** For those that are not familiar with the way the money currently cycles throughout the economy, I have attached a few explanatory videos at the end of this article that you may find educational**
Historically governments have used monetary policy in an attempt to smooth out the economic bumps created by various events (war, embargos, drought, etc.). Since 2008 the onset of the Great Recession, overnments around the world have been and still are pumping massive amounts of money into the financial sector via a monetary policy tool called quantitative easing (QE). Unfortunately the global economy has not been responding to the stimulus as it has in the past. The global economy continues to lumber along with many economic forecasts recently turning negative. The reason/s that QE is failing to generate the expected demand and growth is hotly debated; many opinions explaining why QE is no longer working, cite debt, inflation/deflation, velocity (turnover), interbank lending and personal savings rates. There is no doubt that all these factors influence global growth and demand however in this case they are more likely a result of the majority of investment capital going to automation. This is likely, logical, and inevitable due to, the nature of the system itself, and automation’s superior risk / reward profile. Below I will explore in more detail my logic as to why QE is no longer working, highlight the structural flaw and propose one potential solution to this issue.
Automation:
Almost all sectors of the economy are at some stage of automation with many being in an advanced stage. I have personally witnessed many processes that have been automated in the financial, mining, energy, and agriculture sectors. Having spent the bulk of my career in the financial sector I identified the following problem.
The failure of QE is structural. The evolution of the path Central banks use to conduct monetary policy has included greater numbers of people and institutions within each evolutionary step, so that greater numbers of people can benefit from these large transfers of wealth. This system worked well, with the majority of the capital being distributed to the real economy, supporting each successive rung along the way. Traditionally this has resulted in greater economic growth and all it’s benefits as well as side effects (asset bubbles, etc.). Unfortunately the system no longer behaves this way; the dawn of the age of automation has cut out many of the rungs QE used to touch, altering the results of the policy.
Here is a simplified description of the evolution of the cycle of money starting from the oldest to the most recent manifestation:
- A national Central bank borrows money- Gives it directly to the people to stimulate demand and economic activity
- This process has evolved into: Central bank borrows money – Lends it to the banks – The banks lend it to the people – A healthy percentage of that money reaches the real economy stimulating demand and economic activity
- Next reiteration of this process is as follows: Central bank borrows money – Lends money to the banks – The banks invest the majority of it in businesses via financial markets – The banks also lend some to the people – A healthy percentage of that money reaches the real economy stimulating demand and economic activity
- The current situation is: Central bank borrows money – Lends it to the banks – the banks are investing the majority into automation– Lending some to people – The amount of money being invested or lent to the real economy is insufficient to stimulate demand and growth
Automated (aka algorithmic) trading is a great example of the attractiveness of automated processes; computers are more accurate, more efficient, more reliable, and react at near light-speed. The superior risk/reward profile of automation makes this trend inevitable. The numbers support this theory. As Haynes and Roberts state, “the three product groups with highest automated participation are, in decreasing order, FX (80 percent), equities (67 percent) and interest rates (62 percent). November 12, 2012 – October 31, 2014.” Most estimates of stock market activity lie between 50 – 70% and the profits are also enormous.
Redirecting capital in this manner has effectively cut out much of the real economy, thus changing the expected economic reaction. This CNN Money story also points out that there is a problem with QE policy and introduces a monetary policy tool called helicopter money that puts money directly into the hands of the real economy. I am happy to see that policy makers are finally considering policies that will inject money directly into the real economy.
The near future is going to continue to be extremely challenging for people who are trying to adapt to the inevitable automation of our society. The sooner we identify problems like this and admit that we have made a mistake; the sooner we can proactively respond and make a difference in people lives.
So what can we do about it? Awareness! Pass this information on, learn more about it, discuss it with others.
Be Seeing You!
Update!
I thrilled to report that the Bank of England (BOE), the European Central Bank (ECB), and the US Federal Reserve (Fed) are implementing and officially considering public money creation policies such as helicopter money!
For more information please visit Positive Money!
Explanatory Videos
Quantitative Easing – Financial Times, Bank of England, Marketplace
Initial Public Offerings – IPO’s,
