Monetary Disorder

There's a place where the lights won't find you
Holding hands while the wall come tumbling down
When they do, I'll be right behind you
--Tears for Fears

The always thoughtful Jim Grant offers several insights relative to the current state of financial and economic affairs.

Portfolio balance channel. This is a fancy phrase for central bank sponsoring of higher asset prices in hopes that it will spur consumer spending. Another name for this is the 'wealth effect' which enjoys marginal empirical support at best. Central bank administration of asset prices, as demonstrated by the ham-handed interventions of the Chinese, has reached epic levels.

Aggregate supply. Central bankers have implemented policies aimed at boosting aggregate demand. They forget or ignore the effects of their polices on aggregate supply. Cheap credit motivates expansion which could easily put downward pressure on prices despite the monetary inflation. A nice example of this can be witnessed currently in US shale oil production. Lower capacity utilization helps explain why 'headline' CPI numbers have not gone thru the roof. Monetary inflation has resulted in excess supply versus demand which, as ECON 101 suggests, weakens prices.

Helicopter money. Traditional monetary policies have not brought about hoped for economic strength. This leads central bankers toward increasingly radical ideas. If the existing monetary system grounded in credit money creation isn't working, then aren't ideas of bypassing the banking system altogether and simply mailing checks to citizens a 'logical' next step. Grant suspects so. These pages have thought so for some time.