There is nothing new about the perils for peace and liberty which stem from the combination of monetary inflation and technological revolution. Indeed, we can find a prime illustration at the dawn of the modern age during the Northern Renaissance in Europe.
But first, towards better describing the peril, I urgently propose a new entry into the economics dictionary: techno-asset inflation. The definition is this: techno-asset inflation is found where monetary inflation and technological revolution interact to produce virulent asset inflation.
The positive supply shock emanating from the technological revolution bears down on goods and services prices. This expands the scope for monetary inflation by impeding an intensification of its symptoms in goods and services markets. Serious symptoms can trigger serious popular resentment. Under these circumstances it is in asset markets rather than goods markets that symptoms of monetary inflation are likely to become most severe. (Note that many asset inflations occur outside technological revolutions; some of these are twinned with positive supply shocks in the form of previous shortage whether due to for example famine, war, or cartel action, going into reverse).
Asset inflation in some of its phases can be popular. That is the case, for example, when there are widespread wealth gains which outweigh—in electoral arithmetic—the diminished or negative returns on government bonds and money. Simultaneously asset inflation might well be beneficial for some key actors, including—with some overlap— big government, election campaigners, crony capitalists and monopolists. These benefits, though, are problematic for a free society. And the malinvestment which is intrinsic to asset inflation eventually takes its toll on prosperity and can stimulate political extremism.
The asset inflation threat is now at a high level—comparable to dangerous episodes in history all the way back to the Northern European Renaissance in the sixteenth and early seventeenth centuries. Yet there is no apparent awareness of the peril in the news about the Fed’s evolving policy framework under its new Chair. Instead, the focus of official communication to date has been the promise of a zero-tolerance policy towards “persistently elevated” inflation.
The best that sound money advocates can now reasonably hope for—not expect—from the task forces at the Fed would be clues that this institution could make a start on tackling its in-built historic deflation phobia. Meanwhile, the laboratory of history does not justify optimism with respect to the menace of techno-asset inflation The history goes all the way back to the Great Monetary Inflation which accompanied the Northern Renaissance in Europe of the sixteenth century and extending into the early seventeenth century, when asset inflation in Holland emerged as the star symptom.
The technological revolution then had at its core the printing press, great strides in scientific knowledge including astronomy, cartography, and actual exploration especially of the Americas. The monetary inflation with its source in precious metal inflows from Latin America went along with goods inflation averaging 2 per cent annually (in terms of gold prices of goods). The underlying monetary inflation (spawning goods and asset markets) was fiercer overall than the 2 per cent statistic (itself a highly imprecise estimate) might suggest, given the camouflage in goods markets. The camouflage resulted from the positive supply shock related to globalization (new lands discovered and brought into the global economy) and productivity gains (increased knowledge and transmission of information via the printing press).
Monarchs and their governments gained fund-raising advantage from the technology revolution coinciding with the precious metal inflows. There were three channels:
First, the underlying real increase in demand for gold and silver coins as explained by the rise in living standards; this was alongside individuals’ demand for gold and silver to make good the erosion of real monetary holdings by the inflation. This revenue was most important for governments which could get the gold/silver at well below the cost of mining (for example the Spanish sovereigns from their new lands in South America or the English sovereigns—especially Elizabeth I—from seized Spanish bullion boats).
Second, the scope for a quick rise in inflation-tax revenue from coin debasement, which would have given rise to more public discontent if price inflation (as measured in gold terms) had not been contained by the positive supply shock of technological revolution. This revenue was short-lived and indeed in England Queens Mary and Elizabeth on the advice of Thomas Gresham turned against debasement as practiced by Henry.
Third, the novel and swelling appetite for risky loans—as North European wealth-owners sought to get a high nominal return on loans to compensate for inflation whilst underestimating the risk of default (in modern terms we would describe this as desperation for yield). There was no such thing then as risk-free government debt; all sovereign debt was inherently high-risk. The European center for this loan market was Antwerp (whose population was then larger than London).
Tudor monarchs, Holy roman emperors, and Spanish kings raised funds in the rapidly growing Antwerp loan market. Henry VIII used as his Antwerp agent the merchant Thomas Gresham (of “Gresham’s Law” fame) and his Chancellor Thomas Cromwell had great business connections there. Of note, the Low Countries were the epicenter of economic growth in Europe at this time with corresponding wealth gains; and these countries were variously under the control of Spanish Monarch or the Holy Roman Emperor. All the easier to raise funds to wage war, which was happening now in the context of the Reformation, which Spanish Kings and Holy Roman Emperors sought to turn back.
Asset inflation also had the usual dimension of land prices and land speculation. In England, no doubt this facilitated and incentivized the grab of land from the monasteries by Henry VIII who sold it to a burgeoning merchant class. A terrifying example of the sovereign and religious authorities gaining from asset inflation, in the form of raising capital taxation including confiscation was the Inquisition, most of all in Spain, which financed itself by seizing the property of its victims.
Fast forward to the two great techno-asset inflations of the digital revolution alongside the monetary inflation of the 2 per cent inflation standard, both now in their fourth decade. The first ran from say the mid-1990s to the mid-2000s; the second from early in the second decade (say 2012) and is still on going. The increased supply of goods and services made possible by the ongoing revolution has evolved over time. First early in the revolution there was the general productivity surge in the US and most other countries. Then came the gains from globalization made possible by IT (and also driven by the crony politics of China’s accession to the WTO) alongside rapid productivity growth in the countries acquiring comparative advantage (think of Asia and microchip production).
As for all techno-asset inflations, this has been a good time for big governments raising funds. In modern idiom, persistent camouflage of monetary inflation in goods and service markets has encouraged the Federal Reserve and foreign central banks to pursue manipulated low interest rates. These central banks (and those to whom they answer politically) have been counting on (incorrectly since 2021 for multiple reasons) the camouflage continuing even despite some skepticism in some quarters about this AI phase. They have imagined that their own monetary skills under these circumstances could prevent consumer prices breeching their targets in a way which would trigger popular resentment. Credit risk premiums have been abnormally low for most of the time. Hence there has been a bulge in government indebtedness.
Monopoly capitalism has flourished. And so has crony capitalism. Cronies are heterogeneous, including criminal elements related to businesses which are in effect quasi-Ponzi-schemes in the epicenter of manic speculation. Think of the role of Enron as top election financier of George W. Bush in 2000 or FTX cryptocurrency exchange as second largest contributor to the Joe Biden campaign of 2020.
And there have been the capital levies and confiscations facilitated by asset inflation. These include crucially a non-indexed capital gains tax and a downward manipulated level of interest rates subject to income taxation which makes no allowance for inflation. Governments have sought to increase the effectiveness of such levies against obvious payer-resistance by attacking traditional rights to bank secrecy and implementing international exchange of information on capital holdings and interest incomes.
The great asset inflations of Europe in the sixteenth century ultimately led on to the most fantastic one of all in Holland, including the tulip bulbs and the stock in the Dutch East India Company. It took the invasion of Holland in 1672 by the armies of Louis XIV to bring a general crash across all asset classes. Possible ends to the present asset inflation are wide-ranging. The scenario of Chair Warsh and his working parties pre-empting political forces in tackling the threat of asset inflation are implausible.
