of this are staggering. As for the banks, they already have us stabbing one another in the backs for the interest payments they neglect to create. Deflation shifts the nightmare onto their balance sheets as legacy debt becomes arithmetically unserviceable.
So far we’ve belabored the shadow-form, fear, as the King’s men do every day. Let’s talk about deflation, the budding social movement that has yet to be recognized as such. The monetization virus has infected practically all crevices of society. Stand in any lunch line and eavesdrop shamelessly. The conversation is a meretricious hum of sameness: refinancing mortgages, anticipated pay raises, imperiled 401k balances. The polis has squeezed out Mozart. This is the insistent plague of financialization. The fabric of our consciousness is pledged to Mammon. Wall Street’s illness trickles down. Perhaps it acquaints with our wealth on the way up.
Suddenly the velocity plunge takes on an ominous cast. After all, the hours of the day must devote themselves to something. If we’re not shopping what are we doing? Thinking? Plotting? There are a lot of idle hands out there should the Devil attempt his own WPA. Anyway, the Panopticon wants to know. It gets nervous when our transaction markers go dark.
The global economy is shrinking as we shrink back into ourselves, back into our skin. I speak only for the long-developed world, but suppose we own all the crappy plastic devices we’ll ever need, that we’re spending more time talking to our children and re-acquainting with our aging parents who won’t be here much longer anyway. It’s a horrible notion to the bankers, but a ‘sustainment model’ mindset may be seizing the collective consciousness. Souls are awakening from a long, materialistic sleepwalk. Perhaps we were pricked awake by a procession of indignities. The most recent? How about all FDIC-insured accounts in America being pledged to Wall Street should their derivatives bets go south? What’s the chance of a derivatives melt-down with a 50% reduction in the world’s most systemically ingrained commodity, oil? Hmm.
Yet rather than being applauded for our advancing enlightenment, we find ourselves castigated for ‘antisocial’ deflationist tendencies. Secular stagnation is a crime, Larry Summers all but suggests. Punishment should take the form of negative rates on savings accounts. If you will not commit to a socially responsible level of shopping, the money gods will make mall visits compulsory. Even Keynes admitted aggregated production is better adapted to a totalitarian system.
So Dr. Fekete, it could be we have no more velocity to offer the Machine. What you characterize as a pathology is an evolution-by-inches. You see, we were run ragged with very little to show beyond callouses from the hamster wheel. In the event of another 9/11 we will never again respond to government entreaties to ‘show our patriotism’ by swiping our credit cards. We may be on the verge of showing we’re greater than the sum of our shopping. How’s that for a revolution?
Deflation is the manner by which we plan to starve the beast. There are no panaceas. The pain will be shared. That is true. But think of the 1% who own half the world’s wealth, and the dizzying heights from which they must fall. All that financialized banditry must be denominated in something. You can’t hide CDO’s under the mattress. Their greed has long since crowded out our expectations. The masses have been normalized to austerity. It doesn’t frighten them. The Masters of the Universe, by contrast, have so much to learn about themselves. For them, deflation paints a long way down.