We’ve been down in Nicaragua for a couple of days. At first, the Internet didn’t work. Then the power went out. It is paradise down here; but the butter is melting and the milk has gone bad.
“This seemed like the beginning of a horror movie…” said visitors last night, as we dined by candlelight. “When we came down here, the place looked like a set from Jurassic Park. And then the power went out. We could just imagine the raptors getting through the electric fence.”
This morning, there is still no electricity. And we’re running out of battery, so we don’t know how much reporting we’re going to be able to do today.
So we’ll come right to the point:
There is a lot more money around than there used to be. And people are much more free with it… as if they expect it to keep coming. A generation ago (and even a few years ago) they wouldn’t have considered spending so much on so many things. They would have wanted more margin for error… some savings, in case times got tough.
But now, no one cares about savings; everyone has credit. With no need to stockpile money, people can spend it more freely. Besides, interest rates are low. Borrowing is cheap and painless. And since prices on all assets tend to do nothing but go up, people figure that almost any investment will be worth more in the future than it is now. Save money? You’d have to be crazy.
That change in attitude alone accounts for some of the money you see around you. It just circulates more freely. But where does the rest come from? It is almost as if people really were richer… as if they actually had more money.
And indeed they do. They have more money because the monetary authorities and the financial industry give them more. The money supply is increasing three times as fast as the supply of goods and services. But now, thanks to globalised markets, the supply of goods and services can easily be increased. Leave it to the Chinese… they’ll put out just about anything in such monstrous quantities that its price will go down.
Supplies of land… artwork… oil… gold… and even shares of real businesses, on the other hand, are more limited. Naturally, those are the things that seem to be reacting to all this extra ‘money.’
In fact, a recent study of the housing market in the United States shows that most of the increase in house prices was in the price of the land itself. The actual price of the house barely increased… which makes sense; it is easier to reproduce plywood and cement than it is land.
The point is, what we really have is not a case of runaway prosperity… but a case of runaway asset price inflation. What comes next? Typically, asset price deflation. How and when remains to be seen… and remains the subject of so much interest here at the Markets and Money. At least, when we’re not on vacation.
Markets and Money