Dylan Grice is a strategist with Societe Generale and is based out of London. He is the co-author of the French investment bank’s much-followed Popular Delusions analysis. “History is replete with Great Disorders in which social cohesion has been undermined by currency debasements. The multi-decade credit inflation can now be seen to have had similarly corrosive effects... I fear a Great Disorder,” he says. In this interview, he speaks to Vivek Kaul. Excerpts:
Why do governments debase money?
Governments usually raise revenue through taxation which has the benefit of being transparent and open. Everyone knows why they are poorer and by how much. They know who the perpetrator is, if you like. But raising money by simply creating it, debasing the existing currency stock is very different. For the government, the effect is the same. Whether printing money today, or clipping coins in the past, the debasement represents a real increase in government revenues and therefore purchasing power. But it’s better increasing in tax revenues because you can pretend you’re not actually raising taxes. You can hide what you’re doing. By printing one billion dollars, it now has one billion dollars more to spend without having to be open about what you’ve done. But we know that revenue cannot be raised without someone somewhere paying. And here is the problem such an action creates: who pays?
The answer is that no one knows who or by how much. Most people are completely unaware that they are even being taxed. Keynes said that inflation redistributed wealth arbitrarily and in a way in which “not one man in a million is able to diagnose.” All people see is that they are suffering a decline in their own purchasing power.
Could you explain that in detail?
Unfortunately, things being more complex in the real world than in whodunit novels, the group finds someone to blame. But there does seem to be a coincidence of past currency debasements with past social debasements in which society looks for an enemy to blame for its problems. History is replete with Great Disorders in which social cohesion has been undermined by currency debasements. The multi-decade credit inflation can now be seen to have had similarly corrosive effects. Yet central banks continue down the same route. The writing is on the wall.
Further debasement of money will cause further debasement of society. I fear a Great Disorder.
Can you give us an example?
In medieval Europe, for example, the seventeenth century currency debasements coincided with the peak in witch trials. During the French (and Russian revolutions), rapidly debased currency coincided with the revolution’s transition from a representative movement to one which becomes bloody and self-consuming. The hyperinflations in Central Europe after the World War-I saw societies turning viciously on their Jewish communities.
What sort of great disorder do you expect to play out in the days and years to come?
Although what we’ve seen in the last few decades has been an unprecedented credit inflation, which is a different type of currency debasement to the monetisations of the past or quantitative easing of today, today’s problems have the hallmarks of past inflations. So we see Cantillon redistributions in the very sudden increase in wealth inequality which has favoured those closest to the money creation (the financial sector and anyone with access to cheap credit). Everyone else has suffered. Median US household incomes have stagnated during the past 20 years while there is a record number of US households on foodstamps.
That’s a fair point...
We also see the in-group trust turn to suspicion as societies look for someone to blame. The 99% blame the 1%, the 1% blame the 47%, the public sector blame the private sector, and private sector blames the public sector. In the euro zone the Northern Europeans blame the Southern Europeans, Germans blame Greeks, Greeks blame bankers. In Spain, the Catalans blame the Castillians and want independence. Meanwhile in China, popular anger seems to be deliberately directed by the Party towards the Japanese. So everywhere you look, everyone is blaming everyone else for the overall malaise. But that malaise is really just a consequence of the various credit inflations each of those societies experienced.
But the money printing isn’t stopping...
The central banks’ solution to these problems is to print more money. But I think this solution is actually the problem. I understand why they’re doing it, and I appreciate what a difficult situation they find themselves in. But since these problems have been cause by their past currency debasement – asset price inflation engineered by credit inflation – I don’t see why another round of more traditional currency debasement is going to heal anything. I hope I’m wrong by the way, but I’m worried that this is the beginning of a Great Disorder in which social frictions increase. I’m concerned that distrust deepens both within societies and between them and inflation ultimately becomes uncontrollable. Obviously, financial markets reflect an environment like this, the financial analogue to less trust being in bond, equity and real estate markets will go much higher. Of course, that implies their prices go much lower.
Vivek Kaul is a writer.