Veblen goods and Money supply: Rolexes and Noodles

"In a money supply rug pull, the value capture becomes disproportionately skewed towards the men in the high castles."

If central bankers were entrusted to write an epic, I believe they would base it on Japan, the country that I consider in the modern scheme of things, 'post development' in sorts. As such, I have chosen the most interesting monetary experiment in the world to place my story of two worlds, a world of Rolexes and a world of noodles. So grab your saki, and hold on to your treasury notes as we understand how purchasing clusters develop due to a disproportionate share of value capture of the free money tap.

Let's start with a 48.4 year old persona who's simple pleasure in life is to have a nice noodle dinner after a productive day of work at the office. Let's check how much his paycheque has been supporting discretionary spending:

If we compare the wage growth of our average persona with food inflation, we can clearly see that inflation-adjusted wage had close to stagnated and if we want to specifically want to follow the noodle index, well here it is:

We can clearly see that half an hour of peaceful post-work dinner was eating up bigger portions of the salary pie especially post 2021 when the effect of easy money supply started being felt.

Now let's understand the cash fountain of the country using the following indicators:

M0 Money Supply (Cash): The bare-bones backbone of the money supply in a nation. This includes the cash in circulation and current central bank reserves. This can be considered an indicator of the collective current account of the population and the sovereign.

M1 Money Supply (Cash + Savings): This figure is the most popular and one would find it in most literature. This is essentially the sum of M0, savings accounts, and traveler cheques. This should be considered as the rough indicator for the liquid money market for the common man.

M2 Money Supply (Cash + Savings + Short-term deposit): This includes M1 supply plus short-term deposits in banks. In this case, any deposit of less than one year is included in this amount. These are low-risk debt supplies and help us understand the friction to conducting day-to-day regular businesses/trades.

M3 Money Supply (Cash + Savings + Short & Long-term deposits): Though this figure is not used nowadays, this figure constitutes M2 in addition to long-term deposits and can be considered a good indicator for cash supply for the development of businesses which is risk-taking.

In order to put the money supply in context we must have a look at the purse of the biggest mafia in town, which would be the central bank. As such in the same period the balance sheet of the central bank can be studied in the following graph:

Now, away from the boring stuff, let's study our second persona who stands close to one standard deviation away in terms of age the common man. Consider this persona a 62 year old business owner in Tokyo, who likes to buy a Rolex watch after closing important business deals.

Rolex happens to be the Ferrari of watches and though you might have the money, it is next to impossible to buy a popular model on Retail. As such Rolex happens to have one of the most liquid grey markets and is a classic example of a Veblen good in which the price and demand keep having a positive Pearson correlation.

Scared of the pandemic we all had broken our piggy bank and as in this world all the piggy banks happen to be connected, the biggest one of them tends to export inflation. Japan was no exception to the post-pandemic tsunami of cash while supply chains were constrained, a perfect storm one might say, but the manifestation of this storm is slow.

M0 minus the current account of the central bank represents the disposable cash in the hands of the common man, while M2 or M3 can be considered as the liquid purse of the business owner with some adjustments of course. When the money supply was easy, bulk of it flowed to the men in the high castles and these men understand what money is so they started to diversify their risk, even after that there was enough left in the M3 purse to buy Veblen goods like no tomorrow. Considering Rolex watch prices in the secondary market, it is clear that the prices went beyond crazy territory post-pandemic but even with a lot of cornering efforts by the grey market, prices had an overall upward trend and only broke under the fear of central bank lending rates coming running after M2 and M3 with a stick. While the purchasing power from M0 started feeling the pressure of inflation as wage growth had stagnated post-pandemic, the effect on M2 and M3 had clearly a larger lag which allowed the risk owners enough time to diversify the purse and even go buy the Daytona they always wanted.

"The risk owners comparatively win in ebbs and tides because they consciously sail, rest of us are on autopilot"

Even in developed economies money supply acts like alcohol, which if consumed beyond the level of intoxication tends to start highlighting the already existing characteristics. The development of inequality is nothing new but the tide of comparative money supply that we experienced post-pandemic created distinct clusters of purchasing power. The problem with the clustering of purchasing power is, the general macroeconomic indicators tend to misrepresent the scenario. I believe at some cut-off of the Gini coefficient, we have to start publishing purchasing power indicators backed by access to the specific stream of the money supply.

So may you be eating noodles like me or fighting over your access to the limited edition Grand Seiko, it is important to understand that events have orders of manifestation which are observed with lags, the people who understand the lags of first, second, and third order effects of major world events would keep having the keys to the high castles.