For several years there has been a tug of war in economic circles between the dominant Keynesian economists and those of the "Austrian" school.
More recently, there has been some question by the conventional economists to the Austrians: if the "printing" of so much "money" is supposed to lead to hyperinflation and its attendant economic catastrophe, why then in the wake of all these trillions of dollars that have been dumped into the economy, has it not happened? Why are we still afloat, rather than having tea at the bottom of the economic ocean?
I believe there is a very good reason for it, and it the answer is not that the Austrians were wrong, but rather because at the time their theories were formulated in the earlier part of the twentieth century, there was one thing missing that today pervades the world economy: electronic currency.
Back in the olden days, the king would mint his coin and by whatever means it would find its way into the economy. Once released, the king lost much of his control over it. He could and often did make decrees making it a crime to do this or that with "his" money, but at the end of the day, people were going to do what they would, and for the most part the king was powerless to do anything about it, save in very specific cases.
The same can be said of paper monies of later times. Once the national mint released its bills into circulation, it had in some ways little to no control over it. For the most part, once a bill was out there, it was out there.
Fast-forward a few decades to the latter half of the twentieth century as we find something new that had never before existed. The advent of the digital computer enabled a novel implementation of balance-sheet entries from paper to digital storage. This in itself was insufficient, but once computer networking passed a threshold of capability and ubiquity, a fundamental shift occurred in terms of the king's ability to exercise far greater control over the currency assets released into the general economy.
Electronic currency, as it now exists in our daily lives, provides the king two capabilities in far greater measure now than ever before. Firstly, it allows the king to know exactly who has what to a degree the kings of old could never have imagined possible. And secondly, it enables the king to take back that which he gave.
Banking laws are many, and often very strict. Part of the requirements placed upon those institutions that wish to do business as banks is that they must abide by the various rules for the maintenance and reporting of their assets, both for the purposes of taxes, audits, and the provision of information on the accounts of its customers. With the right authorization, whether it be a warrant or some other rule to which the bank agrees upon becoming licensed to be a bank, any information on any account must be handed over to the requesting agency. There is very little wiggle room for denying such requests. If an FBI agent shows up a Chase Bank with a warrant for all account information relating to John Doe, the bank must provide it. That information may be extensive, including balance information, transfers, and even purchasing information if the customer is the holder of a credit card issued by that bank.
This brand of access allows anyone in the right position of authority to gather much information on a given individual's financial activities and, by extension, others as well.
The capability in which we are mostly interested, however, is the ability to directly access accounts and alter their balances on command. The significance of this can barely be over-stated. Electronic records in conjunction with sophisticated networking allows someone in the position of authority to readily locate most, if not all, of the accounts attached or otherwise associated with a given individual. Once identified, in purely technical terms it becomes a matter of a few keystrokes and the balance of any account can then be altered, whether outright or through transfer of funds from one place to another.
The power of this is absolutely enormous, both in political and economic terms. A few short years ago, for example, the island of Cyprus decided it was going to give every account in every bank there a haircut to the tune of ten percent. In a matter of a single weekend, the government ordered all banks to close their doors. Once secured from those pests whose property the odious government of that unfortunate nation sought to swindle, it was a mere arithmetic matter of examining the balances of each account, calculating the 10% and electronically transferring it to their coffers.
So what then is the significance of this in the context of hyperinflation and economic catastrophe? It is plainly this: a government is now technically capable of pulling money out of circulation very rapidly, efficiently, and easily. We shall shortly see why this is a game changer.
In times past, once the printed monies were released into the economy, repatriating them to the national treasury was a non-trivial, some would say mainly impossible, endeavor. If the king prints and releases "too much" money, the excessive cash artificially increases demand because people often spend excess money. As demand rises, so follow the prices. If the king errs by releasing even more money to address the rising prices, prices only rise even more. At some point if the king does not gain possession of himself and stop releasing more cash into the economy, the rate of inflation then begins an asymptotic rise. This is what is commonly referred to as "hyperinflation", at which point the king finds himself between a rock and a hard place. If he cuts off the money supply on Monday morning, the economy will collapse to one degree or another by, say, Monday afternoon.
But the king may not want to suffer the consequences of his foolhardy decision. Therefore, like all good intending but hopelessly misguided tyrants, he attempts to delay the inevitable in the hope that things will stabilize if given some time. This, however, is unlikely, meaning that all he is accomplishing is the delay of the inevitable, all the while digging the economy into an ever deepening pit.
At some point the presses literally cannot keep pace with the demand for cash in response to the rapidly rising prices. That is when the train goes completely off the rails and the economy crashes, often with very unpleasant results for many.
Because he was unable to recall the cash with any practicability, the king went the opposite way and drove even more into the economy in the false hope that it would somehow all work out. Wrong-0.
But today the situation is fundamentally different. If the king issues too much cash, he can simply order it recalled. Forget the various legalities that might, under normal circumstances, tie the king's hands, preventing him from being able to recall currency without the benefit of due process for those from whom the cash is to be taken. In an "emergency" those obstacles to unilateral action are often swept away at a moment's notice, paving the way for immediate and direct action.
Unlike in olden times where the practical reality of repatriating cash to the national treasury would have entailed real men visiting every bank and home in the land, computer technology allows accounts to be instantly identified, accessed, and altered to whatever degree the issuing authority deems fit.
Today if it is deemed that the amount of currency in the system is too great, by way of emergency declaration the issuing authority now holds the technical ability to identify specific repositories of such resources and instantly transfer them back to treasury hands.
Consider the TARP bailouts of 2008-2010, as well as the others. Literally trillions of dollars were pumped into the global economy. At those volumes there ought to have resulted an episode of hyperinflation. While the inflation has indeed been high, it is nowhere near to qualifying as hyperinflation. Why? Have all the economists of the past 100 years all been wrong? Well, no but also yes. Not wrong in the sense that had those cash resources been actual printed paper, hyperinflation would almost certainly have occurred by now. Wrong in the sense that what should have happened didn't, but that was because of the nature of electronic currency.
It is not inconceivable that those who received TARP payments, many of whom remain unknown to the general public, were given those funds on conditions. One of those conditions may have been that once received, the transferees were not to do anything with those funds for some specific period, or perhaps not until given the green light. It may seem unreasonable, but consider the alternative of losing your shirt with no recourse, save to go out of business. All of a sudden such conditions do not seem so bad after all.
Electronic currency allows us to inject as much as we want, created out of thin air. If the infusion proves too great, movement of some or all of those funds can be restricted, completely stopped, and the currency even withdrawn from "service".
This capability alters the economic game fundamentally. It also places frightening power into the hands of a very few men who now have to ability to crash any economy on the planet within a day or two.
As we plainly see, our advancing technologies have quietly ushered us across an invisible threshold into an age where at least some of the old rules may not necessarily apply anymore. It remains to be seen how the landscape of these new technological realities unfold for us. Something new is afoot, but do we have what it takes to keep it under control. Perhaps more importantly, can we trust the people wielding this immense power?
As always and until next time, please accept my best wishes.