Global Crisis/ Innovation Blog

Where Will the Money Go? When Will Inflation Recur?

By Shlomo Maital

  Simplify!  Simplify!  In an age of uncertainty and enormous fog enfolding the global marketplace, how can we make sense of the rapid and often startling events that occur? For example, yesterday’s Financial Times reports that Ireland, Portugal, even Spain, cannot sell either government bonds or any corporate bonds any longer.  Since neither government nor business can do business without borrowing, unless this situation unfreezes soon there will be crisis.  The unthinkable appears increasingly likely – withdrawal of periphery states of Europe from the euro system, returning to their original currencies.  The key will be Spain, whose government owes 250 b. euros this year in maturing debt. If Spain cannot roll over the debt – what will happen? Spain’s socialist Prime Minister Zapatero appears angry and in total denial, blaming everyone and anyone for Spain’s woes – except his own government’s ineptness.

     Let’s simplify and look at the issue of money. America is engaged in an enormous and irresponsible experiment, flooding the world with money. (It is called QE2, it should be called PRINT ONE TRILLION MORE AND RUIN THE DOLLAR).  There already is a huge amount of money, not only dollars but euros and yen and yuan, in the world, after Central Banks tried to battle the crisis with credit expansion.  That money is at present earning nothing.  A quick look at the back page of The Economist reveals that real interest rates worldwide are near zero. Even where nominal interest rates are high (India, Brazil, Vietnam), inflation is equally high, and the different is nil.  So huge amounts of money are parked, waiting, waiting. It is like a football (soccer game), the final game of the World Cup 2012.  The pitch is ready. The players are on the sidelines waiting.  They have not yet taken the field. The referee is waiting to blow his whistle…..and we wait.  WHERE WILL ALL THAT MONEY GO?  It has to go somewhere – the opportunity cost of lost interest while it is waiting is huge, and pensioners, for instance, need their monthly payments, so pension funds, institutional investors, insurance companies, all need to find some reasonable return somewhere, adjusted for risk.

    Where????

    When will the money “go onto the field” and begin to play?  Where will it go? How will it be invested? With enormous uncertainty surrounding global capital markets, and risk hysteria (the next step beyond severe risk aversion) prevalent, with bond markets frozen, banks unwilling to lend – when will the money begin to ‘play’?  If you can innovate a new and attract investment vehicle, one which offers attractive return and transparent easy-to-measure clear risk, you can do very well.  The old vehicles are tired and unsuitable.

     I recently looked  at this question:   Why has the world not had inflation, if so much money has flooded into the world, in Europe, America and Asia?  Answer:  the ‘velocity’ of money has slowed everywhere, without exception.  The money is not in play.  Since economic momentum is the product of the amount of money times its velocity,   even if M money has grown,  V velocity has fallen to offset it, leaving momentum stagnant. 

    When will inflation again rear its ugly head?  When the money begins to move again.  When velocity begins to rise.   Watch that number closely.   You will have to calculate velocity yourself  (nominal GDP divided by Money),  the World Bank, which provides 1,158 data series,   sees fit NOT to provide one of the most vital ones, velocity of money.