A Chicken or an Empire: Your Choice
Article originally hosted and shared with permission by The Christian Economic Forum, a global network of leaders who join together to collaborate and introduce strategic ideas for the spread of God’s economic principles and the goodness of Jesus Christ. This article was from a collection of White Papers compiled for attendees of the CEF Global Event.
I know a man who loaned out the equivalent of $50,000 to a neighbor. Much to his chagrin, the debt was settled with a single chicken.
I’m familiar with another family that, in similar circumstances, made a choice to diversify their family business geographically. Over the next 30 years, they expanded one company into 4,500 companies and 3,000 manufacturing plants.[i]
How could such similar beginnings yield such different results? They resulted from differing responses to the same monetary occurrence. I’ll explain in a moment.
By the end of this essay, you will have joined not the 1%, but the 10,000th of 1% (.000001). You will be one in a million. How? John Maynard Keynes quipped that inflation is something only one in a million people understands. You will be that one.
Inflation is not a dazzling topic. Most people consider it boring. But it affects your lifestyle, the things you can do, your ability to care for yourself and your family, your ability to do business, your ability to save for retirement, and much, much more. It’s like air: not something you think about very much, but extremely important.
Perhaps being one in a million also sets you apart in another way. Perhaps you are a part of a remnant of individuals who can actually help those closest to them as the ravages of inflation take their toll.
My aim in writing this paper is first to consider the definition and destructive nature of inflation and second to explore a Christian response to inflation in keeping with the principle of subsidiarity—an important principle I’ll review for you shortly.
Inflation is defined here as an increase in the quantity of money that results in the dilution of purchasing power and is evidenced by the increase in cost for goods and services. In layman’s terms, things keep getting more expensive because the number of dollars in use goes up faster than the number of products available to buy them with.
The government is supposed to keep track of inflation, and it has some tools for that. Two such efforts are the Consumer Price Index (CPI) and Personal Consumption Expenditure (PCE). These price indices were originally constructed to show whether a family could continue to enjoy a basic lifestyle through time or if cost increases for goods jeopardized a family’s ability to care for itself.
However, the measures have changed through time. The original “basket of goods” (the specific products whose prices are monitored) in CPI has changed. Certain products have been substituted, with each one assigned a unique weighting in the index.[ii] Through the decades, the measures have become less reliable as a gauge of enduring economic security.[iii]
Now that we’ve defined inflation and have seen that it deals with both the quantity and quality of money, let’s define “money.” We don’t think about this one very much because we have dollars and cents in our pockets or our bank accounts, and we can buy things with them—case closed.
But the question is crucial: What is money? It’s especially important in a time when digital code is described as “coin” and its creation referred to as “mining.” Central banks are now aggressively pursuing their own digital currency versions as a substitute for the physical form.
“Specie” is the term given to money in the form of coins or notes (someday soon, these may be forgotten relics of our past that require an explanation, as eight track or vinyl does today). The value of those coins and notes has for millennia been secured by the materials they are made of (usually gold and silver) or were exchangeable for in the case of a paper proxy. Only since 1971 has the world operated on a system where reputation and faith are the only backing for currencies. Since that time, credit has been easier to create and has largely displaced specie as the more important form of money creation.
Currency evolves along a continuum of trust. If trust is ever questioned, the social reversion is to the most secure form of money available. Historically, that is gold and silver.
A significant revolution in money creation occurred in 2020 when governments took control of the distribution of credit. They began delivering money/credit directly to businesses and individuals.[iv] Before that, credit (a form of money) was normally created two ways: by a central bank or by a commercial bank.[v] Following the global pandemic, governments around the globe have rediscovered a powerful third way to create money. By directing credit and credit guarantees towards politically favored recipients, and bypassing the central bank as the primary creator of money, governments are breaking into the domain of bank-created money.
This kind of politically motivated monetary inflation has created many economic disasters throughout history. Governments today seem to be operating according to the very dangerous words: This time is different. The words are dangerous, of course, because that’s what every disaster-creating government throughout history has said to salve its conscience just before inflation ran away with its economy.
Now, back to inflation. Will inflation be transitory? Yes and no.
Inflation is returning in a way it has not been experienced in decades. This bypass of the central banks by governments is in an early stage, and it changes the nature of how both money and inflation will be experienced in the years ahead.
There are, of course, post-pandemic supply-chain bottlenecks that temporarily boost inflation statistics. These appear to be the focus of the central bank community, leading them to conclude that inflation will be transitory. The neglected element that economists appear to have missed is that governments globally are retaking control of credit distribution (therefore money creation) and, like Bernanke’s and Friedman’s “helicopter drops” of money, are now delivering cash and credit guarantees to preferred constituencies (via the Cares Act, PPP, and Mainstreet Lending program, as three examples) with commercial banks assisting in distribution but in no way taking on credit risk themselves. This shift in roles further politicizes access to resources and invites a new era of inflation.
After decades of disinflation and the accrued benefits of declining capital costs, we should now anticipate a reversal of the past. This will include an increase in consumer inflation and, as a downstream consequence, a decrease in real returns across almost all asset classes. A different approach to asset management is required in the years ahead, including a different approach to liquidity management.
As dry as statistics may seem, the reality of inflation and money supply growth is in some contexts a drama, in others a thriller, and, in a few rare cases, a complete horror show. Inflation should enter your mind not as a statistic, but as a human experience. Stories illustrate the pernicious nature of inflation, with extreme stories shining a light on the final stages of currency repudiation and collapse.
When families run out of money before the end of the month, or when retirees are gradually squeezed between rising costs and a fixed income, we witness the minor stresses and strains of inflation. When the later stages of inflation are reached, occasionally an extinction event occurs—extinction for the currency and for the values held dear by that culture. In the end, inflation matters because people matter.
Stefan Zweig narrates his personal inflation experience in The World of Yesterday,
“Prices jumped arbitrarily; a thrifty merchant would raise the price of a book of matches twenty times the amount charged by his upright competitor who was innocently holding to yesterday’s quotation; the reward for his honesty was the sale of his stock within an hour, because the news got around quickly…people wanted goods instead of paper. The most grotesque discrepancy developed with respect to rents, the government having forbidden any rise; thus tenants were protected…property owners the losers…before long, a medium-size apartment in Austria cost its tenant less for a whole year than a single dinner. A man who had been saving for forty years…became a beggar. A man who had debts became free of them. Standards and values disappeared during this melting and evaporation of money; there was but one merit: to be clever, shrewd, unscrupulous, and to mount the racing horse instead of being trampled by it.”[vi]
Today, the divide between rich and poor continues to widen. Some attribute this to an unjust capitalist system. However, a closer look reveals that monetary policy choices (central bank liquidity creation) globally have increased the quantities of money and credit on an unprecedented scale. Therefore, asset prices (stocks, bonds, real estate, art, etc.) have taken on overblown bubble characteristics, with central bank liquidity largely trapped and recirculating within financial markets. This is evidenced by the Forbes’ annual world billionaires tally that lists a record 2,755 billionaires. This year’s crop sports a combined worth of $13.1 trillion, up 64% over the past year to all-time highs. Household Net Worth in the U.S. reached an all-time high of $130 trillion. Net Worth ended Q1 at 606% of GDP, dwarfing previous cycle peaks of 492% in 2007 and 446% in early 2000. Owners of assets have benefitted in the process, while much of the poor and middle class has been left behind. This awkward economic reality is a defining factor in the policies of redistribution likely to be implemented in the years ahead and contributes to existing social and political tensions.
Inflationism is implicit in the current monetary regime. The previous system, known as Bretton Woods after the New Hampshire gathering in the 1940s, was dollar-based and gold-backed. It ended in 1971. Micheal Bordo recounts, “For the first time in history, the world after 1971 adopted a peacetime fiat money regime.”
Now, with no tangible asset backing our currency, limitless money and limitless credit creation are allowable. Political exigency and circumstantial justifications, such as recessions, financial market panic, and, most recently, pandemic, have meant that policymakers “print” whenever necessary and spend on whatever they desire.
This is a part of the devolution of money. Guilio Gallarotti observed, “The monetary orientation of politics has changed over the last century, from one of stable money to one of inflation. With the politization of the budget (through the rise of the welfare state) and the electoral impact of unemployment, inflation has become a fundamental means through which elites gain and maintain office.”[vii]
The emergent phenomenon of inflation will indeed be a challenge to control with government debt surpassing 125% of GDP (see chart). Nial Fergusson comments in The Cash Nexus, “Inflation is easier to start than to stop under conditions of high public indebtedness. A central bank aiming to halt inflation by raising the short-term interest rate would be likely to fail if the government continued to run high deficits.”
With a budget of six trillion dollars proposed for 2022 and expected revenues of $4.16 trillion (which assumes an increase of 670 billion for the year), the deficit is anticipated at $1.84 trillion. This follows 2021’s deficit of $2.3 trillion, 2020 at $3.1 trillion, and 2019 at $984 billion—a four-year total of $8.25 trillion.
Fold in all debts, not just governmental, and the motive to inflate away these burdens becomes even more compelling. Over the past six quarters, total debt securities—Treasuries, agencies, corporates, and municipal bonds—have jumped $8.174 trillion, or 18%, to $53.920 trillion. There’s been nothing comparable. At 251% of GDP, the total debt securities ratio compares to 200% in 2007; 157% to end the ’90s; 126% to end the ’80s; and 74% to conclude the ’70s. As the debt binge increases, so does the probability of policymakers intentionally ramping up inflation to alleviate the burden of those liabilities.
Jeffrey Frieden in his book Currency Politics states, “The level of the exchange rate can express a government’s position on the trade-off between domestic consumers and domestic producers…. A government’s exchange rate policy tells us a great deal about its priorities, both international and domestic.” Strong currencies serve a purpose, as do weak currencies. The policy choice to interfere with an exchange rate implicitly conveys who is intended to accrue economic benefits in the future. It is a choice of designating winners and losers.
Public policy choices indirectly designate economic winners and losers. When politicians prioritize massive spending initiatives and fund them through ever-larger deficits, the context is set for a follow-on policy choice: inflation.
Step one: Spend beyond your tax revenues; provide discriminatory benefits to select constituencies, creating deficits in the process.
Step two: Pay back your debt with cheaper currency.
Large scale budget deficits and debt monetization (after beginning 2008 at $850 billion, Fed balance sheet assets are on course to surpass $8 trillion in a few months), or literal printing, contribute to asset price distortion and the gradual loss of purchasing power.
Stanley Fischer said in his IMF World Bank paper titled Inflation and the Poor: “The claim that ‘inflation is the cruelest tax of all’ is often interpreted as meaning that inflation hurts the poor relatively more than the rich. It could also mean that the inflation tax is particularly unfair because, the taxing mechanism being little understood, the inflation tax can be imposed by stealth.” [viii] He goes on to quantify that, indeed, the deliberate tax via inflation is felt more by the poor in society.
So, considering current policy choices, the social programs being scripted by global leaders seem necessary to aid the poor even while the net effect of inflation, stemming from deficit spending and money printing, is punitive to them at the same time. There is a tragic irony in the chosen public policy winners also being the concurrent losers. It’s like a grand societal experiment with Stockholm syndrome—policymakers creating a system of abuse for which the people are in turn grateful.
I began this paper with a $50,000 chicken. The value of the chicken never really changed, but the currency devalued to the point where it took that many currency units just to buy the barnyard bird. The debt was a real obligation, fixed in currency units (German Marks), with no escalators or indexing of debt applied. The element of surprise came from the changed value of those currency units. With a fixed currency obligation came great relief to the borrower. The foul consolation for the neighborly lender was like adding insult to injury.
Crisis compresses time. There is no clearer example of this than the Stinnes family in Germany. The family grew a small coal company into a vast multinational conglomerate—in large part due to inflationary crisis dynamics—and a diversified revenue base that enabled them to act boldly when others were cautious. The single greatest investment the family made was in a boat, which allowed for delivery of coal outside of Germany and, thus, brought income in a variety of other currencies. The value of foreign currency revenue in a period of domestic inflation was seen in the Stinnes family’s ability to consolidate distressed assets throughout Germany—from a replenishing store of savings not subject to monetary policy abuse to the dramatic inflationary repercussions experienced between 1919 and 1924, destroying the local currency. Sidestepping the consequences of inflation, the Stinnes family grew their business interests exponentially in a relatively short period of time. They created an economic buffer against the costs of hyperinflation, turning crisis into opportunity.
As we conclude, the Catholic social theory of subsidiarity is instructive for structuring a response to emergent inflationary trends, inspiring outreach to those in need and taking direct responsibility for neighbor care. Subsidiarity as a principle places power and decision making at the lowest level possible.
“Subsidiarity charts a course between individualism and collectivism by locating the responsibilities and privileges of social life in the smallest unit of organization at which they will function. Larger social bodies, be they the state or otherwise, are permitted and required to intervene only when smaller ones cannot carry out the tasks themselves. Even in this case, the intervention must be temporary and for the purpose of empowering the smaller social body to be able to carry out such functions on its own.”[ix]
Subsidiarity offers both a perspective and prescription for the inflationary consequences ahead. Today, a family’s inability to meet basic needs regularly defaults to governmental resources as a solution, consistent with the migration of welfare and other social safety nets from private charity to the public sector over the last one hundred years. The period ahead provides an opportunity for private sector and community-based initiatives to step forward and perhaps even supersede the role of government in meeting the needs of people, reestablishing neighbor care and meaningful grassroots compassion.
The numbers suggest we are a long way from being able or willing to displace that governmental role.[x] What seems to be missing is a missional and neighborly generosity. We must assume that some economic buffer is maintained through a period of inflation that helps maintain the means by which those resources can be utilized.
Surveying the approach taken in Acts 2:42-47, we find a noble voluntarism and generosity defining the early life of the church. Open hearts translated directly into what we think of as hospitality and open homes. The sharing of resources can take on many forms but begins with understanding where all our resources come from, and, with gratitude of heart and willingness of spirit, making available all that we steward to tangibly express love to our community.
The practice of delegating this awareness of need and deferring to the public sphere of governmental solutions elevates the role of larger social bodies. It also allows for a detrimental distancing from needs and narratives that might well soften our hearts and further transform our lives through inspired compassion and generosity.
The age we are entering is an age where Christ followers must be defined by their deeds as well as what they stand for (not just what they are against). The lives of our families and communities can be greatly enhanced by a depth of sensitivity to the needs around us and a commitment to roll up our sleeves and directly assist those that are most affected by pressures and personal crises—including those wrought by inflation.
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[i] A Genius in Chaotic Times, By Edmund Stinnes
[ii] Shelter is given a 42% weighting in the CPI, and on the latest data was up a mere 1.7%, contributing to an understatement of the inflation figure.
[iii] The Ghost of Arthur Burns by Stephen S. Roach https://www.project-syndicate.org/commentary/fed-sanguine-inflation-view-recalls-arthur-burns-by-stephen-s-roach-2021-05 “In the aftermath of the 1973 Yom Kippur War, Burns argued that, since this had nothing to do with monetary policy, the Fed should exclude oil and energy-related products… from the consumer price index…we gulped and followed his order to take food – which had a weight of 25% – out of the CPI… He also raised questions about homeownership costs, which accounted for another 16% of the CPI. Take them all out, he insisted! By the time Burns was done, only about 35% of the CPI was left – and it was rising at a double-digit rate!…”
[iv] Russell Napier. https://mcalvanyweeklycommentary.com/the-power-of-politicized-credit-russell-napier/
[v] This is the Keynesian distinction between “state” money and “bank” money dating to the 1930’s. Others make the same distinction but call them “printing press” and “fountain pen” money. The Economic Journal Vol. 41, No. 162 (Jun., 1931), pp. 241-249 (9 pages)
Published By: Oxford University Press
[vi] The World of Yesterday by Stefan Zweig, pg. 204
[vii] Micheal Bordo and Forest Cappie Monetary Regimes in Transition, pg. 49 quoting Guilio Gallarotti.
[viii] World Bank Policy Research Working Paper 2335 https://documents1.worldbank.org/curated/en/667341468767111866/pdf/multi-page.pdf
[ix] Robert K. Vischer, “Subsidiarity as a Principle of Governance: Beyond Devolution,” Indiana Law Review 35, no. 1 (2001): 119. (Quoting Fred Crosson, “Catholic Social Teaching and American Society,” Principles of Catholic Social Teaching, ed. David A. Boileau (Milwaukee: Marquette University Press, 1998), 170-171).
[x] Joe Carter; https://blog.acton.org/archives/104847-can-private-charity-replace-the-social-safety-net.html