Posting a slightly abridged version of this article, which was published in Bitcoin magazine in July 2021.
Dear Dr Carney
This is an open letter in response to your Reith lecture series on the BBC from December 2020, “How do we get what we value”. This content now also appears largely represented in your book “Values(s): Building a better world for all”.
In short — in order to help solve the huge issues of our time — 3 of which you summarise as Credit, Covid and Climate, you argue that we need to realign the valuations that our economy constantly pitches on society.
I don’t doubt the issues you raise or your sincerity in trying to address them. In my view, throughout your entire Reith lecture content there is an elephant in the room which you ignore, and yet is so fundamental to our well being as a society. A crisis of your own creation. This is sound money, and we no longer have it.
You appear to recognise the very high time preference of society. You correctly state “If we value the present more than the future, we are less likely to make the necessary investments today to reduce risk tomorrow”. In the questions put to you in the lecture series, Camilla Cavendish also refers to the “tragedies of the horizon”.
What you conveniently ignore are central bank contributions to this, in the UK and other major developed nations, which are near absolute. Over many years the manipulation of government bond markets has driven the risk-free rate of interest of government debt to sit close to zero. All in the interests of chasing continued growth in Gross Domestic Product and protecting our economy. Central banks as puppeteers of trillion dollar fixed income markets. Decisions made incrementally month by month. But months become years, and years become decades.
The main issue - we do not live in a time of sound money. What are the impacts? The economic signal to all participants for years now has been not to save, but to spend. To consume. Borrow to consume. All forms of debt, whether sovereign, corporate, or private, have risen at eye-watering rates over the last decade, even before the pandemic. It is no wonder we live in an era of high time preference.
Individuals are not encouraged to save their dollars or pounds, moreover they also cannot count on them holding their value in the future if they do. George Osborne even commented as part of your lecture series “a pound is a pound”. Really? A pound is transferable by owner and is portable across distance. But not over time.
Worryingly, the risk-free rate of interest signalled by sovereign debt markets forms the basis upon which ultimately all other assets are also priced. Necessary price signals to the market for pricing just about everything else are being severely manipulated and distorted. Ask yourself how stock markets realistically sit higher than now, than before the dawn of Covid-19?
Economists can debate money velocity and find ways to justify the increases in M2 or other measures of money supply. They can also point to the very low levels of CPI inflation (UK and equivalents elsewhere) over the last two decades as justification for central bank actions. I would argue this is woefully (and probably wilfully) misleading as to the impacts on society of these central bank policies. The money created has resulted in inflation - asset price inflation. Real estate and equities, to name but two.
This especially matters as the distribution of these gains is unequal and massively skewed towards the wealthy. Ask yourself how easily a current house owner in the North East of England, say, can trade up to purchase a house in Hampstead in London. Asset price inflation has huge implications for social mobility and inter-generational fairness. The underlying quantitative easing has many other impacts. For example, over the last two decades the cost of securing an annuity / guaranteed income for retirement — the cost to retire — has skyrocketed well beyond life expectancy improvements.
You cite good components of any society as being fairness between generations, in the distribution of income, and of life chances. Yet can you not see how your own policies whilst governor of the Bank of England have lit a fuse under asset price inflation, exacerbated social inequality, and driven debt and consumption at all costs? The ruptures felt from these resulting inequalities have already manifested themselves across the world and will continue to do so.
If society cannot rely upon the soundness of the base money used to price everything else, how can they place the correct value on anything?
Stephanie Kelton explains very clearly in her book “The Deficit Myth” that government debt and annual deficits need not be of primary concerns to countries issuing their own currencies. This appears to me to be an incredibly dangerous long-term experiment being carried out in real time. It leads to persistent monetary debasement. With the current increases in money supply and debt, it will be difficult to slow down — indeed the Bank of England has not managed any form of reversal of its policies instituted since the credit crunch around 2008. Currently, central bankers are not even thinking about thinking about raising interest rates. They don’t dare — any misplaced rhetoric in a speech by a central banker nowadays can send markets tumbling.
Granted, she does not advocate for a free lunch, and identifies inflation as the main danger sign for overreaching. There is a question around whether we will ever see this danger sign though until it is too late to restore the fabric of society. As Jeff Booth articulates in his book “The Price of Tomorrow”, we live in an era where technology is driving unprecedented levels of deflation. Deflation should, in a rational world, prove beneficial for all concerned. However it does not fit with the Keynesian mantra of debt and inflation at all costs.
This has played out for two decades or more. This is likely to accelerate in the midst of further technological progress. Hence on one side we have the relentless impact of technology driving deflationary forces. On the other side we have skyrocketing debt and central bank policies attempting to stimulate GDP growth and inflate away the impact of this debt, but failing. This will not end well.
There is a quote widely attributed to Keynes “When the facts change, I change my mind. What do you do, sir?”. My challenge to central bankers is that they are employing analogue policies for a digital age. Keynes would have changed his mind by now.
Let’s recap by trying to articulate the state of current government bond markets in simple terms.
- Bond prices are sky high, and yields at historic lows, purely due to central bank interventions in these markets.
- Central banks can only enact these bond purchases by debasing the currency in some form.
- This debasement must eventually reduce the future real value of the principal of the very same nominal bonds, when held to maturity.
The effects are long term, but at some point, bond investors may wake up and question what the real worth of this principal will be at maturity. If they start selling, bond prices fall and yields rise- necessitating yet more intervention to keep debt interest manageable. To borrow a phrase of yours from the lectures “If it doesn’t make sense, it doesn’t make sense.” The fate facing central bankers at present recalls the old Irish joke when asked for directions; “Well, sir, if I were you, I wouldn’t start from here”.
With that said, we can start by acknowledging the current dangers of the situation we are in. That time preference for society needs to be drastically lowered, and that unsound money is causing fractures and increasing social inequality, and distorting the value we place on everything.
I have got this far without saying the word. You do not like saying the word. You did not say it in 4 whole lectures, only once vaguely alluding to dangers “from cyber to crypto”. But what if wider society were to discover a harder/sounder form of money? A trillion dollar plus asset class. The first manifestation of absolute, digital, scarcity. Immutable, decentralised, borderless, divisible, portable, and verifiable? The best performing asset over the last decade. A superior store of value which — viewed with a long lens and beyond the short term trading of speculators — will wholly preserve its value over time.
It might just help lower society’s time preference again, halt our endless needless consumption and addiction to debt, and help restore our sense of values in the world.
Link to lecture series - www.youtube.com/watch?v=uvw-aC0KLD4
Mark Carney's book - www.amazon.co.uk/Value-must-read-politics-economics-Governor/dp/0008421099