The Fed has now joined in the fun of printing money and buying up its own government bonds, to try to reassure investors that all is well with the world. Monetarists assure us that this will create more deposits in banks, which in turn might be spent and start to lift the recessions. That would be good news indeed. If you hurl enough money at a problem, someday some of it might start to do something useful depite the broken banks and the falling property prices. The monetarists are right to say people and companies are short of money. It’s deposits they need more than bank loans, turnover businesses require more than working capital bank facilities.
My worry is that on both sides of the Atlantic the governments are trying this at the same time as running collosal government deficits, and issuing huge quantities of bonds to pay for them. Markets are being told that buying different government bonds is a “flight to quality” which can never be criticised. Those who think this have not read their history books.
History tells us that many countries have in the past defaulted on their public debts when the burden becomes too great. It’s not just the well known South American villains who have let the international money lenders down. Countries like Spain, Japan and Germany have also been serial offenders if you go back far enough. The UK and the US have not in the past cancelled obligations or refused to pay interest, but they have often inflated their way out of the full rigour of the repayments, paying the lenders back in depreciated dollars or pounds.
Even if this time round they do prevent a return of high inflation and meet all the repayments, it is still possible to lose money fron a “flight to quality” if you buy a long bond on too low a rate of interest. There can be bubbles in gilt edged securities, as well as in properties and private sector shares. One of the problems the Japanese encountered when trying money printing in the 1990s was deciding how quickly to withdraw the cash once it seemed to be working, to avoid triggering a great inflation. They also discovered that if you did not first mend the banks, it was difficult for anything else to work.
It is worrying how quickly the Obama administration has been bogged down by the Credit Crunch. They try initiative after initiative, just like the UK, allowing nothing to work through. At the base of all this trouble is the obstinate refusal of the authorities on both sides of the Ataltnic to take a tough approach to the broken banks and financial institutions where the public sector now has a significant investment. It is causing political pressures for the politicians, who seem incapable of finding the people to sort out these broken and badly run organisations. The financial sector living on public sector subsidy is living well beyond its means and failing to sort out its businesses quickly enough. The result will be more losses, more bad news for taxpayers, and more anger about the remuneration of the executives responsible.