Friday, March 20, 2009

More on Quantitative Easing.....

Several commentators have left some interesting links that are related to the new 'fad' of quantitative easing (printing money), and it seems that this policy is gaining ever greater traction as a policy tool. Perhaps the most interesting example is that of the proposed IMF quantitative easing (QE):
Alistair Darling and senior figures in the US Treasury have been encouraging the Fund to issue hundreds of billions of dollars worth of so-called Special Drawing Rights in the coming months as part of its campaign to prevent the recession from turning into a global depression.
The first thing to note here, is that the calls are coming from the US and UK, which are countries already following the QE policy. That the calls are coming from two of the most troubled economies only serves to illustrate their desperation. This policy proposal is simply a way to try to inflate away the underlying problems, but to do it on an international basis. As for the domestic policies of QE, there is a fundamental belief that economies can be stimulated to act in accordance with government wishes, regardless of underlying economic drivers (for those new to the blog, you may wish to read here for a discussion of the underlying economic reality).

Just to add to the curious situation, both China and Russia are considering / proposing that the IMF could replace the $US as the reserve currency by providing a clearing house, thereby creating a new de facto currency:
China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.

[And later]

The source said the Chinese paper envisaged the International Monetary Fund's Special Drawing Rights (SDRs) being first assigned a role of a clearing currency on some transactions and then gradually becoming the main global reserve currency. "They said that the role of reserve currency should be given to SDR," the source said.

The idea of the IMF providing a world reserve currency is, to say the least, a very curious one. The IMF has a limited gold reserve, but otherwise is reliant on financing from governments of countries. The following discussion is now out of date, but sets out the status of IMF gold.
The International Monetary Fund currently holds 103m. ounces of gold, valued on its books in August 2003 at $8.1 billion (IMF, 2003a) but probably worth $38.4 bn at market prices. The IMF has no real use for this gold. Admittedly, it provides fundamental strength to the IMF’s balance sheet. However, it is a small amount compared to the IMF’s $350 bn in total resources or its $228 bn in usable currencies (IMF, 2003b). By its Articles of Agreement (IMF, 1945), particularly Articles IV and V, the IMF may receive gold from countries in settlement of obligations, but it cannot lend gold as part of its stabilisation programmes. Nor can it lease, swap or use its gold as collateral. The IMF cannot revalue its gold without selling it, and an 85% vote of the membership is required to authorise such a sale. Were the IMF to sell its stock of gold rapidly in order to generate money to meet an international financial crisis, it would depress the world price for gold and diminish the value of the gold held by countries in their reserves or offered for sale. Various efforts have been made in recent years to use some of the IMF’s gold stockpile to fund debt relief for poor countries. However, none of the efforts or plans proposed to date will generate the needed funds without collateral damage to the IMF or to the gold-producing countries. (1)
As regular readers will be aware, a fiat currency has no real value except the value that is assigned by our collective belief in the value. The question that springs to mind with an IMF reserve currency is to ask what might inspire such a belief. Whilst such belief in an IMF currency is a very curious notion, in some ways it is no more curious than our belief in the value of the $US or £GB. It just serves to highlight the absurdity and fragility of currencies which can be 'printed' without constraints.

The situation in the US is now one where money is being printed without constraint with a significant expansion of QE:
LONDON (SHARECAST) - Bond and gold markets soared but the US dollar tumbled as the US Federal Reserve chief Ben Bernanke unveiled a $300bn treasury bond buy-back plan as part of a new $1.15trn package to rejuvenate the US economy.

In a move mirroring recent actions by the Bank of England, the US central bank said it would move to buy treasury notes with maturity dates of between two to 10 years to “help improve conditions in private credit markets.”

The Fed also moved to prop up the housing market by saying it will buy $750bn of Freddie Mac and Fannie Mae issued mortgage-backed securities, on top of $500bn already pledged to the two agencies. It also doubled the agency debt it plans to buy this year from $100bn to $200bn.
One of the underlying purposes of the policy is to try to prop up the ailing house market. I can think of no better example of the bankruptcy of imagination than this policy, and no better example of a complete misunderstanding of the realities of the current situation. Bernanke is claiming that the QE policy has an end plan, but at the same time offers no actual end to the policy:

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke on Friday said the Fed's buying of longer-dated U.S. Treasuries would "taper off" when the economy no longer needed help, allowing the Fed to cease its emergency support.

"The time will come when the economy will be growing, the housing market will be recovering, that support will no longer be needed. And we will of course at that point taper off that support," Bernanke told community bankers in Phoenix, Arizona.
Quite simply, I do not 'buy' the idea that there can be any end in sight to such a policy. The US government's borrowing is expanding at such a rate that there is no realistic possibility of raising the finance to cover the exploding costs. In particular China has been funding the US government and the discussion of a move away from the $US as the reserve currency is the final confirmation that the 'game' has come to an end. Once again China has issued warnings to the US:
China hopes the United States will guarantee the security of the Chinese assets and investments in the U.S., China's Foreign Ministry reiterated on Thursday

Foreign Ministry spokesman Qin Gang made the remarks in response to a question on the decision of the U.S. Federal Reserve Wednesday to spend up to 300 billion U.S. dollars to buy long-term government bonds and expand purchases of mortgage-related debt to revive the economy.
The full article is not as dramatic as the quote suggests, with Qin Gang apparently accepting the policy, but the warning still remains. Niall Ferguson in 'The Ascent of Money' called this game 'Chimerica' - the game of China funding US consumption. I made a speculative post recently on how China might finally unwind its funding of US debt, and imagine that it is likely that we will see China moving in a direction approximate to that which I have outlined. The US policy of QE, in particular the move to purchasing treasuries is preempting the end of Chimerica, in the same way the UK preempted a failed bond auction through the introduction of QE.

In the meantime China is now in a position where it is flexing its economic muscles with impunity. Their blocking of the Coca Cola purchase of a Chinese drinks company is an example of their new found power. Quite simply, the US dare not 'take on' China over such a protectionist act.

Whatever the actions of the US government and the central banks, the status of the $US as the world reserve currency was always going to be challenged, but the moves of the Fed will now simply accelerate the decline. I have continually predicted the collapse of the $US, and have been endlessly surprised at the resilience of the currency. Up to now, there has been a delusional belief that the reserve status of the $US would somehow 'save' it, regardless of the actions of the US government. A while ago I wrote a post specifically to point out the many reasons why the reserve status would not save the $US, and the policy of expanding QE to purchases of treasuries simply adds to the many reasons for why it cannot resist collapse.

As I am writing this post, I can not help but find the situation in the world economy to be ever more surreal. When I first started writing this blog, whilst being able to see the oncoming crisis, I could never have imagined that the policy makers would take actions that could take a major crisis and turn it into catastrophe. I am genuinely baffled that so many otherwise intelligent people, are undertaking the policies that they are. Several months ago, when QE policy was first being proposed for the UK, I commented on the strange way in which the Economist magazine was reporting the policy. I will quote from my post (I will not put it in block quotes as it is fairly long):

[quote starts]

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.

[Quote ends]

The reason for quoting at such length is that the Economist's thinking illustrates the central delusion that Western economies are 'well managed', and that problems such as hyper-inflation are only applicable to non-Western countries. It appears to be a quite astonishing form of arrogance built upon a self-satisfied sense of superiority. The belief is that 'it can not happen here', but there really is no justification for such a belief. I can not see any difference between the policies in the UK and US and those in Zimbabwe.

However it is spun, both governments are now funding large part of their operations through printed money. Whilst the mechanisms and methods may not be so direct as those being used in Zimbabwe, there really is no fundamental difference, except that lots of people are now saying that when the UK and US print money, it is a 'good thing'. Both the UK and US also claim that the policy is temporary, but both governments had structural deficits before the crisis, both are taking no action to restrain the deficits, and both are in fact expanding the size of the deficits. Under such circumstances, it is difficult to see any point at which the policies might be reversed.

The article that I quoted regarding the Economist was titled 'Money Printing Economics - The UK and US as the New Zimbabwe?' I think that the time has arrived where the question mark in that title can now be removed.

(1) Jonathan, ES 2004, 'IMF Gold and the World Bank's Unfunded HIPC Deficit', Development Policy Review, vol. 22, no. 1, pp. 31-40

Note 1: Sorry for the lack of posts recently, but I have been distracted again by other commitments. Many thanks for the many useful links and the interesting discussions in the comments sections. I am endlessly encouraged by the intelligence of the comments, and some of the insights that are presented.

Note 2: I hope that you do not mind yet another article on QE. I am focusing on the subject as I can think of nothing else as important in the current crisis as these policies. I will move off the subject for my next article, in which I am planning to discuss some broader indicators of the state of the UK economy, and possibly also the US economy.

Note 3: I have had confirmation that I will have an article published in the Trade and Forfaiting Review, and will link to the article once it is published. The magazine specialises in trade finance, and also has some very interesting articles that are likely to be of broader interest.


  1. Hyperinflation and the crash of the Keynesian model could be in the offing soon if the Chinese drastically draw down.


  2. Well, where to begin. (Please edit this rambling, these are comments on months of your blog. Wanted to express them to you regardless of how much appears!)

    Firstly, thanks so much for your blog. I first came cross it a few months ago (referal from CIF) and have dipped in and out but have been reading voraciously the last fortnight and have finally caught up!

    I have read more widely since and it's been staggering seeing the 'mainstream' just getting closer and closer until at some point they will also be shouting 'but he's not wearing any clothes'!! Historians will look back at this period in history and be staggered by the wishful thinking and stupidity. I have been speaking recently to an old friend and a life-long supporter and writer for a socialist party in the UK and he (although disagreeing widely with your solutions!) shares the vast majority of your analysis. I remember late night chats with him and his son 17/18 years ago; the idea that capitalism could come under such a crisis to make revolution even slightly possible seemed so utterly insane to us as teenagers, but the words unchartered territory come rapidly to mind all the time these days. I also, for what its worth, linked your blog to a UK Junior Minister I know. I have few hopes for it making much difference but would have kicked myself if I hadn't done it.

    I will admit that I am terrified. As a student of history the socio-political consequences of what is going on are going to be unprecedented. For a dispirate society like Britain, unused to hardship and community/family co-operation things are going to get pretty hairy even if we do turn away from polcies that will lead to hyper-inflation and possible mayhem.

    I am a socialist and from a political standpoint that view has not changed, but your posts on benefits, education etc have challenged my views strongly (a good thing) I have not changed my fundamental views that the state can be agent for good, that people fundamentally want to work and to contribute but whether this can be possible within capitalism I question more than ever!

    Your posts on reform are interesting but I wanted to end each one by asking (facetiously) if we could start money again from scratch? Yes, I can see where aspects could work (and certainly from your libertarian standpoint) please lets have your system but does that mean all the inherited wealth should be shared out - all those who've made a fortune from this boom should lose it (yes, they may do shortly anyway!)? 100% Inheritance tax? Otherwise the wealth will stay where it is - with the rich - regardless of the talent for work, starting business, innovation - that's been the history of capitalism and no more so than in Britain.

    I also think that the environment is going to become a major factor. You accurately assume that when push comes to shove people will care more about feeding their populations than long-term envioronmental concerns. However, for a man so well read and concerned with evidence you do show a disregard for the overwhelming scientific evidence that climate change is happeneing and that MM carbon emmissions are its primary cause. Just because a few scientists disagree is hardly evidence that it's not proved - half of America still believes the world was created 10,000 years ago for God's sake. Even though the evidence is there for evolution beacuse some nutter in a creation museum with a Phd gives it legitimacy people can point to people like him and say it's not proved.

    Anyway, the environment may have a have an impact IF there is accelerating real impacts on climate, sea-levels, hurricanes, during the next 15-20 years etc. Until then, I entirely agree, and think that Britain will very quickly start digging coal out of the ground like there's no tomorrow!

    I have been reading Oliver James recently too and have been struck by the further irony that not only have we been having the 'party' you wrote of, but that actually few people have really enjoyed it - the poor have looked on as the property owning classes got richer and richer. The middle classes have worked harder and harder in their desperation to keep up with the symbols of status and the rich, whilst ostensibly happy, seem more miserable than ever - in and out of clinics, obsessed with fame and baubles. The idea that GDP growth (even if it WAS real wealth) should be the be-all and end-all of what government is for has always been flawed. The fact this one was based on debt was even more obscene.

    We're a fat, money and celebrity obsessed mess of a nation and my one silver lining is that out of this, after some horrendous shocks, we might come out a materially poorer but socially happier place. It will take ten years and more to get there but it's just possible we might be a better place at the end of it.

    You must feel like Sarah Connor in the scene in T2 where she's screaming at the kids in the park just before the bomb goes off. A little dramatic perhaps but you get the point!!!

    Keep up the good work

    P.S For what it's worth I'm fleecing my interest-free credit card to buy some physical gold in the next two weeks. I think I'll take the risk on its value going down - I don't see it. April 3rd is going to be a big day I think.

  3. Hi CE.

    I like your observation on the central delusion of the innate superiority of western developed economic thinking. The most striking example of this is perhaps the US' reaction to the Asian Financial Crisis of over a decade ago.

    As a student of Japanese economics at the time, it was pretty obvious back then that Japanese banks were technically insolvent from bad loans secured on real estate (land value) prices. It had some remarkable parallels with the more recent credit boom in the US. During the Japanese credit boom, real estate prices spiralled upwards on the back of ambitious residential and commercial developments (incidentally aided by Yakuza intervention to smooth the inevitable forced evictions of downtown Tokyo residents among other things) and those valuations enabled their own secured credit derivatives bubble which funded so much economic expansion through SE Asia in the 1990s (expansion which many US commentators at the time mistook for real wealth too).

    When it came crashing down though, the reaction from US economics commentators was telling in the context of more recent US economic history. US government policy advisors were frustrated by Japan's refusal to kickstart the economy by 'cutting out the bad wood' - effectively letting bad banks go to the wall. I would urge readers to review the original context of Edward Kane's term 'zombie banks' in 1987.

    Japan's refusal to reconcile the banks' losses and push the burden onto the taxpayer was derided as recently as 2000 by US economists as being a solution that only Japan could get away with without significant public unrest.

    The idea that Japan's credit boom and bust could not happen in the US or Europe was a textbook example of the innate superiority delusion. Somehow, financial crises were things that happened only in hot, faraway countries and level-headed economic management kept such wrong-headedness from our more civilised shores, even though a long history of booms and busts has taught us that every single credit-driven economic expansion in history has led to subsequent financial catastrophe (whithout exception to this day).

    And we seem to be seeing the same reasoning with quantitative easing - disastrous consequences of printing money only seem to apply to African dictator states and irrational South American economies.

    Even now, US and UK economics policy advisors say that the reason Japan didn't tackle deflation successfully was because they were too late in implementing measures such as rate cuts and money printing to combat its effects. But yet again, contrary to the models our best and brightest economists have produced, we see the US and UK descending into deflation under bizarrely similar circumstances as that of Japan at the beginning of the 1990s.

    But what worries me most about QE is the Bank of England's recent track record of understanding the recent economic climate. On their own admission, the Bank of England didn't really understand the financial derivatives market between 2003 and 2008. Mervyn King was also recently admitted that the BoE didn't really understand the link between the 'real' economy and spiralling housing asset prices.

    And yet now we see an untried and unprecedented money printing exercise being instigated in the UK based on a questionable premise (the expectation of deflation at an undefined point in the future), for unclear ends.

    So my only question is: How long will it be before we see Mervyn King appear on BBC1 with yet another sheepish admission that the Bank of England didn't really understand QE?

    I also fear that the US economists were right about one thing - only Japan could get away with burdening taxpayers with bank losses without significant public unrest.

  4. You wondered about the 'strange' behaviour of many politicians, financiers, 'experts' and media commentators. Quite simple really.

    They KNOW they are RIGHT. Axiomatically, the rest of us whiners are wrong,- QED. It really is that simple.

    On a more technical note. Its their Economic Model, ie. Permagrowth - "there is NO other model". They are reacting to a symptom of this 'failing' model. They simply cannot accept (they probably don't even question) that their model-in-use is failing, how could it be failing? Yes, ... ...

    Brian P

  5. On Printing Money and Quantitative Easing

    So apparently the printing of money is a disaster in Zimbabwe, but if Western countries do it, it is 'inventive' and to be commended …. I can not see any difference between the policies in the UK and US and those in Zimbabwe.

    But the UK and the US are not printing money in the way that Zimbabwe did at all.

    There is a crucial difference between Zimbabwe and England: in Zimbabwe the central bank “printed money” and gave it to the government to spend on state expenditure like salaries of government workers etc. Without new production of goods and services, inflation and then hyperinflation resulted.

    The UK is doing no such thing at present. The whole point of your correspondence with the Bank of England was that the bank explicitly denied that it was directly purchasing UK government bonds from the treasury.

    In fact, European Union countries are under a legal constraint not to engage in Zimbabwe style printing of money: “printing money to cover the size of the Government’s debts – as happened in Zimbabwe and Weimar Germany – is outlawed under EU rules.”

    But there are two other factors that have seriously worsened the Zimbabwe inflation and domestic supply problems:

    (1) Severe droughts in 2002-2003 and again in 2007, and then a catastrophic flood in 2008 have devastated agricultural production.

    (2) Despite the nonsensical jargon of “smart sanctions” (so obviously similar to the Iraq disaster of the 1990s), Western sanctions have crippled the economy:

    “[Western] sanctions [against Zimbabwe] mainly affect the lives of ordinary people. Gideon Gono, governor of the Reserve Bank of Zimbabwe, wrote recently that the country's foreign exchange reserves had declined from $830 million, representing three months' import cover in 1996, to less than one month's cover by 2006. Total foreign payments arrears increased from $109 million at the end of 1999 to $2.5 billion at the end of 2006. Foreign direct investment had shrunk from $444.3 million in 1998 to $50 million in 2006. Donor support, even to sectors vital to popular welfare, such as health and education, was at an all-time low. Danish support for the health sector, $29.7 million in 2000, was suspended. Swedish support for education was also suspended. The US issued travel warnings, blocked food aid during the heyday of land reform and opposed Zimbabwe's application to the Global Fund to Fight Aids - the country has the fourth highest infection rate in the world. Though it was renewed in 2005, the Zimbabwe grant is meager. Agriculture has been affected too: scale matters, but no one disputes that subsidies are vital for agriculture to be sustainable, and sanctions have made it more difficult to put a proper credit regime in place.”

    Obama, it now appears, will continue this policy of assaulting the long-suffering population of Zimbabwe.

    Western countries like the US or the UK are not suffering from severe supply shocks, but lack of demand, so the analogy with Zimbabwe doesn’t work.

    Furthermore, they are not “printing money” Zimbabwe-style at all, but buying assets from banks and other private corporations.

    And above all if Japan could engage in this type of quantitative easing without hyperinflation, then it is clear that hyperinflation is simply not an inevitable result of quantitative easing at all.

  6. Michael: Thanks for an informative link. The article mirrors my own views closely, and it is good to see others sharing the same/similar perspective.

    Matt: A very interesting point about the 'no clothes'. I think historians will be debating the current period of time for many years. The big question that will be repeated is 'why did they do it?'

    Also, thank you for passing on the link to the minister. My aim in this blog has always been to have some kind of influence on thinking in the mainstream, as well as for readers in general. As a person writing a blog that influence may be very limited, so such help in bringing it to the attention of others is greatly appreciated.

    I am also concerned about how people in the UK will adapt to the changed circumstance, but steer away from such questions here. I will leave the fall out of the crisis to others.

    With regards to the environmental debate, I will also skip it on the basis that it is beyond the remit of the blog. However, I am aware of both sides of the debate.

    As a last note, I liked the analogy with Sarah Connor. Very apt...

    Paul: You may note the comment from Lord Keynes that has been added after your own. In light of your studying Japan's economy, you may want to add some comment to this?

    With regards to the track record of the BoE and other mainstream economists, I agree that it is problematic that these people are still 'in charge'. They got it all so very wrong, but are using the same models and theories as the basis of their actions.....

    Brian: I can only agree with your comments.

    Lord Keynes: Interesting points. For the issue of Japanese QE, I would point you to one of my earlier posts, which explains why Japan 'got away with it':

    The circumstances that allowed them to get away with it are not in place now.

    With regards to being no difference to Zimbabwe, I pointed out that the following:

    "Whilst the mechanisms and methods may not be so direct as those being used in Zimbabwe, there really is no fundamental difference"

    I have not posted on the subject (as I wanted to give the subject of the BoE and QE a break) but the BoE can purchase treasuries sold at auction even a week prior to the BoE buying them. Not direct purchase but.....

    I have also explained how indirect purchases can be manipulated when the government controls the banks, and have shown a chart which identifies that UK banks seem to be the ones increasing gilt purchases - whilst overseas investors pull out of the market....coincidence??

    You say:

    Furthermore, they are not “printing money” Zimbabwe-style at all, but buying assets from banks and other private corporations.

    My answer is that, however it is spun, governments are being funded with debt purchased with printed money, whether directly or indirectly purchased.

    With regards to the problems in the Zimbabwe economy, yes, they are certainly greater than the UK and US, and I would never suggest anything else. However, you spend a considerable amount of time trying to blame outsiders for the mess in Zimbabwe. I will not get into a detailed debate on this, but I think poor governance and unconstrained money printing might be involved. Do you not think so?

    As a summary, whichever way you look at it, government debt is being purchased with printed money. Direct purchase might be more effective if kept secret as it allows assurance of success at auctions. However, I think that, in a situation in which the banks are now in the pocket of government, other methods can have a similar outcome.

    My aim in pursuing the BoE was that there was an opportunity to bring out into the open the dire conditions arising from the endless bailouts. Throughout the blog I have argued against these activities, and therefore want the public to see the real cost of these actions so that they can be stopped as soon as possible.

  7. Matt: Sorry, just noted your point about editing on re-reading your comment. No need as all the comments are worthwhile and I do not edit comments in general.

    Also, I am giving thoughts to your comments on inheritance. A big subject, and one that deserves a fuller response than a comment here, so perhaps another time.

  8. Reply 1 on Zimbabwe

    However, you spend a considerable amount of time trying to blame outsiders for the mess in Zimbabwe. I will not get into a detailed debate on this, but I think poor governance and unconstrained money printing might be involved. Do you not think so?

    Actually, I did point to significant external factors as well (acts of God, like droughts and floods).

    But my post was a bit unclear.

    I am happy to concede that massive eocnomic mismanagement was a major factor in Zimbabwe (including too much expansion of the money supply).

    But the sheer scale of that disaster has been exacerbated by other factors both internal (e.g., droughts and bad harvests) and external (e.g., brutal sanctions).

  9. Response 2

    I have not posted on the subject (as I wanted to give the subject of the BoE and QE a break) but the BoE can purchase treasuries sold at auction even a week prior to the BoE buying them. Not direct purchase but

    Can you give me specific references on this, as I have obviously not understood the current policy properly.

    I am happy to change my position and admit error if I am wrong.

  10. On Central Bank Expansion of the Money Supply and Capital Account Surpluses in a Country: What’s the Difference?

    You often argue that Central bank expansion of the money supply is unjustified and immoral, because it lowers the value of money in circulation (that is, creates inflation).

    By this argument, expansion of the money supply in any country is supposed to be inherently inflationary.

    If expansion of the money supply by the central bank is effected by lowering the value of money in circulation (creation of inflation), then when a foreigner injects money into an economy by direct foreign investment, why is this not inflationary as well?

    To put it another way: if sudden expansion of money supply always creates unjustified inflation that lowers the value of people’s savings, then why wouldn’t direct foreign investment or (for that matter) any new money introduced into an economy from overseas do the same thing?

    If I receive 10 million dollars from overseas and bring it into a country and spend it or put it in a bank, how does this not lower the value of money in circulation? The money supply has been expanded by this act. It appears to have the same effects in practice as the central bank creating that 10 million dollars.

    Why would it not be inflationary?

    And if it is, then direct foreign investment or foreigners bringing money into a country would be just as immoral as Central bank money creation.

    By the same argument that says that no central bank should expand the money supply because it causes inflation, you could also argue that all foreign investment is immoral and inflationary too.

  11. Helicopter Ben Bernanke is swamping us with Massive Quantitative Easing....The Undertow is likely to destroy us all!

  12. Lord Keynes:

    Sorry (and to other readers), I think my post was unclear as well, and was misleading when I reread it.

    What I mean is that Bank 'X' can buy gilts, and one week later the BoE can then purchase the gilt from bank 'X'. What this means is that there is not direct purchase, but it is possible to come close to direct purchase. Bank 'X' is still not acting as a direct proxy, but the effect will be the same.

    Furthermore, as I pointed out in many posts, the government could pressure the UK banks to 'recycle' gilts as a method of insuring auction success. This is why I have pointed out the coincidental rise in gilt holdings by UK banks....

    Thank you for asking for clarification. Had you not done so, I think my comment might have been unclear.

  13. Lord Keynes: You may note that in my first posting for this blog, I discussed FDI, and was only in favour of wealth creating FDI, and only then with reservations.

    I discuss the issue of money coming in to the UK at some length, and from many perspectives. The post can be found here:

    Quite simply I do not share the view that all FDI is a 'good thing'. One of my many heresies...

    You will also note that, throughout the blog, I am against money being lent into consumption, which is presumably what you mean in your point. However, I would not restrict the freedom of individuals from borrowing. The problem is at the heart of what I have discussed through the blog, so it is difficult to offer a neat summary. However, central bank inflation of the money supply is what has allowed the endless expansion of consumer credit through overseas lending.

  14. On Money Expansion

    Clearly it matters what new money is spent on.

    Consider the two scenarios:

    (1) When a central bank expands the money supply, and the new money enters a bank and is spent on a productive investment, there should be new goods or services.

    (2) When foreign investment enters a country and increases the money supply and is put into a productive investment, this should have much the same effect.

    But in both cases the money supply in the country has increased.

    Yet supposedly this is inherently inflationary and in effect a tax on everyone's wealth.

    Either both methods of increasing the money supply are legitimate or they are both immoral and inflationary

    You can't accept the legitimacy of one without accepting the legitimacy of the other.

    To be consistent, libertarians would have to reject all increases of a country’s money supply caused by foreigners bringing money into the country, if indeed they believe central bank expansion of the money supply is an evil.

    But I see no reason whatsoever why Central bank money creation is unjustified or inherently a bad thing.

    The only difference in (2) is that you might create an income stream that leaves your country decreasing its wealth.

    So in reality the central bank created money which stays in the country is a better way of making an investment!

  15. Why Keynesianism has little to do with bank bailouts and the present Economic Policies of the US and the UK

    Here is an excellent article on Keynesianism, Keynes and why 'finance capital' and bank bailouts have nothing to be with traditional Keynesianism:

    I can't recommend it highly enough

  16. Good morning from France, Cynicus.

    I noticed that Irwin Steltzer is groping towards your own conclusions here:

  17. ROTFL at 'Lord Keynes'.

    No mention of transition to black rule as playing THE MAJOR ROLE in Rhodesia's downfall then?

    You political correctiods are pathetic.

  18. This may be of interest

  19. @Lord Keynes,

    If I come to invest in UK, I have to go to a bank and convert my euros to pounds. The total amount of pounds in circulation doesn't change with my investment.


  20. Mark,

    Thanks for stirring up a lively debate. I think that basically nobody knows what is going to happen, and that goes for our "betters" in govt. and the upper echelons of the financial system as well as the hundreds of people like us who are simply trying to make sense of what is going on based on publicly available information and "common sense".

    As far as the "masters of the Universe" go, it would appear that a lot that's been happening in the US recently, bears the hallmarks of a simple criminal conspiracy (or rather entire families of criminal conspiracies). The role of Goldman Sachs in the bailouts of AIG (via the person of ex GS CEO and Treasury Secretary, Hank Paulson) is as good an example of the kind of shenanigans that have been going on as it gets. AIG is a huge insurance company. Insurance companies, like casinos, are inherently profitable enterprises. It is very difficult for an insurance company to lose money, since the events it insures against are well behaved, in a statistical sense. Mortality rates, natural disasters, shipwrecks and so on, follow Gaussian distributions, so it is possible to calculate risks quite accurately. What AIG (or rather one of its divisions) seems to have engaged in during the last years were Credit Default Swaps. On the outside, CDSs look like insurance, but are not. Bona fide insurance requires that the person seeking insurance has something to lose if the insured-against event happens. CDSs carry no such requirement. In practice, they are simply bets that a company will fail, and any number of such "insurance" contracts can be taken out against a single company default. The official propaganda for the existence of these contracts is similar to the fairy tale about futures contracts in grain - in that case that they allow "Bob the Farmer" to lock in the price of his crop. In practice 99+% of all future grain contracts are made by speculators, who have nothing whatsoever to do with farming. I'm sorry I don't have the relevant links to hand, but looking at the CDS scene, it seems that the vast majority of these contracts were speculative bets on default. Now, when a lot of (powerful) people stand to make a lot of money from some event (for example my house burning down), it stands to reason, that maybe, just maybe, some of them might be in a position to help the process along a little..

    It would appear that AIG had hundreds of billions of dollars exposure to CDS contracts, made by its London branch office. In fact the exposure was much greater than the entire capital of the firm. When payment for these became due after the first waves of defaults, the company suddenly became insolvent. Now, a number of actions could be undertaken by the government at this stage. It could let AIG go down, with huge collateral damage to the millions of individuals and businesses insured by the company. It could split AIG into the insurance business proper, take that over, guaranteeing the companies obligations to policy holders (much in the same way that (parts of) individual bank deposits are guaranteed by the state in the case of bank default), and letting the "other" part go bankrupt. It could also null and void all CDS contracts, leaving AIG whole. The last two solutions would "hurt" the CDS contracts counter parties, but given the fact that the vast majority of them were speculators, it would seem that the "social damage" and taxpayer cost would be minimized.

    But, of course, that is not what happened. Instead, Hank Paulson, "went on his knees" to ask for an $85 bn "rescue" package for AIG. It has now grown to close to $200 bn. Most of this taxpayer money went directly to the speculators, including, surprise, surprise -- Goldman Sachs (some $20bn). Nice work, if you can get it....

    The recent "outrage" about the $200m of bonuses to AIG staff is just a smokescreen to disguise the funneling of a sum of taxpayer's money, 1000x higher directly to well connected parties in the financial establishment.

    In all this there doesn't seem to be any thought out "conspiracy" or "master plan", simply powerful interests opportunistically trying to grab as much as they can, while they can, in an unfolding chaotic system meltdown.. Like well-fed bullies elbowing their way through crowds of women and children to the lifeboats of a sinking ship, without regard whether the lifeboats will be launched, or whether they will even float... This goes for our "political class as well (I'm sure Broon is still hoping for his seven-figure salary at J.P. Morgan or Goldman Sachs after "retirement"). All pretty depressing, really.....

    All the best

  21. If we are experiencing deflation this can only be because a quantity of money has 'disappeared'. If so then QE is an arguably valid response and need not necessarily be inflationary.

    The questions then are...are we really experiencing deflation? And where might the missing money have gone?

    My council tax bill has gone up, petrol prices are going up, utilities and supermarkets are all increasing prices or at least holding them steady. Except for housing I see no sign of prices falling.

    So where might the money have gone. CE will not agree with this as he does nt consider debt-based money is the real thing but I think it is possible to argue that loans written off by the banks is where the money has been lost.

    Re Zimbabwe the govt's war on its white farmers has done the country no favours. White liberals (who have no equivalent amongst other ethnic groups) will never accept this.

  22. In my opinion the two scenarios are not comparable.

    In the case of foreigner investment, what the host country is doing is providing access to a part or share of the entire pool of money circulating in the country in exchange for an equivalent form of collateral (foreign currency).

    It is as if a country is granting or selling the owner of the foreign money the right to use a part of the existing money circulating in that economy in exchange for some form of guarantee. And this right is reversible.

    In my opinion this means that there is no addition to the money already circulating in that economy.

    In the case of QE, money is being added to the pool of money without any corresponding collateral.

  23. Mark, (since people here call you Mark, I assume that is your name)

    I'm a bit out of context posting in your blog. I write about amplifiers while we are discussing world economy and how we can save it.

    The problem is what I see wrong in this crisis, is not the model but it's initial assumptions. We are discussing money when we should be discussing growth.

    Growth is good, says the model. I say, growth is necessary. What we are trying to preserve is the "Growth Umber ales" model.

    Earth is a closed, limited model. Trying to impose open, infinite math to it, you simply head for doom.


  24. The mystery to me is how the capitalist system is supposed to kick start itself again once the previous mechanism has imploded: apparently people will simply re-train themselves overnight from estate agent to aircraft engineer and spontaneously start producing wealth in response to 'demand' and all will be well - we shouldn't tinker with the natural order by printing money etc. But what if the implosion of the previous system leaves the supermarket shelves empty, the power off and the petrol stations empty? As far as I can see, if this happens the system will be dead, and can never be revived. The exact level of inflation will not be an issue as people queue at soup kitchens and soldiers patrol the streets.

    As Dmitri Orlov points out, when the Soviet economy collapsed, at least there was a centrally-controlled infrastructure already in place, and people were used to coping with hardship anyway; people didn't live far from the cities and public transport was good etc. But if our economy collapses then we lose everything.

    Aren't the government's desperate measures a result of their realising that the end really is nigh?

  25. The Next AIG Scandal?
    AIG "healthy" insurance just as toxic as swaps from London office and with no regulation whatsoever.

  26. Hi again Cynicus,

    I continue to highly enjoy your musings and have recommended them to a number of people.

    This past week I have noticed a suprising spike of reader comments to a number of the blogs I follow which are subtly or [usually] overtly racist. I've followed a large number of financial/economic blogs for 4-5 years and I can say that this is definitely something new.

    Cynicus - I suspect that there is a recent co-ordinated effort by supremacists and other right-wing groups to hijack/piggyback/subvert blogs that have high ranking in google so as to get their own propaganda to vulnerable people.

    Think about it - financial blogs, such as yours, are read typically by people like myself looking for information that is fairly easy to digest (easier than reading a heavy tome on the subject). If the blog reader also reads the comments, then they will eventually read an 'advert' of the right-wing movement. Even if they don't agree with the commentor at all, (even if the commentor's opinion disgusts them), the advert has done it's job of sowing a seed.

    I'm not asking you to censor your commentors, just to be aware of the manipulation and propaganda that occurs in unstable climate such as the one we live in.

    So, Cynicus, be very careful. Your blog now links to Survive-And-Evolve's network of blogs. Mission accomplished as far as he is concerned. If you do not respond directly to Survive-And-Evolve comment it will be seen, by some, as a tacit agreement with his opinion.

    Choose to post this not.


  27. Reply To Anonymous

    In the case of foreigner investment, what the host country is doing is providing access to a part or share of the entire pool of money circulating in the country in exchange for an equivalent form of collateral (foreign currency).

    In that case, why does the capital account balance record deficits and surpluses?

    If no new money entered the country, it would always be in balance.

    Also, are you really saying that no new money enters an economy at all, when, for instance, tourists bring in outside money and spend it inside a country?

    This appears to be explicitly denied by even mainstream economists:

    Tourism injects money into the destination economy but this can also lead to inflation which then affects the price of food, clothing, transportation, and housing.

    A Challenge to Libertarians

    If tourism injects new money into an economy (increases the money supply), then by standard libertarian principles (the ones used to condemn central bank money creation) tourism is immoral and evil, because it reduces the value of money in circulation (including your savings) and causes inflation.

    So in reality any consistent libertarian would want an end to the inflationary evil of tourism! (since it is surely as evil as money creation by the Fed or Bank of England)

    I welcome responses to this.

  28. On Tourism and Inflation

    I should have said the link between inflation and mass tourism is proven beyond a shadow of a doubt.

    See Salah Wahab and John J. Pigram, Tourism, Development and Growth: The Challenge of Sustainability, Routledge, London and New York, 1997. pp. 69-70.

    This points out that large numbers of international tourists coming into a country increases the money supply, and that their demand for extra goods and services in a tourist region produces greater inflation in that region.


  29. Matt: It is obvious that you are angry about the AIG bailout, and I am sympathetic with your views. You may have read elsewhere that I simply do not believe these bailouts are about rescuing the savings of 'little old ladies'.

    You may note a consistency in my view that none of the banks should have been bailed out. We are operating in a casino in which the 'house' alone can win, and can never be allowed to lose. AIG is just a novel example of the same thing.

    As you know, I also do not like conspiracy theory but your idea insiders protecting their interests is plausible, as well as a good and likely explanation of the lunacy of the bailouts. However, I believe that the politicians have been (wrongly) persuaded of these policies, rather than being 'in on it'.

    Ketley: Regarding racism in the comments - my own position is that I do not agree with any racist ideology. In the case of the post that you mention, the tone of the post is self-defeating in the context of the reasoned comments made by most readers on the blog, and therefore needs no comment.

    Lemming: I can see your point, but believe that after some hard times, things can be turned around. However, as you identify, the problem is with ideas such as printing money, rather than accepting the necessity for change. These are policies that are aimed at supporting the current systems. In this respect, I share your pessimism, and is why I argue against such policy.

    We can be certain that it will be a long time to recover, but there is no reason why recovery should not happen with the right policies. The trouble is that the shape of the world economy will no longer be in our hands. We are no longer going to have wealth as a 'right' and that is very challenging.

    Note: I have found a very interesting article here:

    "China’s banking regulators: We saw the financial crisis coming two years ago"

    It adds a new perspective on the crisis, and I am digesting the implications...probably more to come on this subject.

    I would like to add to several other debates that have arisen in this section but am short of time. Hopefully I can reply to some of the comments at another time.

  30. @Lord Keynes,

    First of all, someone from UK must still change his pounds to euro in order to spent them in Greece. He does not add any surplus euros into circulation.

    Second, if you see tourism as an export of services, you could fit it into your books.

    And third, the price of a meal in let's say Florina (Greece) is 1/5 of the same meal in Mykonos (Greece) even though they buy the ingredients from the same vendor in Athens, at the same cost. Is that inflation? Why? Go eat in Florina. But there is nothing to see in Florina.
    Prices in Mykonos have the secret added value of being located in Myconos. That value has big demand hence the increased price tag.

    It is more or less like the difference in prices between a cheap and a classy restaurant in the same city. The increased prices of the classy restaurant are not inflation. You just pay more to look classy.

    Finally, if you believe that a local in Myconos, pays the same prices for that meal as a tourist, you are simply wrong.


  31. Mark,

    Thanks for your replies. I mentioned AIG simply because in the countless (I've lost count of them, anyway) bailouts, rescues, "guarantees" etc. undertaken by Western governments over the last 18 months to "prop up" the financial system, it is difficult to dig through the obfuscation in official reports and understand exactly what is going on. Are the taxpayers "giving money" to banks? Nooo (says the government), the government simply "guarantees" things, and hey, it gets some shares in return. Who knows, it might even **make** money on the deals. The AIG bailout is different, because in this case it is plainly obvious what happened, and even mainstream media has noticed it. The Government simply gave $170bn (and counting), in cash to various parties (the biggest chunk to Goldman Sachs, and a number of European banks) who betted against AIG on the CDS market. These institutions did not stand to **lose** $170bn in the event of default, they simply would not **win**. If I buy a $1 lottery ticket, and this ticket wins, but for some reason the lottery goes bankrupt before it pays me my $1M winnings, I have not actually lost $1M. I may be p***ed off, may try to get some money from the liquidators, but I have only lost $1. The AIG incident has highlighted the "decision making process" behind many of the bailouts (totaling some 3 trillion USD) in recent months, and it rightly has many people foaming at the mouth. My sixty-something (multimillionaire) American colleague from work is almost incoherent with rage, after losing more than 60% of his wealth in the latest turmoil, while well-connected hustlers make out like bandits with taxpayer money.

    This brings me to another point you raised - the problem of corruption in politics. I admit that the situation in the UK is not yet as bad as in the US. Ministers can still lose their jobs for accepting e.g. a golfing weekend from some "interested party". But things are getting there. I think the last, more or less "honest" (and independent) politician in the UK was M. Thacher (it may have helped that her husband was independently wealthy). But Major, after his rather lackluster performance as PM (despite having privatized the things that M.T. was afraid to touch), "retired" to a directorship at the Carlyle Group, where he joined ex-pres Bush, Bin-Laden's brother and a few other dignitaries. Tony Blair's affection for the rich included spending holidays with Silvio Berlusconi at his summer home, and since retiring from politics has landed a seven-figure consultancy with an American bank (J.P. Morgan), among other things (I won't even mention "Lord" Mandelson, who ten years ago didn't have two nickels to rub together, had to borrow money for a 200k house from a fellow cabinet member, and now socializes with the cream of the Russian Mafia on board the latter's yacht in Corfu). Had any of these men taken principled positions against financial interests, I wonder whether their post-political careers would have been quite as comfortable.

    And no, I am not "angry", just scared, because it seems that nobody seems to know what they're doing. Politicians are just helpless (having been indoctrinated for the past 30 years that "Mr. Market knows best"), and now are at the mercy of the "wisdom" of the folks who brought on this disaster, and whose only instinct is to survive it (and maybe make some extra money while they're at it). One only needs to look at the Obama economic "dream-team" lineup to despair..

    And finally, I'm with you r.e. the various conspiracy theories (NWO, Bildenburgers, Masons etc.). You don't need a conspiracy, when incompetence, cronyism and greed can explain all...

    All the best

    P.S. The markets have rallied today on the news of (another?) trillion dollar bailout of the banks, announced today by the US Treasury Secretary. It would appear that Hedge funds will be invited to work together with the government to save our economies. God help us all.

  32. O, yeah. Just look at this

    or this

    and weep..

  33. It looks like every country around the world is rushing off to print money and debasing its currency. Which then begs the question, which fiat currency will have any intrinsic value after this blows over?

  34. on libertarians

    The poor have been rebels, but they have
never been anarchists; they have more interest than anyone else in there being some decent government. The poor man really has a stake in the country. The rich man hasn't; he can go away to New Guinea in a yacht. The poor have sometimes objected to being governed badly; the rich have always objected to being governed at all.
    G K Chesterton

  35. Reply 2 to Anonymous

    First of all, someone from UK must still change his pounds to euro in order to spent them in Greece. He does not add any surplus euros into circulation.

    You forget that fiat money systems allow the expansion of the money supply in accordance with demand for it. If more tourists demand large amounts of euros, then eventually the central bank will create more.

    Second, if you see tourism as an export of services, you could fit it into your books.

    But then it requires payments from overseas and is equivalent to foriegn currency earned by exports.

    Either way your money supply has increased.

    As for your comment about restaurants, it doesn't affect my argument.

    There are other instances in which real inflation results from tourism.

    Take accomodation and housing.

    Greater demand in a particular area from tourists can send real estate prices up.

  36. Mark

    A few weeks ago, in quite a low key post, you suggested that most of the banking 'rescue' money was going on paying off foreign creditors rather than settling the results of speculative gambles, effectively between banks, which would have resulted on zero net cost to each bank on average (I think). It struck me at the time as quite a significant insight, meaning that we were already beginning to pay off our debts to the East whether we chose to, or not. Do you still think this is the case? If so, I presume that today's American bank 'rescue package' will just disappear down the same black hole?

  37. Cynicus (Cynice?) -

    Although I find your general thesis persuasive, and it is clear that the major cause of the crisis is less the derivatives debacle itself than the decade of living beyond our means that preceded and fueled it, there's something that's bothering me about the terms of your attack on the various government policies. (I know vastly less economics than you and most of your commenters, so apologies if I've misunderstood your ideas.)

    What you don't seem to be taking into account is the possibility that the bailout, stimulus, printing money etc. do succeed in avoiding a depression. If so, there has to be a cost-benefit analysis, which sets the costs of going even further (hugely further) into debt against the benefits of avoiding depression. These include the economic benefits - things like the welfare payments and massive productivity losses avoided by not having 15% of the workforce sitting idle; and political benefits, which are hard to quantify but potentially very significant, when we consider the upheavals that followed the Great Depression, the rise of fascism etc.

    It may well be that a decade or more of very painful belt-tightening - even more painful than it would have been had we not plunged trillions further into debt - and the possibly permanent loss of economic hegemony to to the Chinese and the East in general, is preferable to a major depression.

    Of course, if the bailout, stimulus, money-printing etc. don't stave off depression, we will have really screwed up royally and you will be entirely vindicated. But that's the gamble we're taking I think - less a delusion that we can leverage ourselves back to prosperity, than a hope that we can leverage ourselves out of depression.

  38. Just came across this article about the so called bailout attempts in the US. It's long, but well worth the read. Highly recommended!

  39. @Lord Keynes,

    But then it requires payments from overseas and is equivalent to foriegn currency earned by exports.

    And it is exactly what it is. What is the difference between “a car I manufacture and ship to your local dealer” and “an apartment (+located in Mykonos) I construct and you come and buy” , both in your overseas currency? They are both exports. Tourism counts as exports in Greek books. Think about it.

    Either way your money supply has increased.
    As for your comment about restaurants, it doesn't affect my argument.
    There are other instances in which real inflation results from tourism.Take accomodation and housing.
    Greater demand in a particular area from tourists can send real estate prices up.

    So, increased demand for something, will result in increased price for that something? Wow, what a revelation my friend. Is it evil? No. Is it silly? Take a look at what happened at iPhone initial release. It's the same thing. Is it madness? Take a look at what we are doing in Africa, in order to have the resources to build that iPhone (or apartment in Mykonos) cheap and give me an answer.

    So, money in the pocket of the local apartment builder in Mykonos are inflationary, while that money in the average Apple shareholder pocket aren't?

    The problem, my friend, is that we agree. That brings us to this...

    You forget that fiat money systems allow the expansion of the money supply in accordance with demand for it. If more tourists demand large amounts of euros, then eventually the central bank will create more.

    No, I do not forget it. I just follow the rules (or better, the model) of this blog. CE follows the “I have an 100 deposit so I lend 80” model. If we follow the “I have an 100 deposit so I borrow 400 and lend them” or the more accurate “I have an 100 deposit so I borrow 3900 (39 leverage? Where did I've seen this number?) and lend them” models, them I must apply them to everything else I read here. And that is madness.

    Finally, I want to share a little rant, I wish I could write myself.

    Your anonymous friend, Zed.

  40. “Either way your money supply has increased.”

    It may lead to an increase in the money supply.

    Lord Keynes stated that both scenarios were similar and I am still of the opinion that they are not.

    In one case the money supply might increase. However, this is only as a result of transactions in goods or services or as a result of a normal functioning of economic activity, which results in an increase in the value of assets held in a central bank. The central bank may or may not wish to increase the money supply proportionally and accordingly. But I suspect that an increase in money supply will never occur automatically and will never precede some form of economic cycle first.

    Printing money is an entirely different matter. In this particular case, the assets in the central bank are a promise of future wealth rather than existing wealth and the new money will enter the economy without any corresponding or proportionate economic activity, which could have been a base to generate it.

    In the first scenario if there is an increase in the money supply this increase is subsequent to wealth generation and is proportionate to that wealth.

    Printing money precedes wealth generation and is instead based upon the increase in the debt of a nation.

  41. So, it is not simply "a href="

    here is the link

    till I find a place to experiment a bit :)

    Zed again.

  42. One thing I'd like to see examined here is who the winners and losers will be if Bank and Government policy succeeds in generating positive inflation that is above recent trends (with RPI heading towards double figures). For property owners, the flip side of putting a floor under price drops - and even boosting house prices - is interest rates will at some point have to go up again.
    Here BOE policy will be key with the base rate and unwinding of QE needing fine adjustment.
    To every scenario - from deflation to hyper inflation - that plays out there will be winners and losers. It would be good to do an analysis in more detail of who they are.
    Currently savers and cash-savings funded pensioners are being sacrificed for the "greater good".
    Personally speaking I am willing to see my modest cash savings dwindle through inflation as long as I remain in work, and don't drop into negative house equity. Most people of working age have debts (including mortgages) that exceed their savings. They are arguably the most productive section of society.
    As for a return to socialism I agree this is the last thing we want, one of the posters above spoke of having a 100% inheritance tax, to my mind redistributing the wealth of those who have worked hard for it to those who just scrounge off the state is not a solution to this country's problems. It will breed massive resentment and the old argument goes if you distribute an equal amount of wealth amongst 10 people, within a few years 2 will double it, 4 will maintain or modestly grow it, and 3 or 4 will blow the lot and still end up penniless and begging for more.
    It's another way of rewarding failure, just as bad as paying bonuses to the parasites in AIG or the absurd pension to Sir Fred Goodwin. Reward should be based on merit, but not stolen from your family after you die either.

  43. Nothing a little reversing can't solve :).

    It is actually
    'a href="url" rel="nofollow"' text '/a'

    changing ' for <>.


  44. Response 3

    Printing money is an entirely different matter. In this particular case, the assets in the central bank are a promise of future wealth rather than existing wealth and the new money will enter the economy without any corresponding or proportionate economic activity, which could have been a base to generate it.

    When a tourist injects $5000 into a country's economy, I see no "corresponding or proportionate economic activity, which could have been a base to generate it."

    The tourist spends it on limited goods and services. It is consumption pure and simple.

    That $5000 could have been created by a central bank lent to a private bank then lent to a consumer who bought much the same goods and services as the tourist.

    I see little difference in the economic effects of the money injected into the economy in either case.

    And, at any rate, the point is that if central bank money creation is supposed to be an inflationary evil (as libertarians argue), then by the very same argument you can object to all tourism as an inherently inflationary process as well.

    I object to neither in theory, and do not believe that central bank money creation is immoral.

  45. UK RPI inflation falls below 0%

    So they use one weighted value (CPI which is now at 3.2%) as the official value,
    while hyping the older value to say we are going into a depression to scare the public to thinking the money printing is needed? Hypocrisy on top of the usual lies.

    Is of note that the items added to the CPI value are all luxury goods, where is the measure of inflation for real food staples and other goods that are raising in value now things have got bad?

  46. Hypocrisy is an understatement my Anonymous friend at March 24, 2009 3:06 AM

    Try reading this and then that.

    I could say it is war. Follow us or else...


  47. Lord Keynes

    “The tourist spends it on limited goods and services. It is consumption pure and simple.”

    The tourist spends the equivalent of whatever value he brought into the country. If the tourist does not spend this money he may convert it back into the original foreign currency. I think that this indicates that almost nothing is being added or subtracted to/ from the economy.

    It also means that if the tourist brings gold and spends it, he takes with him its equivalent in goods and services. But the gold stays in the country. This gold was mined, refined, distributed and then sold...

    In the case of money creation, nothing stays after the consumption i.e. goods and services in exchange are traded for nothing or are instead paid by all the holders of that currency.
    It still looks like two entirely different economic processes to me and with very different but significant consequences, I believe.

  48. Hi CE

    I liked your entry showing why hyperinflation didn't happen in Japan. It certainly seemed to make sense to me.

    Just to take the opposite viewpoint though in the interest of challenging our assumptions, have you ever looked at Mish Shedlock's Global Economic Analysis blog? He has a post there today where he discusses Japan's attempts at QE

    Mish is a very firm deflationist (although he likes gold) and he has been strident that QE will not cause hyperinflation. I personally don't agree with him, but he is someone who I have to respect as he is prepared to take contrary (and often strikingly accurate) views. I just wondered what you thought of his argument?

  49. Hoarder said...

    Reward should be based on merit, but not stolen from your family after you die either.

    ...The trouble being you say merit but it's often not your merit, it's your parent's merit, or theirs, or their great-great-great grandparent who shagged a lord or fought in a battle or just nicked it off my great-great-great grandad.

    The oppportunity and advantage children gain from being born into an educated family, especially a wealthy one outweighs any other factor in their ability to succeed.


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