The west’s money go round

 

      The Euro crisis has been postponed. The Euro area has now adopted the very popular approach in the modern west of simply printing more cash to see them over a rough patch. The European Central Bank’s decision to lend more than half a trillion euros to Euro area banks, for 3 years at 1%, was the nearest thing to a free gift to the banks they thought they could get away with.

          In the short term it has worked. Very weak banks now look stronger, because they can now get their immediate cash needs direct from the ECB. They are not so beholden to the markets, who were getting prickly about which banks to lend to, how much to lend, and what price to charge. Some banks are using extra cash borrowed cheaply from the ECB to buy into the sovereign bonds of Italy and Spain. They can then pocket the difference between the 4-7% yield they pick up on the bond, and the 1% they pay for the money. It’s a great idea all the time they do not lose on the capital value of the bond. As banks buy more of these bonds, so it gets a bit cheaper for the governments to borrow, easing the pressures on them. It’s an indirect way of doing what the US and UK did directly – simply buying up their own debt to make it cheap.

          In the UK the main effect of quantitative easing has been to keep government borrowing rates very low, allowing the government to go on spending way more than it raises in taxes. The government via the Bank of England now owns more than one quarter of all the government debt in issue. It has bought up enough to keep government borrowing rates on the floor, and to allow nervous foreign holders of the debt to sell out and move away. The authorities had hoped it would result in easier credit throughout the economy, but that was never likely. The commercial banks are still constrained by the regulators, so the cheap liquidity circulates mainly within the government sector. The private sector faces credit shortage and relatively dear loans. The UK looks likely to do more of this. There are various stories in the press saying that the Bank will do some more once it has completed its second programme of £75 billion. This means that for most of this year we can expect low government borrowing rates, and continued high levels of government borrowing.

        In the US the authorities have so far avoided another round of quantitative easing. Instead they are currently trying to lower longer term rates by selling shorter term debt and buying longer term debt within the large total of QE already established. The US is doing more to cut its deficit than the UK judging by recent figures. According to spin doctors on both sides of the Atlantic the opposite is the case. One respected institution in the UK has now confirmed that we have had very few cuts inUK government  spending so far – total current spending of course is well up on two years ago – whilst the latest figures in the USA do show declines.

      Does all this money printing matter? Why didn’t people do it before, if the authorites have found a painless way of paying for all that excess public spending? In the past advanced and disciplined countries have avoided money printing on a large scale, believing it to be inflationary. If an economy is operating at capacity and you print and circulate a lot of extra money, the main effect should be an increase in the price level. You have too much money chasing too few goods.

        The authorities today in Euroland and the UK believe there is spare capacity. They therefore hope that printing more money will mainly go into calling more of the unused resources into use, creating a free lunch effect from printing more cash. Unfortunately, if the new cash is all spent within the public sector, and entails facilitating the build up of yet more public debt, it just defers the crisis until the state has to repay that debt, or until the markets panic at the size of the extra debt.

       In Euroland it is clearest. The markets have already taken fright at the size of the public debts in Greece and Portugal. They were beginning to take fright at the scale of the Italian and Spanish public debts. Printing money has not solved the Greek and Portuguese problem, but it has temporarily eased the market’s view of the Italian and Spanish problems. The authorities would be wrong to think this is a permanent fix. If Italy and Spain use the time  well that the extra money has purchased, to cut their deficits and make their debts more manageable, it will work. If they carry on as before, thinking they can build up even higher levels of debt, at some point the markets will do to them what they are doing to Portugal.

       In the US and UK the authorities have other options.  Printing lots of money can lower  the value of the currency, helping competitiveness and cutting living standards by stealth. There is no need or likelihood of US or UK default, because the authorities can simply print the money to repay the old debts if all else fails. If they get to that point it will then prove inflationary. In the meantime the UK has bought itself some time. Inflation is falling for the time being despite the QE. It would however, be unwise to think that a country can adopt a new permanent model of paying for public spending by printing the cash. If you do it for too long there will be a day of reckoning.

 

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66 Comments

  1. Single Acts
    Posted February 4, 2012 at 6:37 am | Permalink

    “In the past advanced and disciplined countries have avoided money printing on a large scale, believing it to be inflationary”

    Well indeed so. Inflation was traditionally defined as an increase in the money supply (i.e. it was inflated) and rising prices were a consequence of this, not a definition as they later became.

    This really can’t end well and if I may give a drugs analogy, the first hit might make you feel good, but there’s no stopping after the first hit and disengaging is often very, very painful. So it will be with QE counterfeiting I fear.

    Also, am I alone in wondering if the current government and indeed the opposition would tolerate the crypto-taxation of inflation to erode their own debts?

    • A different Simon
      Posted February 4, 2012 at 10:42 am | Permalink

      Not just the UK establishment , they are all devalueing so that will eventually take care not only of debts denominated in sterling but US dollars and Euros .

      The official UK deficit is 1.5 British Petroleums per year .

      When you consider all the other liabilities and the almost total lack of provision for old age it’s clear that the sums will never add up .

      This is all one big confidence trick to put the population in debt servitude and I’m not buying it any more .

      Just hard default on the lot , perhaps create a set of new currencies and let the pound , euro and dollar wither on the vine .

      • Single Acts
        Posted February 4, 2012 at 11:27 am | Permalink

        Whilst very sensible indeed, I believe legal tender laws may make the proposal illegal.

        Only one counterfeit (or indeed commodity backed) currency allowed.

        • A different Simon
          Posted February 4, 2012 at 6:43 pm | Permalink

          Single Acts ,

          Do people in the street really think working a bit harder/longer/later in life/reduce their expectations is going to do any good ?

          Are their maths skills really so dismal that they can’t see that they will never be able to save up enough to even part-retire ?

          Do they wonder whether their savings/private pensions will be “hypothecated”/confiscated in the next 40 years ?

          Surely the day is coming when they will just give up and down tools en-masse ?

          The people at the very top are going to have to give back some of what they’ve taken if they want to live in a country which respects law and order and in which they feel safe .

      • Denis Cooper
        Posted February 4, 2012 at 3:40 pm | Permalink

        Thanks, so should I look forward to all my savings being not just gradually devalued, but totally wiped out, so that debtors can get off scot free?

        • APL
          Posted February 6, 2012 at 10:08 pm | Permalink

          Denis Cooper: “but totally wiped out, so that debtors can get off scot free?”

          Denis, I think the figure for inflationary depreciation of Sterling over the last century is something like 98%. Thanks to the politicians, your debtors already have got off scot free.

  2. Antisthenes
    Posted February 4, 2012 at 7:25 am | Permalink

    Borrowing, printing and devaluation can only have one consequence in the end everyone one way or another will be made poorer. All that is being achieved by these policies is that impoverishment is being slowed not halted albeit temporarily. Actually politicians have no alternative apart from it giving them breathing space, to do otherwise the shock of not doing so would be profound and immediately devastating. The West has been for decades constructing a social and economic structure that is predicated on entitlement and avaricious consumption. This has put in place economic and social models that work inefficiently, wastefully and with high cost. The point has been reached where these models are no longer sustainable with current resources and the acquisition of the extra resources needed not possible. These models have to be radically reformed quickly if impoverishment is to be reversed. However current evidence suggests that no real attempt at reform is being made in fact the opposite appears to be happening. The end result of all these measures to keep economies solvent is therefore doomed to failure.

    • lifelogic
      Posted February 4, 2012 at 10:23 am | Permalink

      Indeed nearly all the banking problems are caused by people, banks and governments taking pieces of valueless pieces paper and printing them nicely and dressing them up to pretend they have real value. Then selling them on to the gullible. It is a profitable business – it usually should not even be legal to do it without proper controls.

      The solution is generally for people to trust real assets instead not pieces of paper but even then the government can confiscate with taxation.

  3. John Moss
    Posted February 4, 2012 at 7:30 am | Permalink

    What happens when loans made by the banks to Governments with the three year money given them cheap by the ECB – which are presumably three year loans – mature?

    The Governments will have no money, because they will still be running deficits so the only answer will be to print more money to give to Governments to repay these loans. That increases the volume of cash in the economy, leading to inflation and devaluation of the currency.

    We are on the road to Weimar.

    • uanime5
      Posted February 4, 2012 at 6:19 pm | Permalink

      There’s one important difference between the UK today and Weimar Germany; credit cards mean that even if inflation causes the price of bread to rise to £100,000,000 we won’t need a wheelbarrow full of money to pay for it.

      Also in Germany hyperinflation was fixed by introducing a new currency. This will be easier to do today as in an electronic banking system you can easily convert one currency to another.

      • Bob
        Posted February 4, 2012 at 8:37 pm | Permalink

        @uanime5
        Well that’s okay then.

      • APL
        Posted February 6, 2012 at 12:12 pm | Permalink

        uanime5: “Weimar ”

        Had hyper inflation because their government debts were denominated in foreign currency – Franks and Sterling. The Gernam government printed or exported coal and steel to pay them off and the value of the Weimar Mark depreciated accordingly, thus requiring more printing. Hence a vicious circle.

        The UK government, I hope has its debts denominated in Sterling, there is a devaluation risk but no FX risk.

        We are unlikely to see ‘hyperinflation’ in this country. Very serious levels of inflation yes, but I don’t think hyperinflation.

        That of course is little comfort since the value of sterling over the last century has been destroyed anyway thanks to the government.

  4. Steve Cox
    Posted February 4, 2012 at 7:49 am | Permalink

    A good article, and an appropriate warning. You fail to mention, however, the importance of the so-called velocity of money on inflation. At the moment, probably because as you say much of the new money is circulating in the public sector, there has not been a significant increase in velocity. If the Bank keeps on printing ever more money, though, that is bound to start affecting the private sector. If it is combined with rising inflation and/or a sharp deterioration in the value of Sterling, leading to a loss of confidence in both the currency and the government’s ability to control inflation, then the velocity will rise quickly and inflation will head towards hyperinflation. Per Milton Friedman, “Inflation is always and everywhere a monetary phenomenon”. You cannot increase the money supply ad infinitum and expect there to be no ruinous consequences. If the Bank continues with this madness, the question is only when will the disaster hit us, there is no question of if it will happen.

    • Caterpillar
      Posted February 4, 2012 at 9:54 pm | Permalink

      (I am clearly not an economist but) I do agree with SC that a little thought of all variables in the identity is called for. Empirically, that is what actually happens, because the four variable identity is a truism, I had (mis?)understood that an increase in money supply could lead to a short term increase in real demand, but eventually led to P going upwards (P of what though may be different – where can the system respond?) . In the longer term it is the velocity that increased / correlated with real Q (…though all this might say is that a more productive economy is, well, more productive).

      The UK seems to be in the situation that printing hasn’t led to much of an M increase and hence not the Q increase in the short term. (Though perhaps there has been M propping up and accordingly propping up of some already inflated Ps).

  5. lifelogic
    Posted February 4, 2012 at 8:06 am | Permalink

    Indeed the private sector is still finding it hard to borrow and hard to compete due to a bloated government and lack of banking – yet the state sector continues to grow, waste and make this position even worse.

    RBS group who seem to be one of the main causes of the problem. They continue to suck working capital back from sound businesses. Even business with good property or other security are unable to borrow from them. They still seem to need the money more than their customers they are not really in the lending business at all it seems – other then in a few simple areas.

    I see that Sir Philip Hampton chairman at RBS is telling Ministers:- they should abandon a growing tendency to indulge in anti-business rhetoric or risk damaging Britain’s economic recovery he warned that leading politicians could undermine inward investment in the UK if they continued to demonise business.

    He said: “I think we’ve got to watch it. I think some of the sentiment from Government ministers and politicians recently won’t necessarily help confidence in business morale and inward investment.
    “We need to recognise that businesses have got to succeed and that when they do so people can get very well paid.” – Yes but it is the shareholders in the main who should be they took the risks.

    Well Sir Philip, but RBS and nearly all the banks in general have not succeeded at all they have failed hugely. Despite help and underwriting from taxpayers. What has happened is that top management have been able to help themselves to shareholders funds while destroying shareholder value. At the same time crippling real industry by demanding good loans back early.

    We need proper control of remuneration packages by representatives of shareholders fixing packages and being able to reduce it be a factor of about 15. Pay needs to be allowed to decline hugely at the top there is plenty of very good talent who will work for £100,000 much of it rather better. There is good reason to pay Wayne Rooney well – you want the best there is as you can only have 11 men on the pitch. This does not apply to bankers especially failed ones.

    Perhaps when he gets the share price back to £2+ from 9p he can talk about “good talent”.

    In banking you can usefully replace a single top person with 20 cautious bean counters on £100,000 – the outcome would be vastly superior too. Banking is a fairly simple business after all. Where it is complex it is often due to an attempt to dress up and sell worthless pieces of paper to the gullible. Certainly it is easier than most advanced engineering projects. In the case of Fred Goodwin a stuffed teddy bear would clearly have done far better for shareholders and tax payers.

    We need a smaller state doing as little as possible, sound money and sensible lending to the private sector. Nothing else will get a real recovery under way.

    • Bazman
      Posted February 4, 2012 at 12:12 pm | Permalink

      A stuffed teddy bear would not have better for Fred Goodwin and this is what counts the most. All evidence points to this being the primary concern in banking.

  6. Boudicca
    Posted February 4, 2012 at 8:24 am | Permalink

    Someone should have proof read this!

    Inflation is only down in the UK because the economy is stagnant and in Euroland it is in recession. Both the UK and most of Euroland will want to inflate away the debt – only Germany doesn’t want inflation but then Germany has done quite nicely out of the misery of the PIGS.

    Reply: Yes, I am sorry – I got called away before I had time to check the typing. Done now.

  7. Leslie Singleton
    Posted February 4, 2012 at 8:34 am | Permalink

    With gr8 respect, unfortunately and as every schoolboy would once have known, inflation, the fall in the value of money, is not falling: it is some cobbled together up and down artificial price index that is falling (at the moment) and very exaggeratedly so (again at the moment).

    • Caterpillar
      Posted February 4, 2012 at 9:55 pm | Permalink

      I didn’ t think the CPI itself was falling, I thought it was just the rate of annual chnage that was falling.

  8. JimF
    Posted February 4, 2012 at 8:44 am | Permalink

    A good summary of the situation.
    Yes there will be a day of reckoning, and it will be interesting to know how the current batch of monetary heroes/heroines will be viewed. While Sir Fred and others were taking the gongs and supplying tax revenues for spending in the early years of the decade, they were popular friends. The same could be said today for the good men and women of the Central Banks. They have managed to push the tide out to create all that extra beach for the kids to play on.

  9. alan jutson
    Posted February 4, 2012 at 9:10 am | Permalink

    Wow !

    What an easy solution to the problems of debt, just print some more money.

    Ideal for those in debt, perhaps not so good for those with savings, or who are on a fixed income.

    Once again the profligate and feckless win, the savers and prudent lose.

    The message to all seems to be, borrow as much as you can, spend as if there was no tomorrow, live for today, bugger the debt, because y0u can always go bankrupt and escape the payback.

    • A different Simon
      Posted February 4, 2012 at 11:09 am | Permalink

      Alan , I’m not disagreeing with any of your points re profigacy and responsibility . I’m also not saying that our countries output could not be increased in the short term .

      However , the problems are more fundamental and entrenched for a developed (was going to say mature) country like our own .

      Our economic system relies on indefinite exponential growth of the aggregate .

      Sure we can do better than we are doing now but indefinite exponential growth of the aggregate (in anything other than compound interet debt) is a mathematical impossibility yet people refuse to accept this and believe “growth will set us free” .

      Our economic system cannot sustain itself at a constant level of output , consumption (so saving for old age is out) or a constant or declining population .

      The mistake is believing it was ever designed to do anything other than trickle wealth up from the serfs to the shadow banks which lend money to govts .

      Like all pyramid schemes , because that is what it is , it’s designed to enrich the people at the top by impoverishing everyone else .

  10. John Page
    Posted February 4, 2012 at 9:20 am | Permalink

    Did you type this in the dark, John? 🙂

  11. MickC
    Posted February 4, 2012 at 9:21 am | Permalink

    “inflation is falling….”-not in the real world it isn’t.

  12. Brian A
    Posted February 4, 2012 at 9:30 am | Permalink

    Exactly, all this newly printed money swirling around the public sector simply preserves the existing inefficiencies, and allows policymakers to defer, for political advantage, painful choices about cuts in spending. I do not see how this model can delay the inevitable where, in the near future, lenders will no longer believe in the credit worthiness of a number of sovereign states not already shunned by the markets. It is as though Milton Friedman and his monetary insights had never happened.

  13. ferdinand
    Posted February 4, 2012 at 9:33 am | Permalink

    Increasing money supply does not of courseinevitably cause inflation if the number of transctions is increased commensurately. This doesn’t seem likeley in the present climate so inflation will eventully follow and we shall all suffer, but at least debts might become payable.

  14. Mazz
    Posted February 4, 2012 at 9:40 am | Permalink

    If we printed money it would be called fraud. The gigantic ponzi schemes run by the banks make the Madoff’s appear almost benign. As far as I can see, the Central Banks are the most corrupt places in the world (not to mention Governments) and seems always have been. And they wonder why people don’t vote!

  15. Geoff
    Posted February 4, 2012 at 9:41 am | Permalink

    Every government that indulges in money printing is stealing from it’s electorate. Every extra pound that goes into circulation devalues the rest.That means peoples savings are devalued. That is theft.
    Politicians love it because they get their hands on the new money first before it dilutes the pool. They pay themselves generous wages then pass it to their cronies in banks or big business to ensure that well rewarded directorships or “consultants” fees are forthcoming.
    The grossly non productive public sector likes it because it ensures their wages and index linked pensions keep coming for their make work jobs.
    The real losers are those that have to earn a living in the marketplace or productive people as they are more accurately described. They scrimp and save and are robbed first by taxation then by inflation. Great system if you’re non productive.

    • lifelogic
      Posted February 5, 2012 at 9:13 am | Permalink

      Exactly: “Every government that indulges in money printing is stealing from it’s electorate. Every extra pound that goes into circulation devalues the rest.That means peoples savings are devalued. That is theft.”

      You might extend the argument to much of the value paper the banks have dumped on each other too.

      In the case of money it is just more tax done in an under hand way taxing the responsible and savers.

      Put £10million on deposit earn 3% pay 50% tax and 5% inflation gives you £7.1 M in real value after ten years. Government get the rest and 40% if you die too.

  16. lojolondon
    Posted February 4, 2012 at 10:00 am | Permalink

    Boy. Finger. Dyke.
    They can fudge it and pretend and lie all they like, as long as Greece’s government is spending 15% more than they earn, there WILL BE a day of reckoning. And if their currency cannot devalue then they are looking at 100 years of debt repayment. And more than the 50% unemployment they currently ‘enjoy’.
    And because the Greeks do not have a representative government, there will be a revolution long before then. And because the EU will not relinquish it’s power, there will be bloodshed. And the Greek people will be fighting for Democracy. And I really, really hope that the British army is not sent there by the EU to kill the people who are fighting for democracy in the oldest democracy of all. But we can’t be sure, because the thing the EU likes the best is to have other people fight their battles for them.
    And that is just Greece!
    It is really so depressing, we felt for the poor man-in-the-street when Russia was fun like this, now I am sure they feel sorry for us! 1984 was so right.

    • Bazman
      Posted February 4, 2012 at 10:41 am | Permalink

      Russians felling sorry for our living standards? Now theirs a thought.. At a guess you have never seen how real Russians live. Short, hard and fast with little to live for.
      The situation now in Russia is a rich elite (enjoying-ed) the countries wealth, telling the population that they realistically need to pay more for gas whilst exporting massive amounts and transferring the payments abroad. Communism for the rich. Does all this sound Sound familiar?

      • A different Simon
        Posted February 4, 2012 at 11:42 am | Permalink

        Depressingly familiar .

        What’s the answer , direct action ?

        • Tedgo
          Posted February 4, 2012 at 3:58 pm | Permalink

          Ultimately I think the only way to get the governments attention will be a mass withholding of Council Tax as this is the only stick we still control. Remember Maggie and poll tax.

  17. Madgp
    Posted February 4, 2012 at 10:37 am | Permalink

    State intervention in interest rate policy is a disaster. The disaster is amplified when it leads to ZIRP and QE. The state is like a feckless spender. ZIRP is a trap that leads to massive debt principal. As this goes on, the borrower becomes more reliant on ZIRP and smaller rises in interest rates lead to bankruptcy. Japan will be wiped out by a rise in interest rates to 3% (at which rate interest expense on their debt principal will consume the entire tax revenue).

    History will record Weimar hyperinflation as a walk in the park compared to what’s coming. That monetary madness appeared benign at first as well.

    • uanime5
      Posted February 4, 2012 at 6:33 pm | Permalink

      Weimar hyperinflation lasted for 3 years with the greatest inflation occurring in the last year. It ended when Germany introduced a new currency.

      • APL
        Posted February 6, 2012 at 12:14 pm | Permalink

        uanime5: “It ended when Germany introduced a new currency.”

        But that was not the reason Weimar hyperinflation came to an end.

    • Caterpillar
      Posted February 4, 2012 at 10:00 pm | Permalink

      Think of a cognitive bias and it is hard to not think of the MPC:

      risk seeking in losses,
      group escalation of commitment,
      group think …

  18. De Recardo
    Posted February 4, 2012 at 10:57 am | Permalink

    too much money=inflation

    yes, but the rate of change in the global economy means that there are still plenty of countries who can become the *new* China, make things at a lower rate, Vietnam , for instance, any basket case sub-Saharan country (if they can stop wars and corruption)

    prices inn the eCommerce age can be substantially lower than the old world economy of fixed shops/factories, the deflationary aspect of the developing world has not yet run it’s course

    the challenge for the UK is to provide top-end high quality engineered , civil engineered products, computing, healthcare and other emerging technology lead industries

    Goldman Sachs thinks exactly this

    there is a substantial amount of debt repayment going on in the private incomes, with private wealth @ circa £6 trillion the situation at the national level needs a clever hand over the run up to 2015 , and the election .

  19. oldtimer
    Posted February 4, 2012 at 11:01 am | Permalink

    In days of yore the crown used to clip the coinage. Today those in charge swap to an even baser, lighter metal for the coinage (eg the new 50p piece) that requires the alteration of the slot machines that use it(at great expense to their operators). The latest EZ wheeze you describe must be the “big bazooka” that Mr Cameron was urging on his EZ colleagues. Now that they have the BB and we with the USA have the QE, it is but a matter of time before we face the big belly up.

    • uanime5
      Posted February 4, 2012 at 6:35 pm | Permalink

      In the days of yore the crown would also include less gold and silver in their coins so that minting large amounts of money was cheaper.

  20. NickW
    Posted February 4, 2012 at 11:04 am | Permalink

    The market for a lot of Sovereign debt HAS to be rigged by Governments and central banks because once inflation is factored into the Bond markets the interest rate demanded by the market would collapse all the economies based on borrowing.

    There is no longer a properly functioning market for a significant quantity of the world’s Sovereign debt, and there is less and less of a chance of escaping from the vicious circle whereby Government’s are the only buyers of their own debt, but in so doing, poison the Bond market with the threat of inflation to such an extent that no other buyers now exist.

  21. theyenguy
    Posted February 4, 2012 at 11:24 am | Permalink

    The old economy of capitalism was based upon the Milton Friedman Free To Choose script of floating currencies for growth, jobs, and profit. Fears of debt contagion, most likely from a Greek default will resurface soon, causing derisking out of stocks, and deleveraging out of commodities. Through creative destruction, leaders’ framework agreements will provide diktat for regional security and stability.

    The collapse of Greece, GREK, and the National Bank of Greece, NBG, together with the bursting of the global government fiance bubble bubble, BWX, will be the genesis that transforms democracy into diktat.

    Greece is an insolvent nation, and its sovereign insolvency, poses global systemic risk. Greece has lost its debt sovereignty, and it cannot handle any sovereign debt burden, it can be assured that there will be no sovereign funding. The only funding it might receive is seigniorage aid from the EU ECB and IMF Troika. Greece is a fiscally instable nation, which has no competitiveness, and its economy can not be revived, it can expect to have massive unemployment like that of Egypt.

    Greece is going to default. Greece is the poster nation for European Socialism that came via the Eurozone debt trade, that is the sovereign credit, and bank lending credit experience of the last twelve years, that provided for the right to state employment to be written into the constitution, high labor rates, a lack of exports, the failure of infrastructure improvement at Hellenic Railroads, and an excessive trade imbalance with Germany.

    There are some options for Greece. It may be kicked out of the EU, as an example of being a millstone around the Germany. Or Germany goes back to the D-Mark and forms a Nordic Union with Denmark, Norway, Sweden, and other industrialized nations, not likely. Or Greece becomes ground zero for more technocratic government, featuring structural reforms and austerity, and becomes part of a EU Super State, that is a Federal Union, featuring a Fiscal Union, and the ECB or Bundesbank chartered as the Euro’s Bank, very possible.

    When Greece defaults, banks and the ECB will have to take losses, and credit default swaps will have to be paid. This will be the genesis for Financial Armageddon, that is a credit bust and global financial breakdown.

    Fate is operating to establish true socialism, that is totalitarian collectivism; this will rise to terminate all forms of economic and political life. The sovereign debt to GDP ratio is going to plummet fast, causing quick and fast deleveraging out of stocks and bonds, as the seigniorage, that is the moneyness, that came via national sovereignty, fails. The seigniorage of capitalism will be replaced by the seigniorage of diktat.

    I’ve written of this many, many times on my blog; its simply a matter of bible prophecy waiting to be fulfilled.

  22. Acorn
    Posted February 4, 2012 at 11:33 am | Permalink

    Is this the point where I say that public sector debt is the private sectors savings and net imports? The private sector and even the Bank of England have Balance sheets. Assets equal Liabilities except if you are the government and issuer of the fiat currency that we have to use to pay our taxes. Such a government never “runs out of money”; it spends first and taxes later. Have you ever thought why such a government would want to borrow its own currency when it could just print – or type on a keyboard and press send – some more?

    In the interest of balance JR, can you please allow the following link. The West is going to tilt to the left for the next decade or so as it become anti business and anti anyone with large bank accounts. Could be quite a hostile environment on the doorsteps in 2015.
    http://www.youtube.com/watch?v=oAR0VRLRGHE

  23. waramess
    Posted February 4, 2012 at 11:42 am | Permalink

    The government may take comfort from their debt maturity profile but as 35 percent of gilts are held by foreigners and the Bank of England (UK government) guarantee free convertability of sterling then it would not take much to make those reserves of 40 billion disappear.

    Seems to me that the debt maturity profile is effectively very short when you take into account the market liquidity of gilts and the ability of foreigners to withdraw their funds from the UK at will.

    The whole business is a bit like watching an event that you are sure will result in a collapse and wondering why it has not yet happened.

    Printing money will just help it happen and it would seem the collapse can not be far away

  24. TFS
    Posted February 4, 2012 at 11:46 am | Permalink

    Its amazes me Mr Redwood, that you following the rest of the sheep referring to whats going on as economics.

    I think a dose of watching Max Keiser on Sky(RT), reading ZeroHedge website should give you a dose of reality.

    We’re in nothing more the one big financial Ponzi Scheme, and Wall Street should be named as (the destroyers-ed).

    You need to look at the Silver Market/JP Morgan and market manipulation, it alone will make 2008 look like a mere burp in history, London (hypothecation) the root of all the financial failures so far, MF Global et al. If you are not scared about what you find, then maybe you should not be commenting on financial matters?

    Oh, and don’t forget to look at 700 trillion (yes trillion)+ in the unregulated shadow banking system. Unregulated…..how the fcuk did that happen?

    Reply: I have commented on the worryingly large derivatives positions outstanding, and made various proposals for stronger, smaller and more competitive banks.

  25. Gary
    Posted February 4, 2012 at 12:04 pm | Permalink

    Absolute madness. Disastrous. These people should be put on public trial when the effects of this go to their logical conclusion. The mob may get to them first. The central banks are looking after the only interest they have, the commercial banks, never mind what other platitudes or mandates they spout.

    The problem with the CPI or RPI measures of inflation is that they don’t include asset price inflation, and certainly not govt bonds. They pick and choose their basket for political ends. If they did include bonds they would already see hyperinflation. Another example of the govt central planners and subsidized quangos not having the first clue. They are leading us to ruin. Nothing gets solved on this course, all our problems remain and get worse.

    We are led by idiots and cronies.

  26. Gary
    Posted February 4, 2012 at 12:14 pm | Permalink

    People need to understand that the root of our global economic problems are the central banks and the politicians who enable them.

    Don’t get misled by the lies that the problems are caused by the EU and feckless borrowers. The problem is debt and debt is issued and controlled by the banks , governed by the central banks and legislated for by the politicians. The lender ALWAYS has the final say if a loan is made and a prudent lender will never lend to a borrower who has lied about his means, for if they do they have committed fraud. We need to be clear about this , so that when we seek justice we know where to focus.

  27. Bill
    Posted February 4, 2012 at 2:07 pm | Permalink

    Printing money devalues savings. Those who have been frugal and prudent are being penalized.

    The old are being hit by these policies. It is true, I suppose, that the money generated by QE goes into public sector jobs and public sector workers are then taxed and some of their taxes go to pay the State pensions of those who have retired. But any other money the retired have is increasingly worth less. Am I right?

    • Martyn
      Posted February 4, 2012 at 3:52 pm | Permalink

      Yes, you are right. After a lifetime of work with savings soundly (I thought) spread widely in low-risk areas, I received a statement today for an ‘out of sight out of mind’ ancient PEP to discover it has gone down in value by £1k in the past 12 months – i.e. at a rate of £20 per week. Good job I wasn’t relying on it for survival.

      What is the point these days in saving? And for those approaching retirement who see their savings devalue almost daily and once thought safe, they must all be terrified at the thought of their life’s savings going down the pan.

      Against that, of course, there is the cheering thought that I had been totally feckless in life and reliant throughout on state support my income would have recently have been increased by the government to match inflation (Ha!) by something around 5% I believe?

      • Caterpillar
        Posted February 4, 2012 at 10:08 pm | Permalink

        Martyn is spot on here.

        The UK had years of Brown-Blair sending a message at national level that there is no need to save in the good times for the bad, and reinforced this at the individual level with the concept of means testing. Its better to be wreckless and have no individual means (I recall hearing a paension advisor on a radio show not being able to recommend to a caller to save more because of his income c.f. means testing!)

        The Conservative-LibDem-BoE coalition is now reinforcing this position by rewarding some groups e.g. the wreckless mortgagees whilst effectively fining those whos have been more prudent, wherever they are in their lifecycle.

  28. Peter Lloyd
    Posted February 4, 2012 at 2:07 pm | Permalink

    The conclusion: “If you do it for too long there will be a day of reckoning” is too weak and tells us nothing about whether the current policy is actually right. We certainly are not biting the bullet on public expenditure as you have frequently pointed out.

    Firstly, this QE has been going on for some years and how can we know what damage is actually being done?

    Secondly, until someone actually points out how dangerous it is – if it is – (but instinct alone suggests it is) then governments are not going to stop deploying it.

    Thirdly, might we just look back in a few years and say that the government is buying huge amounts of gilts at the wrong price in a scheme which echoes the sub-prime loan bubble?

    One form of unwinding all this which used to be talked about by the Fed is to sell back the debt when economic conditions improve but you can be as sure as eggs are eggs that the government here will not to doing that soon or at 2.5% and so losses to the taxpayer will follow.

    We need a big and honest debate on this issue because in Europe the UK and the US the monetary measures are not temporary, but permanent. We need to have an idea about what that means.

  29. Atlas
    Posted February 4, 2012 at 2:15 pm | Permalink

    So it seems that the old Political maxim about “Not doing today what you can put off until tomorrow” applies in the new Wunder state of Europe as well.

  30. Damien
    Posted February 4, 2012 at 3:03 pm | Permalink

    QE has not been inflationary nor has anyone seriously proposed that printing money would be a new permanent model for paying for public spending.

    QE is helping large companies with access to refinance their debts at much lower rates. This has been especially helpful to the largest builders who took on massive debts just before the crash. The government has with every budget allocated billions towards the housebuilding industry. The demand for social housing from new immigrants can hardly keep up with supply so billions must be directed to housing associations. 12 million mortgage holders are enjoying record low rates and are paying off their debt in record amounts.

    Other QE is likewise being spent on new infrastructure of every shape and size. This provides jobs and is some say a necessary investment in our crumbling infrastructure. Banks new capital requirements can be financed through QE. This is not inflationary as smaller businesses are de leveraging and overall lending is below target.

    The UK is possibly in recession or very nearly and recovery will be sub par and anaemic for years to come. China risks are high going into 2013-4 and although companies have repaired their balance sheets investors are wary. A break up of the EZ is highly likely with Greece or Portugal having to exit in the next couple of years. In these circumstances some might say the QE was a price worth paying.

  31. Denis Cooper
    Posted February 4, 2012 at 4:28 pm | Permalink

    As far as the UK is concerned the point of “quantitative easing” has always been for the Bank of England to use newly created money to rig the gilts market, so that the government could carry on borrowing to fund its over-spending.

    That became obvious in the spring of 2009 under the Labour government, when it became apparent that the Bank was only buying up previously issued gilts, apart from minimal quantities of other assets, while the government’s Debt Management Office was continuing to sell new gilts at about the same rate.

    It wasn’t just a case of the Bank finding it difficult to identify other assets which it could buy in sufficient volumes, it was the absence of other assets sold by the government which could be removed from circulation by the Bank.

    That has been resumed under the coalition government, for the same reason, and it’s why the current state of play is that the Bank holds gilts to the value of £273,271 million but corporate bonds to the value of only £692 million:

    http://www.bankofengland.co.uk/markets/apf/results.htm

    The government doesn’t sell corporate bonds, so from the point of view of funding the government’s budget deficit there’d be little point in the Bank soaking up any surplus of corporate bonds from the market.

    People have gone to prison for similar market-rigging exercises:

    http://en.wikipedia.org/wiki/Guinness_share-trading_fraud

    But apparently it’s perfectly legal when it’s being done by the UK government and central bank; or maybe the difference is that their activities are not being concealed from other market participants, even though what is being done is not well understood by a wider public reliant on explanations in the mass media.

  32. frank salmon
    Posted February 4, 2012 at 4:33 pm | Permalink

    The result of all this is that voters and politicians are living in the misguided belief that the worst is over, or that the pain will be about a sow recovery over many years. This means that we are living in cloud cuckoo land. If there are no QE and interest were paid on money as a ‘real’ commodity, we might begin the paradigm shift from overspending, over borrowing and over printing corporatism to rational liberalism and beyond….

  33. Sagitarius
    Posted February 4, 2012 at 4:48 pm | Permalink

    Do that mean it is only a matter of time before we have the kind of stagflation that brought the National Socialists to power?

  34. Bernard Otway
    Posted February 4, 2012 at 7:15 pm | Permalink

    As I said in a post in the last 3 weeks,if you don’t want your savings to devalue and you are not a very wealthy person,liquidate into cash and buy forward those consumables you HAVE
    to use for the forseeable future,at todays prices,it is getting interest tax free legally,especially
    imported items.I check the £/Rand exchange rate DAILY 4 weeks ago it was R13.265
    to the £ ,today it is R12.192 this means SA wines among many other items will get at least 8%
    more expensive.LAST NIGHT late at about 11 pm I found a NZ Malborough Sauvignon Blanc
    called MONTANA in my local ASDA on special because of a label change at £5 a bottle,the
    normal price being £8 a bottle I know because it is always that and very popular,I bought the last 10 cases [120 bottles] £600,I consider that I have made 120 X £3 profit = £360
    on an investment of £600 ,I leave all my esteemed fellow bloggers to work out what that means. I consider that it is the only option.AND i have also hedged my bets via my son in
    another part of the world.

  35. Barbara Stevens
    Posted February 4, 2012 at 7:39 pm | Permalink

    Does this mean, pensioners, some who may have the least, will suffer even more. Not from their mistakes but from those who have borrowed for today and forgot tomorrow. I’m retired, and wouldn’t dream of having debt, borrowing money, if I can’t pay for it I got without. Its been a lifetimes policy. We did have a mortgage, and paid that off three years in advance. We now don’t owe one penny in debt, and won’t as long as I’m the financial director of our household. Everything is calculated for the best deal, direct debits paid each month for utilities etc, no one needs a phd to know that. The Internet is the lifeline for seeking knowledge and getting to know the pitfalls. It must go back to the old days when one learnt as you go, and learnt from old habits that debt brings pain, sorrow and poverty. No thanks. When people realise to make do and mend and only buy what they can afford they will be better off. I go to bed each night knowing I can sleep well, and believe me that’s a lot to be grateful for. So if I want something I either save or go without till we can afford it. Simple.

  36. sm
    Posted February 4, 2012 at 8:37 pm | Permalink

    QE produces more £ this equals devaluation and subsequently lower living standards via rising prices/taxes in relation to income. We get increased prices of things we need and falling value of things we previously used to store value.

    Why bother with tax at all for those on minimum wage? those on JSA or a highly regressive council tax/benefit systems etc

    Starting any austerity in the face of banking bonuses in essentially a closed shop public banking environment. Well good luck with that one!

    Why not just move to full reserve banking?
    http://www.fullreservebanking.com/proposals.htm

  37. Ian
    Posted February 4, 2012 at 10:15 pm | Permalink

    I think a lot of the BoE’s QE money was gambled on food derivatives by the commercial banks – helping trigger the Arab spring as world prices soared.

  38. Tony Houghton
    Posted February 4, 2012 at 11:27 pm | Permalink

    John Does George read your blog?

    Reply: Probably not, but I have other ways of giving him the main economic messages I think he needs to consider.

  39. Jon
    Posted February 5, 2012 at 3:27 pm | Permalink

    I think initially its been relatively easier for the US to cut large chunks from its spending, a huge amount of it came from defence cuts and foreign aid also. It will get tougher for them. Our spending requires cuts but with the backdrop of rising costs due to an ageing population and an NHS. A large amount of what we cut is offset by rising costs unfortunately.

    I hope it stays true to its conviction to rebalance to a savings economy away from the change to a borrowing one that Brown implemented. I have a private pension fund, through that it helps employ someone as its invested in so many companies in this country. That person who’s foot maybe BP, tibia maybe Virgin, radius perhaps with BT and a coccyx by RBS could be joined by a lot more like them if we returned back to a savings country.

  40. Peter Lloyd
    Posted February 5, 2012 at 7:30 pm | Permalink

    The article and comments show that no one has a clear idea about the implications of such a large increase in the volume of money from this source.
    It could:
    Portend a sterling devaluation even greater than the one we’ve had which has already been inflationary
    Save us from the deflationary consequences of the ongoing weak demand and allow the banks to re-capitalise and de-gear
    Portend higher inflation later because of the time lags involved and the masking effects of the current defaltionary pressures
    Put money into the hands of the banks which are then profiteering at the expense of the tax payers by investing in higher yielding assets with cheap borrowings from the Bank of England
    Be propping up and encouraging even more inefficient government spending and increasing the size of the unproductive state versus the productive private sector
    Be all of these

    What we do know is that governments like QE because it’s the easy option and they consider it cost free, at least in their public pronouncements. But we don’t realy know what the downside or cost will be and there is no honest debate.

  41. Joe McCaffrey
    Posted February 5, 2012 at 8:02 pm | Permalink

    One step closer to the Zimbabwaen style collapse that is the inevitable longterm result of having a fiat money system – it is simply not credible to think that politicians can be trusted with the money supply.

    Government always strives to grow, it is an inevitable result of the incentives acting upon those in control of it – whether its the tyranny of the status quo whereby any attempt to make a reduction in some area is always resisted strongly by the civil servants whose high wages, princely pensions and easy hours may be at risk (and not to be ignored are the unions and ‘solidarity’) or the elected politicians (with some honourable exceptions) attempting to bribe the electorate with their own money. The restraint on government expenditure comes from the people, when they see their taxes going up and up they resist it at the ballot box, or invest time in avoidance measures up to and including leaving the country for a less burdensome tax environment. To spend beyond the tax base government must borrow money, however it would very quickly reach the point where bond-yields rose so high this would stop being affordable and they would have to stop – it is only through the process of monetizing debt by printing money and buying government bonds that they are able to support such huge deficits, and the vast expenditures they fund, across all of the western world.

    If a disaster like that in Zimbabwe is to be avoided then we must have bold action very soon, the fiat money system must be scrapped and replaced either with a renewal of the gold-standard (or someother commodity backed currency) or for current legal-tender laws to be replaced with a system of competing currencies like that suggested by the great 20th century economist, Hayek. The competing currencies model is probably the easier of the two as it is something that a country could put in place unilaterally without any great difficulty, and would be easier to accomodate with electronic transactions.

    Either that or we may still see the day when long strips of pounds, euros and dollars are used instead of toilet roll in order to save money.

  42. Tony Maloney
    Posted February 6, 2012 at 10:58 am | Permalink

    Glad I am not the only one who is worried about the money printing going on a Threadneedle St.

    Labour are claiming that we are cutting too fast and too deep but the fact is that we aren’t cutting at all and there is little sign of the growth we need to pay our way out of debt.

    As a staunch Conservative I realise that Osborne has a difficult problmem to deal with, but it seems to me that we are taking the flak for cuts but without actually getting the job done.

    I think we are actually storing up problems that will show up i9n the ballot box later

  43. Derek Emery
    Posted February 6, 2012 at 11:04 am | Permalink

    The west cannot compete with Asia where similar skill levels are only a quarter as much. For a decade or so western politicians relied on ever increasing debt to maintain lifestyles in the absence of good GDP growth.
    This option has run out. The west’s massive future health and pension commitments can never be met without massive and therefore extremely unlikely GDP growth, especially as western ageing demographics starts to bite harder an harder.
    it’s obvious that the only way for the west is a decreasing standard of living as nearly all growth takes place in the rest of the world. It will take some time before politicians accept the inevitable.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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