traditional monetarist devices

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(This is excerpted from "Five Acre Plots" - a book in process.)
All rights reserved.

WHAT ABOUT DISINFLATION?

One of the puzzles making the rounds in political and economic discussions these past few years has been the fact that western economies have been enjoying sustained, vigorous growth, without suffering much by way of inflation. This has been a boon to stock markets because of the saw-off between interest rates and the attractiveness of stock market investments. The connection is that interest rates do not have to be raised by central banks to control inflation.

I became interested in this while thinking about the reasons societies get agitated about counterfeiting activities. Counterfeiters offend our sense of fair play, but we are also weed out such activities because they are inflationary. 'Really good' counterfeit money would remain in circulation after being spent by individuals who had produced nothing to offset the value they were enjoying. This means more dollars mapping upon some fixed volume of goods and services.

We also know that notoriously imprudent governments sometimes attempt to elude fiscal and economic problems by printing more money than production volumes warrant.

In both cases, currencies are diluted as the value stolen by counterfeiters (and counterfeiting governments) is extracted from the population of stakeholders, proportionately as they possess equity.

Counterfeiting, however, is only one of a pair of illicit activities. In the following, I argue that some governments have recently taken up a new sort of counterfeiting. I also describe the connection between this practice and the remarkable lack of inflation corporations and investors have been enjoying.

If traditional counterfeiting harms by diluting the value of currency, these new stratagems work in the opposite direction. Traditional counterfeiting has two phases: The first is the act of spending bogus money into circulation. Obviously, since counterfeiters obtain something for nothing, theft is occurring. Where does the value come from? If the counterfeit money is undetectable, the person unwittingly in possession of bogus money spends it in turn, and the next person similarly .... The counterfeiter wins, but, if the money is undetectable, no person thereafter suffers direct harm.

The second phase of counterfeiting occurs as value illicitly obtained by counterfeiters is extracted from all the legitimate stakeholders in the economy.

Honest-to-God counterfeiters are rare. However, a growing number of activities in modern economies that are counterfeit-like in consequence. These include occupations wherein employees are well paid, but for which no commensurate value is created. Even though illicit bills are not involved, such occupations are comparable to traditional counterfeiting in every way. This thievery involves being in receipt of money without generating corresponding goods or services. The corporate scandals beginning in the 1990's, which saw a small tribe of executives and CEO's finesse countless millions from ordinary shareholders with insider trading, stock options and other inventive stratagems all fall under the rubric of counterfeiting.

It is no exaggeration to say that such activities are a significant component of western economies. Why, then, are we not experiencing inflation? The answer is complicated, but it includes a corresponding set of disinflationary activities. What we have is one set of crimes masking another - with the result that economic affairs appear to be wholesome overall.
If traditional counterfeiting involves trading bogus money (or ...