Thursday, June 3, 2021

Unprecedented Money Creation - What Is The Impact?

 I am a great fan of behavioral, as opposed to “classical” economics. Richard Thaler’s Misbehaving (2015) is one of the few economic theory books that I truly enjoy reading. The author went on to win the Nobel Prize in 2017, so he’s no slouch. 

In a nutshell, the main premise of behavioral economics is that people make decisions based mostly on fast, emotional reactions (gut feelings) instead of rational analysis. Importantly, this premise has been tested and proven on the field in hundreds of experiments - unlike “classical” economics which is mostly based on theoretical econometric models.

Thus, we are in fact not homo economicus.  Despite thisalmost every economic theory in the world is based on a strict human “rationality” that just isn’t there.

So... will the current unprecedented monetary flood taking place in the US, EU and UK affect economic behavior? And if so, how?  It’s important because these economies combined account for about 40% of global GDP. Furthermore, how will this behavior affect China, which accounts for another 20%?

First, let’s look at the size of new money creation. I’m using the US as a proxy because of its global economic power and because the dollar is (still) the undisputed reserve currency of choice.

Within just one year the US has exploded money creation (M3) from a bit under $1 trillion per year to $4 trillion (chart below). The Treasury/Fed has “printed” more dollars in one year than the previous six years combined. This shock to the system is surely altering people’s behavior - but, how?

US Dollar Money Creation Explodes Upwards

For one, direct payments to all Americans (helicopter money) is causing a labor shortage, mostly at the low end of the income scale.  Even though this heli money was definitely a one off, people are behaving as if it will go on forever.  Those who “rationally” need jobs and income the most are being offered jobs, but choose to remain unemployed. 

Another effect is the immense popularity of extreme speculation.  Millions who got heli checks are not using the money for insurance against uncertain times but for wild bets on meme stocks and dodgy cryptos, despite acknowledging that their actions are highly irrational.  

The Fed/ECB/BOE themselves acknowledge that such enormous money creation leads to higher inflation (and CPI/PCI are already spiking up), but choose to continue pumping more money into a flooded system.  How rational is that? (Unless, of course, their ultimate  goal is to create high inflation..).

Put those three observations together... those of us who know market history understand that markets can exhibit irrationality, particularly at their manic, delusional stages.  Even Adam Smith understood “animal spirits”. But, right now, this irrational misbehavior is extending to the entire economy. From workers choosing to remain unemployed to central bankers refusing to perform their monetary policy duty,  this irrational behavior is gripping the entire economy.  

This situation looks to me like a train going downhill at breakneck speed towards a dangerous bend in the tracks.  Its passengers are flushed with the thrill while the engineers are stoking on, never mind the brakes..

We have gone way beyond Mr. Greenspan’s partial irrational exuberance, we are now in total Misbehavior Economics territory..


  1. Case in point...

    1. I never thought I’d see the day when China is far more responsible in monetary/fiscal policy than the US and EU combined...

    2. US, EU panicked at the Covid-induced economic downturn. China wasn't that much affected economically, no?

  2. Hi Hell, dun worry, the grass is not as green as you imagine it... way things are, I am not even sure it is grass.

    If we are going to Hell, we will all go together. =)

    1. I’m not a suspicious person, by nature. I trust more than I question, but this whole COVID situation is most certainly playing out in Chinas favor. It’s as if China was 100% prepared for it. Immediate draconian lockdowns, isolation hospitals built overnight, almost no cases outside of Wuhan... gee.. dunno.. lots of coincidence, luck and superb handling of an emergency.

      And right now China is stockpiling grains and coal at breakneck speed. Bulk carrier unloading delays at Chinese ports are at record levels.

    2. Article on Chinese port delays...

    3. You think the lab leak was on purpose? They are a totalitarian dictatorship, so what the government says, goes. Unlike all the political division in the US, where even mask-wearing was politicized Lol

    4. And I am an incredibly suspicious person by nature... are you guys trying to kill a chicken? =)

    5. *"what the government says, goes" in regards to Covid lockdowns, maybe that's why it wasn't as bad there, or throughout. It wasn't allowed to spread. Also, much lower obesity rates in China.

    6. in some ways China is far freer than the West; in some ways far less... everything is just different...

      the Chinese never really bothered about governing theory (our great strength and our great weakness) and never understood the importance of ideology. So behind every official structure, there is an unofficial one; and it is the latter that is important. Thus, it does not really matter if the government calls itself a democracy or a dictatorship or a empire. What matters is how the unofficial system runs.

      Every country does that to some extent but the Chinese make it an art form.

  3. Hi Hell,

    If you guys can, stop the printing presses.... the harder, the better... I know it will probably create a loss generation... but I suspect the alternative will be much worse...

    1. They won't: Politicians only care about the next election, not the next generation ;)

    2. you have to force them to do stuff... they won't do it naturally

  4. Dogecoin has a market cap which is superior to, among many others, Kimberly Clark or Ferrari


  5. Hell,

    I found a way to answer you. Whether or not what you suspect is true, is not important, the virus is a transient perturbation.

    Look the American system as a whole, especially why three of the last four American presidents seem to be village idiots. I don't think America can afford another one like that, and the choice seems to be Biden vs Trump.... again.

    Even worse, the other alternatives seem equally bad... bad policy comes from bad leaders and ultimately (sorry about it) from bad citizens... If you fix the rot inside, nothing from outside can hurt you.

    Best Regards,

    P.S I don't talk about the Chinese because I cannot; and not because I think we are so much better... we are in really bad shape too...