To really understand the issue you first have to understand inflation.
Frances Coppola does a great job of explaining why inflation is a political phenomenon. It’s what happens when poorly run governments use monetary or fiscal policy to squander resources leading to consumption crises. (I.e. No goods on shelves and the crowding out of the goods and services which are available).
It’s a must read not least because you still have the likes of Niall Ferguson going around (erroneously) disparaging the idea that money debasement is hated by the one percent because it kills their risk free rents.
Over on Austrian economics sites, meanwhile, they laugh at Keynesians for thinking inflation is a price phenomenon at all.
For example here’s a curious response to Noah’s Bloomberg Austrian brainworm post on the Mises blog:
Curiously, and leaving the conspiracy plots aside that many, if most Austrians do not believe, I propose that when the brain-worm invades you start believing things like monetary printing boosts the economy, and inflation only pertains to prices.
The above is an important clue to what’s really going on inside the brain of an Austrian, and explains perfectly why things like the original Zerohedge article I linked to misunderstand the issue behind the scarcity of safe assets.
The core problem starts with a fascination that there is such a thing as an intrinsic value system to begin with.
This is an idea that the crypto anarchists are obsessed with as well, something evident from their blog posts about money.
In their world money is not a neutral reflection of relative value dynamics. It’s not even a reflection of favours earned and remembered. Money in their world is value in and of itself.
This is because they believe that money originates from ingenuity and leisure time.
The basic idea here (as I’ve gathered from reading their blogs) is that because someone way back in history was smarter and more successful at feeding himself and his family or providing them with shelter, he accumulated leisure time, which allowed him to spend time on creating, amongst other things, trinkets or decorative leisure objects. (In crypto land that leisure-work is associated with mining and proof of work.)
These objects, being the product of ingenious leisure time, are immediately desired by people who are too stupid to acquire the leisure time for themselves, or alternatively lack the skills for artisanal hobby craft and thus can’t make desirable objects at all. In this way they become traded for consumables, and encourage others to work harder to acquire those objects. Gold in this world has value because it originates as a product of someone’s leisure time. And since it’s shiny, robust and generally considered pretty by all people, it is the most desired and most fungible of all the leisure value objects.
If you think of money as a representation of leisure-time earned and dedicated to the manufacture of something intrinsically valued by those who have less leisure time than you, you can see how and why some people can think that money has intrinsic worth.
Debasement in this world is a heinous crime because it distributes more claims for precious leisure objects than there are objects out there. More mining of gold however is not a problem weirdly enough (and Portugal’s silver debasement saga is neatly overlooked).
Hence you arrive at nonsense theories like the one that inflation isn’t just a price phenomenon. In the eyes of an intrinsic value Austrian money printing leads to the crowding out of all precious objects, not just gold. This includes anything that was once the product of ingenuity or leisure time, and which should in their eyes be treated as a permanent trophy-like store of value. Asset markets, specifically tangible ones like houses (it took someone’s leisure to build a superior house) rolexes, art, wine, classic cars, rare commodities and even to some degree equities and bonds all count as these trophy stores of value.
The only way to acquire these should be through barter or through ingeniously creating your own via accumulating your own leisure time.
Once you see it that way you see that the reason why Austrians are paranoid about money printing. It’s because they worry that a limited amount of precious objects will be crowded out. (Forgetting, we should add, that by their own book the price rise should encourage others who can’t afford such precious objects to accumulate their own leisure time.)
In their world wealth can never be tied to having nothing to want for. There is always the pursuit of physical and durable precious objects at the heart of all their value systems. Thus, when money printing doesn’t drive up prices of consumables produced by all these stores of values, it must in their eyes instead be driving up the prices of the stores of values themselves.
For them inflation is not a consumption crisis, where money crowds out the things people want and need to consume today so as to have a good life, it’s a safe asset crisis. There is too much money in the system and not enough safe assets.
The irony is that to mostly everyone else this is the exact definition of a deflation crisis.
Which brings me back to the original Zerohedge article.
The allegation here is that the Fed’s QE programme has removed so many safe assets that this is about to cause a crisis, and that reverse repo facility will never work because it is no substitute for safe assets.
I disagree. The reverse repo facility is a perfect substitute for safe assets because the key problem is not a shortage of “precious” objects — nowadays these can be produced via the creation of any cult system that convinces people that a cronut or a Koons is a store of value. The problem is a shortage of assets that are truly safe from a change of value-perception risk.
The problem with too much leisure time is that there is now a proliferation of precious objects. In fact, all the things that used to work well as stores of value are being compromised.
Can you really be sure a Rolex will hold its value given that high-end watch production has never been greater? Or modern art? Or gold? All these value systems are threatened by too much supply. The same goes for houses. In many ways you can think of the subprime crisis as an oversupply crisis in which value collapsed due to too many houses being distributed to too many unworthy people. The supply was a responce to the belief that houses would somehow remain scarce. The same went for commodities, which were briefly considered safe assets due to physical constraints, but were unravelled by technology and demand shifts.
The crowding out that the Austrians are obsessed with, consequently, is about the elimination of highly desired precious objects/assets.
Think about it. They moan about high house prices but they also moan about the threat of oversupply and overbuilding, especially if those overproduced precious houses are distributed to the evil leveraged section of society that never had to amass the leisure time or surplus to begin with to gain those precious objects. (Unlike them, who worked for them).
Hence why they are currently obsessed with creating synthetic previous value markets in which supply can NEVER be increased without some intrinsic proof of work. Because it’s not the crowding out of precious objects they really have a problem with, it’s the fear that those high prices won’t last or that those objects might be distributed to the undeserving via government subsides or debt.
The paranoia is also related to not knowing which precious market is over stretched and which may suffer a price collapse any time soon, crushing their break-even rates. What the break-even rate really represents is protection of hierarchy. A precious trinket is just not precious if everyone has one.
So it all goes back to my German sun seeker analogy.
Which is why the only true safe assets are ones which the government can guarantee the break-even rate for. But, as it happens, the only way the government can ensure that is by taking such assets on its balance sheet in exchange for liquidity (the creation of current consumption rights). If that liquidity is evenly distributed that can lead to the breakdown of hierarchy and the spreading of wealth across a greater distribution of people, something the Austrians also have a problem with. At the moment, because that liquidity is being distributed to asset owners, it’s having more of a deflationary effect leading to the crowding out of yet more safe assets (especially those which can’t be overproduced because of government shutdown fears).
And so you end up with a scarcity of government assets, something which can only lead to negative private market repo rates and the pumping up of yet more unstable collateral markets by those paranoid about losing not only their risk-free rents but also their principal — a.k.a hierarchal position in society.
The irony is if the government didn’t intervene with an IOER or RRP policy that crowding out effect would lead to the search for more insane intrinsic value systems and the creation of yet more unstable bubbles. (Mostly focused on guaranteeing value by locking up “intrinsic” or scarce goodies under lock and key (commodity collateralisation and hoarding) that leads to cornering value, but also encourages more supply, or via the manufacturing of new cult value systems. Sometimes a little bit of both.)
The more cult-based the more prone to instability and collapse.
RRP and IOER, however, changes all that. Since the mechanisms guarantee principal they provide a stable store of value in a world where precious objects can no longer do that job. The reason Austrians don’t like it is that in order to do that job properly the stability mechanism must be accessible to all. But that compromises hierarchy, especially the sort which was earned through generations of precious object accumulation. They’d rather go search for new “intrinsic” value systems than be like everyone else.
From the economy’s perspective that’s fine. The more they risk on cryptocurrency bubbles the more of today’s consumable wealth is distributed to wider tranches of the economy at their own risk rather than the government’s.
As I’ve said before, RRP is the route towards official emoney creation. In a permanently deflationary economy which depends on permanent money expansion to avoid stagnation, and in which that expansion takes the form of UBI (arguably replacing conventional rentier society) that begins the process by which money itself is one day eliminated.
Though that’s still a very long way away since there’s still way too much scarcity to be overcome. But the point is that it’s IOER and RRP which is saving the rentiers from crowding themselves and from flinging themselves into increasingly abstract and tenous cult-based forms of value, which in the long run amount to the very same thing as just giving away stuff for free because absolutely everyone has the leisure to create a precious leisure object.