Transiting From Permagrowth To Permaflat - Part Two

In the previous post I laid out the context for transiting our present socioeconomic paradigm from permanent growth (Permagrowth) to steady state, a condition I will call Permaflat.  In this post I examine the financial/monetary aspects of such a transition.  But first, a bit of history.

The last yoke on unchecked money creation was removed in 1971 when the US went completely off the gold standard (ok, going to zero bank reserves in 2020 is also significant, but in other ways). It was not an entirely bad idea, given the severe pressures created on the monetary system by OPEC's oil price shock.  Some ten years later, things got really ugly when inflation spiked to 15% and the Fed (ie Paul Volcker) had to throw the country into a deep recession in order to kill it. 

The relation between excess money creation and inflation is pretty obvious to anyone with a passing familiarity with basic monetary economics: if you create more money than is needed by the underlying economic growth you end up with inflation, created by the existence of money alone. For example, if you create 10% more money but the underlying economy only grows by 5% you could ultimately end up with inflation around 5%.  It's really a cocktail napkin calculation, but it's close enough.

If you need proof look at the chart below: M3 annual growth in blue, CPI inflation in red. The recent huge spike in money supply growth is scary, to say the least.

What is of more concern is that authorities/politicians seem to think that most all problems can be solved by running the printing presses.  Countries/banks/mortgage lenders become insolvent? Print money.  COVID strikes? Print money.  A major bank's liabilities need to be backstopped? Print money. A regional bank (or four) becomes insolvent and needs to be taken over by a behemoth? Print money.

But such money printing is also creating short term excess demand for goods and services, straining the Earth's limited resources.  It's as if  the enzyme critters are boosting their activity by using money as a catalyst.  Yet, the reactor vessel isn't getting any larger and the amount of corn/food is also ultimately limited,  no matter how much money is printed.  Money, after all, is an artificial construct based on faith alone.

Therefore, we could not limit Permagrowth until and unless we also hit the brakes on money/debt creation.  A transition from Permagrowth to Permaflat requires zero money growth.

More on that in Part Three.