Thursday, December 4, 2008

Money Printing Economics - US and UK as the New Zimbabwe?

I am afraid that I am going to backtrack on my promise to post on the reform of the taxation system. I did mention that I might do so if the news (or events) are of particular significance. The news is indeed pointing me in that direction. In particular I have just read the last weeks edition of the Economist, had an interesting comment posted, and read some news in the Telegraph, all of which discusses so-called quantitative easing.

For those who have not encountered the expression, quantitative easing is the weasel worded expression for printing money.

This from the Economist magazine (a magazine I once had great respect for and for which I am a print subscriber):
'This is where the Fed has already been inventive: printing money to buy all manner of assets. In October it said it would buy short-term commercial paper. This week it unveiled two new schemes: a $600 billion plan to reduce mortgage rates by buying government-backed mortgage securities and the debt of America’s state-sponsored mortgage giants; and a $200 billion scheme to buy the debt backed by credit-card, car, small-business and student loans (see article). This approach could be broadened to other markets that have shut down. For instance, there is little fresh (senior) credit for firms in bankruptcy. If the government can provide that cash, it could stop the coming wave of bankruptcies from becoming one of corporate liquidations'
Apparently, printing money is now 'inventive'. Here is the same magazine discussing Zimbabwe:
'WITH prices doubling every few days, Zimbabweans now spend huge amounts of time and energy preventing their meagre cash resources from completely evaporating. Trying to catch up with galloping hyperinflation, now officially running at 2.2m per cent a year and at least four times faster in reality, the central bank has been printing ever bigger denominations. But it is outrun by galloping prices:'
It may seem odd that the local currency is still used at all. From Z$25 billion to the American dollar at the beginning of this month, the cash exchange rate had jumped threefold within a fortnight. In restaurants or shops, prices are still quoted in local currency but revised several times a day. Salaries are paid in Zimbabwean dollars, still the only legal tender. A minibus driver taking commuters into Harare every day still charges his clients in Zimbabwe dollars—but at a higher price on the evening trip home—and changes his local notes into hard currency three times a day. The local money is losing its relevance.
So apparently the printing of money is a disaster in Zimbabwe, but if Western countries do it, it is 'inventive' and to be commended.

The following is a comment on my last post:
'The press is suddenly awash with the notion of " quantitative easing " the helicopter strategy is now seriously being prepared by the boe and ecb, the printing presses are being readied.

It seems that the govt has no intention of borrowing the money when it is so much more convenient to simply print it.

How do you see this playing out and how quickly will deflation turn to rampaging hyper inflation. Presumably, investors will flee sterling as soon as this policy is enacted.

Will this hasten the end, or will it result in the mother of all dead cat bounces before the structural problems induce the final plunge?'
If we compare the comment above with the Economist, I think I that the anonymous poster on this blog has a better grasp of the situation.

Another commentator a while ago asked whether the UK would follow the US in this policy of printing money. I have this from the Telegraph:
'In what would be a major departure for British monetary policy, the Bank is considering pressing the button on printing presses by engaging in a so-called policy of quantitative easing. It emerged after the Monetary Policy Committee cut borrowing costs by 1pc to just 2pc - the lowest level since 1951.'
As is painfully illustrated by the case of Zimbabwe, printing money is the surest way of destroying the value of a currency. Now the really odd part is that there is a claim in the same Telegraph article that:
'The radical proposals, which are currently being explored by Bank experts, could be put into action within weeks, although they would have to be vetted by the Treasury, which is thought to remain sceptical. '
As I have already pointed out in previous articles, there are storm clouds on the government borrowing horizon. The article in the Telegraph proposes that the printing presses may get started in a few weeks. This is about the time that I predicted a government debt default, and at which time I suggested that the government would be faced with either - you guessed it -printing money, or default. Bearing this in mind, the idea that the treasury opposes this move looks to be very dubious.

Now we come to the crux of it. If the government prints enough money, this will provide an potentially unlimited amount of liquidity to the banking system, and the banks can then use that money to buy government debt, thus financing government borrowing. Meanwhile, the government can continue to service its expenses and keep repaying the debt owed to overseas creditors. In other words, the government will appear not to default. However, overseas investors will not see it this way. They will see it as it is - a default. Instead of failing to repay, they will be repaying the debt obligations in what can only be termed 'comedy money'.

At this stage, some readers may be tempted into thinking that this is all well and good. UK Plc is the winner, and those poor foreigners lose out. The same argument can be said for the US and other countries that go down this route. However, as we can see from Zimbabwe, this is not a winning situation. The first problem is that the currency will collapse, making every single import into the UK horrendously expensive, thereby impoverishing everyone. The second is that the devaluation will destroy the value of savings and investments. Thirdly, you end up with a currency in which no one has confidence, even leading to a move to barter, much as is the case in Zimbabwe.

The people who appear to gain most are those who have huge debts. They will see their debt diminish with the hyper-inflation, but this will also mean that nobody will lend any money, including investing into businesses, except at insane rates of interest, but even then very rarely (excepting the government who can just print more to lend, thus enhancing the hyper-inflation). I pointed out in a previous post that the value of a currency is entirely based upon confidence, and the loss of confidence means that there is no more saving, no more investment, nothing but the most crude economic activity fixated upon immediate consumption before more value is lost in the currency, and finally with money fleeing the country in search of a safe haven.

It is a situation in which the cautious and responsible get burned, and the spendthrifts win. However, even the spendthrifts lose in the end, as the general economic collapse hits everyone. This, as the anonymous commentator has identified, is a recipe for complete disaster. I seem to remember another commentator asking whether there would be food shortages, and my suggesting it could not get that bad. Getting the printing presses started is a good road to take you to that situation - though I still do not think it will get that bad (I hope).

I will return to the anonymous poster's question, which was:
'Will this hasten the end, or will it result in the mother of all dead cat bounces before the structural problems induce the final plunge?'
I will confess that I am not sure of the answer here. It all hinges on confidence, and how quickly it evaporates, and how quickly the currency sinks on international markets. That will, in part, be determined by how quickly the banks churn out the money, how they spin it, and how long it takes before everyone gets wise to the damage that is being done. There may be a bounce, but I can't see it lasting.

The one certainty is that it will make an already catastrophic situation even worse. When I predicted the default all that time ago, I did think about the option of printing money, but saw it as a last resort to pay government workers, whilst the government tried to scale back expenditure. This is different, as it is an attempt to print the government out of the black hole, and will just lead it deeper into the hole. In both cases it is an act of desperation, but doing so before it is the last resort has the suggestion that people actually think that this is a good idea.

That is very scary indeed.

Note 1: Pocmloc asks me this about the forthcoming taxation post (about half written now).

'I noted your past welfare proposals. have you ever done any analysis of ideas along the line of flat tax/national income/no benefits schemes? They seem superficially sensible but no one takes them seriously enough to say what their real effect on the economy would be'
You will be please to hear that this is at the heart of the proposals, but more of that when I post.

Note 2: I have to go in a moment, so will post this 'as is'. I hope there are no errors...

Note 3: I have just found this article, which may be of interest to those who read my previous post. It mentions that there is growing unrest an industrial heartland of China - Guangdong. Guangdong was the first part of China to open to the West, and has been leading the way in trade of many exportable goods. The boom has also seen large numbers of other Chinese people move to the province, as the pay and work prospects were so good. If Guangdong is hurting, the rest of China will follow.

Note 4: I forgot to add a link and quote in the above post, which is for the following article which was provided in a comment (apologies for not citing it earlier, and thank you for the link):
How quickly could the United Kingdom go bankrupt? Given the speed at which countries and companies have been brought to their knees in recent months, it is no longer hard to envision a scenario in which foreign investors become spooked by the UK's soaring debts and flee.
If you have time, it is an interesting read.....

Note 5: A commentator, Jeremy (see comments below) has very kindly referred me to national statistics and points out that M4 is at a very high level. The definition of M4 from the bank of England is as follows (link takes you to BoE page on which there is a link to a Word document):
  • UK private sector's (for first time defined as the non-bank non-building society private sector) holdings of:-
  • Sterling notes and coin; plus Sterling deposits (including share certificates of deposit) with banks in the UK; plus Building society shares, deposits, and sterling certificates of deposit.
At the most basic level, M4 is the money sloshing around the UK economy. At present M4 is £billion 1 718.3, compared with £1 538.2 in 2006/7. The same statistics show that there has been a steady rise in M4 during this year, and that the numbers have been climbing faster through the last few months, commencing in July.

The important point here is that, if the money supply expands faster than output, then inflation will follow, and output is falling. The most simple example of the principle of money supply and inflation can be seen in the housing boom, in which creditors injected large amounts of money into the UK mortgage market, with a finite supply of housing, thereby pushing up prices. i.e. if you have more money chasing the same number of goods, then prices will rise. What I believe Jeremy is pointing out is that there is an inflationary impetus within the economy. The spectre of deflation has been promulgated whilst inflationary circumstances exist.

If we look at the other statistics for the UK, we see that inflation is going down. From National Statistics, we see that the Consumer Price Index is showing a -0.2% drop for October, but that inflation still remains reltively high. A report from the Telegraph says the following of shop price inflation:
'Overall prices were 2.7pc higher than the same month last year, compared with 3pc in October and a peak of 3.8pc in August, and the BRC said that there was more deflation to come following the VAT cut to 15pc from 17.5pc. '
The answer quite simply is that the slowing of the rate of inflation reflects the decline in commodity prices, as well as deep discounting by retailers. However, as Jeremy points out, there is still a relatively high rate of inflation. What we have are opposing factors. On the one hand, there is the increase in money supply, and on the other we have the discounting in retail, as well as the falling back of commodity prices. To add to this, we have the fall in the value of the £GB which is inflationary, as it will make the prices of imported goods higher. This is a fairly simple explanation of what is going on, but I will try to expand further on what all of this means later.

Note 5: Lemming (see comments below) has passed on a fascinating link to an article, in which it is apparent that the new Banking Bill means that the BoE is no longer obliged to publish details of their issuance of money. Bearing in mind that we are currently being prepared for the printing presses to be started, this looks mightily suspicious at this particular moment. I recommend viewing the article here.

Regular readers will know that I am the arch cynic when it comes to conspiracy theory. However, this is looking more than a little 'iffy'. It is just too much of a coincidence. It looks like the politicians have grasped the severity of the situation, know that they are about to default, and are hoping to hide the fact that they are about to attempt a 'Zimbabwe'. That they think that this will go unnoticed, is damning indication of their competence.

Thank you, Lemming, for such a useful link.


  1. You're scaring me! My rent finishes in March... best book my ticket now. Just need to decide where... South America, China, South East Asia?

  2. Just before submitting my last post I decided to delete a one liner.

    It read, I still see hyper inflation buried somewhere, maybe it's in the end game.

    I deleted this line as I have posted about the danger of hyper inflation several times, with any response from this blog.

    When all this money (bailouts etc) hits the streets - watch out!

  3. Wait a wee minute...

    Surely the operative word here is easing? If the government does print a little extra money it is justified especially if there is deflation in the economy. There probably isn't enough money in the economy for the amount of goods and services. Quantitative easing is therefore the best solution.

    If there is a collective easing across the main western economies then inflation problems are reduced as currency valuations are relative to other currencies. There will still be be inflation but not a complete currency collapse.

    I am very much of the belief that concerted policies between the US, UK and Eurozone economies can have massive benefits to their economies.

    Ultimatly I believe that the sterling will have to peg to the Euro and eventually both the Euro and Dollar will have to peg together. Effectively a single western currency, with a highly collective monetary policy between all nations.

    The simple fact remains that there are two many currencies for such a fluid and tight knit globalised economy.

  4. cynicus

    I suspect that, like many reading here, the reality of where we are still surprises. I have been reading your blogg and following the progress of this catastrophy fot 18 months now. Although my head told me otherwise my heart, deep down, dismissed the possibility that this could turn into the worst case scenario.

    What I failed to realise was the utter stupidity of the policy makers. I figured that, long before we reached this stage the penny would have dropped as to the underlying cause to this crisis. The response and continuing idiosy has shattered any illusions I had as to the quality of analysis and imagination by all main stream politicians, economists and commentators.

    The end game for the UK, in particular and the western economies in general is now being played out. As individuals I guess all we can now do is prepare as best we can for the inevitable horror about to unfold.

  5. Cynicus, can you help me out please? I keep hearing about deflation but if you look at the government stats:

    Then Q3 2008 M4 money supply (the broadest measure I think we have of money supply in the UK) is still in double digits growth.

    Where is the deflation? I don't get it!

  6. With all the respect, i dont think that people in Europe or US have a clear idea of what hyperinflation is or what it means to common citzens. Its total disaster. Im writing from Brazil, and we had something like 85% devaluation of our currency in a MONTH during the 80s. Its not beautiful. Theres shortage in almost any comsuption area, since you can make money by simply delaying to sell by a couple a days. Food wasnt much of a problem here, but gas stations for example where almost always dry.

    You can ask any brazilian old enough what he or she prefers, between the 97-98 crisis or the 80s inflation, and he will def choose the first. In a hyperinflation scenario, you are living for the day, and thats enough to say how bad it is.

    PS: Sorry for the possible english mistakes.

  7. Guido Fawkes seems to have spotted an obscure amendment in the new Banking Bill.

    "Banking Bill
    Part 7 — Miscellaneous

    The amendment is as follows:

    Weekly return
    Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall cease to have effect."

    There is an explanatory note at #

    which says "This clause removes the requirement, established in the Bank Charter Act, 1844, that the Bank of England must produce a weekly return of accounts. As a result, the Bank of England will be able to determine whether, and in what form, it produces a return."

    Guido and his various commentators believe that this amendment is to hide the speed at which the printing presses are running.

  8. A great post.

    I have never been here before - but came over from Guido.

    I make a living out of investing and took most of my money out of the stock market 2 years ago and put all of it in National Savings and Gilts to keep it away form banks that I rightly feared would collapse. My Gilts have made money as the Bank Rate has dropped. I am not in the property market as I rent my home and have no debt but am now seriously considering what assets to put my money in once the Bank Rate hits zero.

    I wholly agree with you, quantitative easing is going to cause inflation to happen for sure. The only thing that I am uncertain about is the extent to which we get deflation in asset values and prices first. In essence we could see a deflationary bust followed by an inflationary burst in very short order.

    If we have deflation I want to be in 'safe' nominal assets and if we have inflation I want to be loading up on debt and buying real assets. Timing my decision to flip from a deflation investment strategy to an inflation investment strategy is going to be trick.

    Unfortunately I do not have the luxury of sitting by and waiting for things to play out.

  9. Farmer,

    "I make a living out of investing" - it will indeed be a trick to try and determine when to switch from deflationary to inflationary assets. I am in a similar position, but right now have a rough 50/50 split between inflation-friendly and deflation-friendly assets. Where I hope to win is with assets such as long-dated euro government bonds, which should do very well under deflation, but will also perform (in sterling terms) if the U.K. goes into inflation first (as I expect).

  10. Cynicus,

    I feel compelled to say the following in response to your remark that you are an arch cynic when it comes to conspiracy theories.

    As soon as the word ‘conspiracy’ is mentioned it immediately makes people doubt the validity of what they read; indeed, calling it a theory further undermines its legitimacy.

    I completely accept that there is an enormous amount of non-referenced, ludicrous propositions on the internet such as our world leaders are actually reptilians from other planets etc. There are also some writers who seem to be on the right lines but who just don’t quite get it and draw incorrect conclusions (some of which is likely to be intentional to mislead and confuse).

    With all the detritus that purports to expose conspiracies its easy to miss the extremely well researched articles that describe documented occurrences and instead end up dismissing everything that offers a non-conventional explanation as a conspiracy theory and therefore a load of rubbish. I think you just need to know where to look.

    I would like to recommend to you an outstanding Dutch researcher who I would even go so far as to say has probably produced the highest quality referenced conspiracy articles on the internet. As I’m sure all your readers will agree, I believe you’re an excellent writer and an extremely perceptive individual and as such I urge you to take a look at some of his work.
    I highly recommend the fascinating article on the Pilgrims Society – its very long but extremely thorough:

    Also if you have not heard of it, Carol Quigley’s Tragedy and Hope - a History of The World in Our Time is the original definitive conspiracy book covering the years 1892 to 1945. But be warned its enormous!

    Like other commentators here I find myself asking how policymakers can be so myopic and foolish; however I struggle to accept that they are. After all, the huge numbers of people who comment on blogs and after online media articles suggests many laymen seem to be aware that policymaker’s actions will not work or worse serve to exacerbate the situation.

    So, are policymakers really as stupid as they appear and the ordinary layman wiser? Unsurprisingly in light of my remarks above, I find it more plausible that policymakers are somehow constrained, their actions being invisibly guided by powerful groups who are not publicly accountable, and who are implementing agendas that further their group’s interests over those of the rest of society.

    I guess perhaps you could call me Cynicus Politicus because I just don’t buy it either.

  11. Hi
    you regularly state that too much regulation of international finance has (partly) caused this crisis rather than not enough regulation.

    This statement baffles me, and rings untrue -- unlike everything else I have read of yours. I may well be wrong, but it seems like the product of 80's free-market ideology (again, unlike the rest of what I have read by you).

    I listen to what is said by the the heads of banks, (nobel prize winning) economists, the hedge-fund managers, tv pundits, press jounalists and all the other 'experts' and I see varying degrees of delusion, wishful thinking, incompetence and dishonesty.

    I would be grateful if you could clarify how it would be sane to trust any of these people to influence the global economy without stringent regulation.


  12. Frank Field MP has realised we're bankrupt...

  13. If things are this bad in America, what does it mean for UK?

  14. Have you seen this? Taken from Guido's blog......


    Banking Bill
    Part 7 — Miscellaneous

    Weekly return

    Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall cease to have effect.

    The 1844 Banking Bill ensured transparency in the operations of the Bank of England. It has been good enough for over 164 years.The section the new Banking Bill seeks to abolish reads as follows:

    And be it enacted, That an Account of the Amount of Bank of England Notes issued by the Issue Department of the Bank of England, and of Gold Coin and of Gold and Silver Bullion respectively, and of Securities in the said Issue Department, and also an Account of the Capital Stock, and the Deposits, and of the Money and Securities belonging to the said Governor and Company in the Banking Department of the Bank of England, on some Day in every Week to be fixed by the Commissioners of Stamps and Taxes, shall be transmitted by the said Governor and Company weekly to the said Commissioners in the Form prescribed in the Schedule hereto annexed marked (A.), and shall be published....

    Surely it can't be that they don't want us to know how fast the Bank of England's printing presses are going to be running?


    I'd be interested to hear you views.

  15. And they'd Print and they'd Print and they'd PRINT!, PRINT! PRINT! PRINT!


  16. They'd Print and they'd Print;
    And they'd PRINT, PRINT, PRINT, PRINT!


  17. I'm really confused by your take on this. When you say:

    "I did think about the option of printing money, but saw it as a last resort to pay government workers, whilst the government tried to scale back expenditure."

    That sounds like the Zimbabwe situation. But if the government was to print money in a carefully considered way before it became a last resort, then it could be used to generate limited inflation which would devalue the debt of government and over-stretched mortgage holders, and devalue the pound meaning we might get a chance to build an export economy.

    I'd suggest telling the Bank of England that the new inflation target is 15% for next year, then drop it 1% per year until it's back to the normal 2%. They can use printing money to make sure that they reach it. If they over or undershoot they should adjust the target the next year so that by the end of the process, prices are about double what they are now, and everyone's debt (in real terms) is halved.

    As long as the increase in money supply is limited and short term, it will only create normal inflation, not hyperinflation.

    Are there any holes in the above idea I haven't spotted?


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