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The New Monetarism


The following discussion pursues issues raised in an article by Elbert Friedberg in the Financial Post, May 16, 2000. I argue that western economies harbour covert factors controlling inflation. These measures may or may not be deliberate, but they are regressive and destabilizing. Ironically, if they are not contrivances on the part of governments and wealthy sectors, they will be more difficult to repair. Whatever their origin, they need to be apprehended - in both senses of the word.

Monetarism - the notion that governments can manage inflation, unemployment and other economic markers by controlling the amount of money in circulation - was discarded in the late 1970's, ostensibly because of difficulties deciding what should be counted. Monetarism involves increasing or reducing M1 money (currency + demand deposits) by adjusting taxation and/or program spending. Control of M1 is also achieved by adjusting reserve ratios (the multiplier whereby banks leverage deposits into loans), taxation and central bank interest rates. Taxation and interest rate changes affect populations differentially, according to wealth distribution patterns. The wealthy dislike inflation, but they are scarcely fonder of tax rate increases. From the wealthy person's point of view, the best scenario would feature modest incomes and zero inflation - possibly even gentle deflation so that a portion of equity increases occurred without tax exposure.

Low inflation/low interest economies have an additional `wealthy benefit'- they transfer a larger proportion of government program spending to earned incomes.

Governments' official purpose is to maximize economic activity while controlling inflation. According to Statistics Canada, the Bank of Canada's target range is 1% to 3%; and, since 1992, inflation has averaged 1.5%. If a choice must be made between economic vigour and controlled inflation, governments, especially conservative governments, will do whatever it takes, even if the consequences include recession and unemployment.

Fortunately for economic growth and the stock market, inflation has not been a problem in North America for more than a decade, and interest rates have remained correspondingly low. This unexpected docility has been accompanied by a steady fall in the rate of growth of (M2) money in circulation (M1 + savings and fixed term deposits). M2 growth (10 per cent per annum in 1983) fell to almost 0 per cent by early 1995. Non-monetarists point to this as evidence that inflation drives M2 growth, rather than the other way around.

Not everyone agrees. Because monetarism is out of fashion, Friedberg claims that inflation has been out of control since the mid 1990s. Why, then, have North American economies been so well behaved? Friedberg suggests that global events, coupled with contingent North American fortunes, have allowed governments to go on whistling in the dark. The analogy might be with a sailing ship maintaining a desirable course because of fortuitous wind direction and sail positioning - even though the captain has sworn off using the rudder. The craft may be proceeding in the right direction, but it is not under control and things could go awry at any time.

Factors keeping the economic ship on a desirable course (at least until 2002's stock market correction) included North America's trade deficit due to depressed commodity prices in 1997 and 1998, coupled with strong stock market performance. (The former made products cheaper, the latter sucked money into investment portfolios that would have otherwise chased goods.) As well, until 2006, consumer prices have been restrained by the strong U.S. dollar.

Sounding rather like Karl Marx predicting big trouble, (albeit making the minor charge of blundering rather than bourgeoisie exploitation) Mr. Friedberg predicted an imminent bout of inflation, followed by recession as governments attempt to regain control, over-zealously deploying their remaining interest rate tool.

Friedberg may have underestimated North America's policy makers. There are important reasons traditional monetarism has become less important, but they do not mean that monetaristic initiatives are not in play. An unnoticed balancing of inflationary and disinflationary forces has been occurring. To take an obvious example, government-convened gambling complements the inflation-dampening factors Friedberg alludes to. The reason is simple: monies subscribed to gambling activities are not available to purchase (demand) the goods and services making up the Consumers' Price Index and other measures of inflation. How much is involved? Canadians aged 18 and over spent $447 per capita in 2001, compared with $130 in 1992. In aggregate terms, revenues (after prizes) from lotteries, video lottery terminals and casinos reached $11.3 billion in 2002, four times higher than a decade earlier.

Far more important than gambling in terms of consumers' capacity to demand goods and services, the advertising and embellishments festooning the commercial world are simultaneously inflationary and disinflationary. On one hand, they drive prices up (cost-push inflation) even as they diminish demand-pull inflation. North American commerce appears to have crossed a threshold. The way business is conducted elevates overhead costs to the point that the net result is deflationary. (To some extent, this depends upon automation and globalization simultaneously reducing employment opportunities and remuneration levels.)

Admittedly, these are ill-defined notions. It should, however, be possible to quantify factors and investigate relationships ... a project someone qualified will have to undertake. The argument I wish to make is that we have erred by treating economic activities as if they were homogenous (so that advertising expenditures, for example, have the same accounting status as raw materials and labour). This has opened the window to de facto monetarism of the worst sort - regressive, environmentally destructive and politically destabilizing.

This is a new problem. Until perhaps fifty years ago, the overhead burden represented by retailing activities did not impede economic vigour - in fact made it possible. Money would have been of little use without a distribution network communicating the nature of products and mediating transport between producers and consumers.

In other words, until the middle of the 20th century, the North American economy practised a spontaneous, wholesome monetarism as a natural adjunct of `getting started'.


Everyone agrees that rampant inflation is destructive and must be avoided. However, economists and politicians ought to be equally alarmed about the veritable thicket of inflationary and disinflationary factors that have been springing up. An issue not often thought about is the difficulty of maintaining wholesome levels of competition. The ongoing battle between the US government and Microsoft Corporation dramatizes the problem. Computer software would seem an ideal laissez-faire arena, yet the American government has deemed it necessary to intervene on behalf of small corporations and consumers. The point is, rife with covert inflationary and deflationary factors, modern economies have evolved away from the sort Adam Smith envisaged, in which `the invisible hand' could be trusted to discipline and reward economic players. Thus, Microsoft coupled good luck, a mediocre product and the propensity of consumers to respond to advertisers to dominate the operating system/software market. This is relevant because global markets are increasingly reserved for corporations with enormous luck, great chutzpah or deep pockets. (Even deep pockets do not guarantee success: Canada's Corel Corporation once boasted an advertising budget of $50 million per annum.)

The point is that promotional expenditures and other discretionary corporate practices are disinflationary. Embedded in the costs of goods and services, such expenditures transfer billions of dollars from consumers and diminish the need for traditional monetarist interventions.


The new monetarism features another covert element: the consequence of having a growing proportion of wealth in a few hands. The effects of this skewed distribution have been working through economies and political agendas for decades. The most obvious result is depressed demand, which cannot be compensated for with rising personal debt levels or conspicuous consumption by the wealthy - no matter how valiant the effort.

The gap between rich and poor in America is wider than at any time since the Depression, with the wealthiest 1 per cent of American households owning 40 per cent of the wealth while 80 per cent own just 16 per cent.

Since economies consist of supply/demand relationships, extraordinary wealth accumulation by ten per cent of the population is an economic depressant. Increasingly hard pressed to find markets, corporations have been overrunning one another, striving for economies of scale and calling for global trade arrangements maximizing access to cheap labour.

Nothing is more inspiring than the fervent desire of corporation executives and political leaders to provide "jobs" ... the public virtually drowns in this display of compassion, while the same people devote themselves to removing jobs to high-repression, low-wage areas abroad, through corporate decision or government policy.

Noam Chomsky

Although such measures make sense at the micro-economic level, they exacerbate macro-economic problems. More and more, 1st world employees are being marginalized. Simultaneously, 3rd and 4th world populations are being co-opted into productions of interest to western markets. Under the glare of global accounting, the struggles of beleaguered workers, no matter where, translate into ever-fiercer competition for remaining well-paid employees. Any corporation downsizing, outsourcing or automating in the interests of efficiency is counted excellent if agendas are achieved through attrition, perhaps bolstered with retirement incentives. Over the next twenty years, this strategy seems certain to eliminate an economically crippling proportion of `good jobs' without harming a single employee. The far more politically manageable victims are the future millions lacking any sense of entitlement or outrage, never having had `such a job'.

Another consequence of covert monetarism has been the shake out of legacy retailers and destruction of downtown sectors. Many of these properties were of historical and architectural significance. (The commercial buildings replacing them seem to have been designed with shelf lives corresponding to amortization periods set out in Income Tax Acts.)

Consumers must now transact their affairs in centers that are indistinguishable from one another. The `shopping experience' has become as homogenous as the products consumed. McDonald's outlets in London, Ontario are identical to those in Vienna, Athens, Austria, Greece and, of course, London, England.

Some will object that shopping malls offer economies of scale, convenience and social opportunities. Big Box stores compete with product variety and competitive prices. However - rather than an argument that corporations are sensitive to consumer preferences - the `Big Box' phenomenon can be interpreted as evidence that consumers had little interest in `mall shopping' in the first place.

When traditional stores vanished (after being abandoned by shoppers mesmerized by promotional campaigns) consumers had to go somewhere.


All of this may be moot. The retailing sector is engaging in a `virtual experiment' that will test whether consumers chose mall shopping over legacy outlets. Electronic retailers (e.g., STORES EVERYWHERE.COM) are replicating circumstances a century ago when retailers set up outlets in every hamlet and intersection across North America. E-stores are similarly inexpensive and unobtrusive. They can be constructed for a few thousand dollars; and, like old-time general stores, must be sought out by turning on computing devices, engaging in searches, typing in URLs.... Of course, there are differences: one cannot fondle merchandise and must wait to take possession - although Canada Post offers next day delivery and e-bay is hooking up millions of buyers and sellers for next to nothing. As well, many services cannot be transacted at a distance (although phone-sex workers are pushing the envelope).

The point is, web-based retailing could accomplish the second transformation of the `shopping experience' in living memory. Like the first, entrepreneurs and corporations are driving this from the top down. Electronic retailing offers the last word in downsizing and cost cutting - people displacing, nominal infrastructure, highways transformed into storage space cum distribution network....

This means still more of the costs of doing business transferred to taxpayers from consumers - a development catalysed by consumers' flagging capacity to support traditional commercial practices.

Unfortunately - if mall and Big Box history is any guide - advertising and other arbitrary expenditures will use up associated cost reductions. Internet retailers are already experimenting with new strategies. Data mining, push technologies, computer cookies ... allow promotions tailored to individual preferences gleaned from cyber-trail databases. All of these developments mean that those now employed in traditional sales and support occupations will have to go - just as tens of thousands of Canadian bank employees vanished in the 1990s.


If successful, electronic storefronts will accelerate globalization by transferring 1st world retailing into hyperspace. In this world, very few persons earn wages. Instead there are three-dimensional vistas adapted from computer games, avatars shopping and interacting with one another, simulacra, and holograms.... Shopping malls and Big Box stores weaned consumers from expecting familiar faces and on-site help. Decades of impersonal shopping, marginal service and, now, product support call centres ... have made it more likely that consumers will take the step into virtual stores. If this occurs, big box stores and malls will suffer the fate they meted out to downtown retailing. They will not vanish completely of course; just as a retailing stub lingers in downtown America; and recidivists can occasionally be spotted going somewhere with horses and buggies.

Along with globalization, electronic retailing will lend further impetus to fiscal and social conservatism. For 3rd and 4th world workers, e-trade may well write fini to their hopes of anything approaching the distributed well-being 1st world nations have, until recently, been enjoying. The self-fuelling, therefore insatiable, need for micro-economic cunning on the part of western corporations and governments is the greatest threat to well-being ordinary human beings have ever faced.


Many political, economic and military adventures can be traced to skewed wealth distribution - undoubtedly the most potent monetarist factor in existence. To take a current example, the last half of the 20th century years saw enormous public debt growth in both Canada and the USA. In 1997, Canada's net federal debt reached $588 billion, to which must be added to provinces' and territories' debts. Around 1990, politicians began worrying about the size of the debt and ongoing deficit financing. Statistics Canada described the results:

In 1994, the federal government undertook a massive program to reverse the nation's financial course. Because of a reduction in program spending and a growing economy, Canada was well on its way to achieving a financial turnaround before the decade ended. By 1997/98, the government recorded a surplus for the first time in 28 years; the following year marked the first back-to-back surplus in almost 50 years. With consecutive surpluses continuing into the new century, the net federal debt had been reduced to $534 billion as of March 2002.

A less sanguine explanation is possible. Why was deficit financing embraced in the first place. The answer may extend beyond infrastructure needs, public pressure or imprudent governments. Three facts are relevant:

* For the last half-century, both Canada and United States have boasted a significant wealthy population.

* Public debt represents a safe, lucrative investment.

* The wealthy sector's growing share of total wealth has meant a falling-off of traditional investment opportunities.

The evolution of public debt may represent governments' interest in public sector employment and public debt to replace domestic investment opportunities lost to globalization.

With regard to `safety nets' - unemployment insurance, pension programs, health care ... such provisions facilitate economic vigour and reliability by encouraging people to make educational choices targeting specialized employments. Canada is proud of its health care and safety nets, but they may exist because Canadians are more cautious (than Americans, for example). Left to their own devices in an often snowy and always recalcitrant climate, Canadians might have put so much aside that the business of generating wealth and permitting it to be pumped upstairs might not have gone as hoped. Safety nets are thus de facto monetaristic devices: they encourage people to work like horses and spend like asses.


In the last half of the 1990's, federal and provincial/state governments in Canada and the USA significantly reduced deficit financing. In Canada, this has necessitated claw-backs of social programs and reduced transfers from federal to provincial to municipal governments. Neither country has significantly reduced public debt however. Rhetoric notwithstanding, a reasonable prediction is that this will not occur. Any significant reduction of public debt would deepen the wealthy sector's investment crisis. Controlling deficit-financing amounts to stabilizing public debt at what is deemed a safe upper limit.

This may be the best consumers and taxpayers can hope for. To be sure, if trillions of dollars of public debt were repaid, enormous debt servicing costs would be removed from taxpayers. This would open up many possibilities. However, the wealthy sector's resulting need for investment opportunities would trigger more technological development, electronic retailing and other `workforce rationalizations'- all bad news for most people.


In the meantime, Canada's federal and provincial governments have recently been plumping for the privatisation of public sector services and selling off of public assets. Unfortunately, there is little evidence that for-profit organizations are more efficient than the public sector - even before necessary extra surveillance and inspection costs are factored in. However, privatising is a way to replace investment opportunities lost to globalization. Privatising and corporate amalgamating are also symptomatic of an economy suffering from anaemic demand because covert monetarism has been managing the inflation problem in mischievous ways.


It is not difficult to find statistics applauding the number of new millionaires western economies are spawning. What are rare are frank discussions about the way corresponding failures of general demand are being handled: Neo-conservative responses sharpen the wealth-distribution gradient. Government-convened gambling and superfluous distribution expenditures further erode the usual person's purchasing power.

Covert forms of monetarism also demonstrate cross-fertilization. Financially hard-pressed populations are often tempted to gamble. Such `investments' received an enormous credibility boost when governments got involved in gambling and funnelled (some of the) profits to charities, sports activities and other good works. Canadians could imagine that they were contributing, even as their `investments' ($447 per capita in 2001) made economic matters worse.


There is evidence that we are entering the end game - the coup de grace transmogrifying western economies from an upper/middle/lower structure into the rich/poor split characterizing most nations throughout history and across the world. One important signal involves translating rights claims - demands for support because food, shelter and medical attention are legitimately due to persons - into comparable sums under the aegis of food banks, United Way campaigns and other charities. The reason is simple: people receiving charity are more tractable no matter how desperate their lives becomes. Governments interested in deflecting political problems (because they foresee matters getting worse?) are more interested in extinguishing rights claims than gun registry programs. (Of course, gun registration is something that can be talked about!) Where there is a will to do damage, there is a way.

For those interested in cooking the `poor's geese', conservatives everywhere recommend the CRUEL GRUEL with JUST DESERTS recipe:

* Describe welfare recipients and unhappy `interest groups' as ne'er do wells rather than as victims of de facto monetarism.

* Add liberal quantities of hot tongue.

* Supplement, as required, with interest rate adjustments, free trade agreements and targeted claw backs.

* Stir things up until decent people are brought to a boil.

* Add good life condiments: Bingo! Lotteries! VLT's...!

* Finally, add food banks, church suppers, and rescue missions on cold nights.


In spite of micro-economic stratagems, tax cuts, claw backs, the harvesting of 3rd and 4th world labour ... 2001 and 2002 were devastating years for western economies. Beginning in 2000, Internet and technology companies suffered a massive `correction'. Nortel, Canada's flagship technology corporation flirted with bankruptcy, going from over $120 per share in September 2000 to $.67 cents in October 2002. Britain pondered whether to adopt the Euro or the American dollar. Others recommended eliminating government involvement in domestic and international economic activities B a view summarized by Martin Murenbeeld in the Financial Post, January 11, 2002.

Once the Canadian government decides to leave most spending and investment decisions to the private sector the Loonie will rise and Canadians will become richer as a result.

Unfortunately, such recommendations suffer from the same `fallacy of composition' driving political and economic affairs into one crisis after another. For at least fifty years, economies have operated according to the micro-economic behests of corporate CEOs and wealthy interest groups. They have been using up natural resources, pollution sinks and public health, not to mention reservoirs of good will, education and infrastructure achieved in gentler times.

The most critical erosion involves the failure of distributed well being ... the backdrop against which the commercial world has been prospering since the 18th century's Industrial Revolution.

In a world wherein too much is owned by too few, political processes are inevitably corrupted. As this occurs, more power devolves to corporations, often already in crisis because they have left too little on the table. The wealthy sector's response is to continue what they know best - attacks upon target populations - an ambition as grim and irrational as a cancer storming its host's remaining vitality.


By now it is should be clear that I suspect wealthy interest groups of `spontaneously contriving' replacements for traditional monetarist tools. Since this sounds like conspiracy theory, I will suggest a few economic and political benefits the wealthy sector enjoys because of covert monetarism. These benefits are sufficiently interesting to wealthy individuals that they can be seen as triggering de facto collusions, without the need for formal structures, agendas or even articulated awareness. Controlling inflation without having to resort to interest rate increases is the most important of these benefits. Economies can be likened to fires in well-engineered stoves. The goal is reliable heat and energy. If inflation is the rate at which the fire is burning, monetarist devices, including interest rate adjustments, can be regarded as the damper controlling the rate of combustion.

One might ask what is wrong with simply using of such a damper, given that the mechanisms and precedents are all in place. The answer involves the benefits of non-interest inflation controls. Minimizing tax exposure on interest-driven income is an obvious benefit. As well, interest-rate increases have unhappy consequences for stock markets because good returns on interest-bearing investment become preferable to risking money in the stock market. Government-convened gambling, convoluted distribution practices and frivolous commercial practices reduce consumers' capacity to purchase in exactly the way interest rate increases depress demand.

These measures have one other desirable outcome. The wealthy sector risks destabilizing its apple cart should wealth-generating processes leave too much money distributed across populations. The reason is simple. People cannot be trusted to spend their money properly. Too much wealth might lead to investments in tools, technologies and communities extricating the hoi polloi from the clutches of governments and aristocracies.

The trick has been to spread enough money around to occupy the industrial/commercial complex, but not so much that individuals are tempted to liberate themselves. Government-convened gambling falls into the excellent strategy category. It has the desired anti-inflation benefit, while draining away dangerous disposable income.

A similar analysis applies to discretionary commercial expenses - advertising and other arbitrary activities. The costs of these projects embedded in the price of goods and services, reduce consumers' purchasing power - and the likelihood that they will get up to things on their own recognizance.

One of the secondary benefits of covert monetarist devices is their capacity to apply themselves automatically. Barring addiction problems, well-placed gambling opportunities adjust amounts so `invested' according to whether basic needs have been met. One sees why it would be desirable to institutionalize and legitimate such `opportunities'. They would then be are well positioned to achieve virtually autonomic anti-inflation adjustments. In comparison, after-the-fact interest rate adjustments are and crude. Similar feedback loops can be seen in the advertising and discretionary expense arena.


The suspicion that covert monetarist tools are operating with some measure of deliberation is encouraged by an oblique consideration. Governments profess to be concerned about profligate energy consumption and pollution. Yet significant repairs could be achieved with a simple legislative change. Certain commercial practices, i.e., advertising and activities having to do with presentation or retail aesthetics, could be removed from the list of expenses chargeable against gross income. Such activities could continue. (How could they not under freedom of expression laws?) However, they would henceforth be paid for out of profits, not customers' pockets. This seems to be what `freedom of expression' requires! Since such obvious possibilities have not been debated, much less legislated, a reasonable suspicion is that the covert monetarist function of commercial festooning is well understood.

Covert monetarisms offer further macro economic benefits. Interest-rate adjustments impact balance of trade and exchange rate figures. The Canada/US trade relationship has been influenced for decades because the American dollar has been worth considerably more in the Canadian dollar. If interest rates had been raised to control inflation during this period, there would have been trade consequences - something we began seeing in 2003 and 2004 as the Canadian dollar gained against its American counterpart.

Low interest and inflation rates also minimize paying income tax on money a second time to offset the consequences of inflation - a benefit especially important to those with estates and investment income.

There are political benefits as well. If the purchasing power of 1st world consumers was maximized because retailing was conducted with an eye to efficiency and throughput, the results would be doubly provocative to workers in 3rd and 4th world nations. One of the challenges facing the wealthy sector involves organizing the global economy so that it continues to generate and harvest wealth for them. Political unrest would be heightened if 3rd and 4th world populations observed 1st world populations enjoying even better appointed lives - as they could if commerce was carried out with an eye to efficiency and ecological restraint.

In other words, wealth harvested from natural resources, new technologies, and the exploitation of 3rd and 4th world populations must be prevented from `trickling down' economic ladders (or constituting a `rising tide', to use the late President John Kennedy's metaphor). The consensus seems to be that equity not destined for well-to-do accounts is best evaporated in frivolous commercial activities. Workers eking out $1 a day existences would be even more volatile if they saw their bleak lives funding real wealth for ordinary people in the 1st world.

Thus, the modus operandi is to characterize failures of general prosperity as a perhaps unfortunate, but entirely innocent, feature of the New World Order.

Gambling, frivolous commercial activities and public debt are important elements in this remarkable deception.