Happiness and small green pieces of paper

However, one example of what Ford himself observed was that the Earth had a clear problem, namely: "Most of the people living on it were unhappy for pretty much all of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movement of small green pieces of paper, which was odd because on the whole it wasn't the small green pieces of paper that were unhappy".

The book was published in 1979, and the economic environment at that time was marked by high levels of inflation in the aftermath of an oil crisis and a collapsed monetary system, but the observations feel just as relevant today.

Never before have there been so many small green pieces of paper in circulation. Since the US subprime crisis, and the subsequent collapse of Lehman and rapidly rising unemployment, the world's central banks have used all available means to boost their economies, not least by trying to stimulate increased risk through a lower price of money. When this provided insufficient impact, the next step was to introduce "quantitative easing". This simply means increasing the amount of money in the system. It can take the form of small green pieces of paper, but in a modern society this does not have to be through physical money. The principle, however, is the same.

If we look at the growth in money supply over the long term, we can see a number of clear trends. In the 1970s and 1980s, money supply increased rapidly and inflation was high. To curb inflation around the world, inflation targets were then introduced by a number of central banks, which quite quickly had an impact in the form of a lower rate of growth in the money supply and a period of more moderate inflation.

The basic definition of inflation is relatively simple. If the amount of money grows faster than the real output of goods and services, inflation arises as more money has to "chase" a fixed range of goods and services, and their prices go up. Of course, the opposite also applies and if growth in the money supply declines, buying pressure decreases, assuming that the underlying growth in society remains constant. However, we have become used to measuring inflation in increasingly specific ways. The value of a typical "basket" of goods is measured over time, and this provides the basis for a "consumer price index", or a kind of inflation on the specific goods that an average consumer buys. It is this measure that represents the inflation we talk about in our day-to-day lives. However, this does not include price changes for other types of assets, which can be bought for the money not spent on milk, lettuce, carrots and pâté, such as the price of financial assets.

Since 2009, growth in the global money supply has gained considerable renewed momentum, even though growth in the real economy has been moderate or even weak. However, this has not resulted in any inflation, which may seem strange. The number of small green pieces of paper is increasing, but the basket of goods and services is not increasing significantly in price. Moreover, this is a fact not only in Sweden but also in the rest of Europe, in the USA and, for some considerable time, in Japan.

So where are all the small green pieces of paper going?

Since January 2009, the Swedish consumer price index (CPI) has risen by a total of 5.3 percent, which means less than 1 percent per year throughout the period. Over the past three years, prices have basically remained unchanged. This means that there is no measureable inflation in the consumer's shopping basket.

Looking at other asset classes, however, something has indeed happened. Property prices have risen across Sweden by about 40 percent, and in Stockholm by some 55 percent, since 2009. However, this this has not led to a higher cost of living since interest rates have fallen over the period. Over the same time, the Swedish stock market has yielded 240 percent, including dividends. Even an investment in a Swedish bond fund over this period has provided a return in excess of 30 percent. A certain part of the return on equities and bonds has been through dividends and yields, but a large part has been through an increase in asset prices. Quite simply, these assets have a higher price today since interest rates are lower and there are more small green pieces of paper.

During this year, expectations for the US Federal Reserve have swung from a belief in interest rate hikes during the summer to an expectation of no rise at all during the worst unrest a month ago. Over the past week, expectations have again intensified for an initial rate hike in December.

Back to Ford Prefect's finding that "Most of the people living on it (Earth) were unhappy for pretty much all of the time", and unfortunately happiness is difficult to define. However, we can note that Sweden came a creditable 8th place when the Gallup-Healthways Global Well-Being Index attempted to quantify well-being in 135 countries a year or so ago; probably something resembling happiness, in its simplest form. In addition to economic factors, the metrics that were considered as defining a country's well-being were good physical and mental health of the population, a safe environment, social inclusion and a sense of purpose.

What will happen the day interest rates start to rise?

My hope is that is that well thought-out savings act as a foundation stone, and the fantastic performance of recent years is not taken for granted. In combination with the privilege of living in an environment where both security and the opportunity for social inclusion are better than in many other places around the world, perhaps our relative happiness can persist, even if the numbers of small green pieces of paper are no longer growing at the pace we have been treated to.

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