A Trap of their Own Making

As we have laid out in some detail in our professional work, it is clear that Chinese banks have entirely lost their inhibitions about creating money these past twelve months. It is equally clear that once such money is called into existence, someone must be caught in the act of holding it when a balance sheet snapshot is taken, however eager their desire to ‘pass the bad or depreciating half-crown to the other fellow’ may be and thus regardless of what the fate of that money will be an instant after the shutter has closed on the statistical camera.

That the sum of demand deposits credited to the account of non-financial corporates has increased this past year, rising by around a third or Y4.7 trillion and hence constituting approximately 55% of the corresponding 28%, Y8.4tln increase in non-currency M1, therefore tells us nothing whatsoever about either the current motivation or future intention of those receiving it. As such, this is a compelling illustration of the cardinal rule that one should never to try to deduce dynamic effects from an exercise in accounting principles.

In disregard of this stricture—and even though demonstrating an anxiety laughably at odds with the modern-day inflationists’ brook-no-hindrance efforts to place more money in the hands of those most likely to spend it—this accumulation has already prompted some of the more hackneyed members of the Commentariat to start banging on about China being caught in a ‘liquidity trap’.

Heaven alone knows how such worries will develop if that stale, old wine in new, MIT-relabelled bottles concept of ‘helicopter money’ is one day put into practice, but it sounds as though the advocates of this ‘scam’ of ‘monetized fiscal stimulus’ (q.v., Weimar, Revolutionary France, Continental USA, etc.) will be as alarmed as the drunken magician who cannot recollect ever putting the rabbit into his hat in the first place.

In any case, this diagnosis is made in utter ignorance of the fact that Keynes supposed this somewhat mythical state of economic dyspepsia to arise through the witless response of those recipients of money whom he personified, in his usual supercilious fashion, as his fellow ‘college bursars’, men whose habitual incomprehension of what was afoot he, Maynard the Magnificent, affected to despise. As rates fell, these hidebound souls, so Keynes imagined, might so come to fear the capital loss which would be entailed by the inevitable reversion of bond yields to their pre-slump norms that they would hoard all the cash that came their way for want of any better idea of what to do with it, so holding up real rates, slowing the velocity of circulation, and thus worsening the slump.

All in all, a typically sophomoric, Keynesian ‘paradox’ from which, once he had stumbled into it, no lesser intellect could, of course, ever hope successfully to extricate himself. It is one which has been keeping the Bernankes, Buiters, Blanchflowers, and Blanchards rolling in honours (and honoraria) ever since

Ironically, it never seems to occur to today’s ‘college bursars’ – those managers of pensions and other long-term investments who are happy enough to parrot this much-abused phrase – that, under the onslaught of today’s central bank euthanasists, they, the rentiers, are not only not prey to such fears but they have become the most avid of momentum chasers, utterly heedless of the perils of mean reversion and instead actively seeking justification to buy for a further rise in prices (and, ergo, fall in yields). Though seemingly oblivious to the fact, in this way have they, themselves, become instrumental in forestalling all possibility of such a ‘trap’ from ever materializing.