EMILE WOOLF

[Going Postal 12-8-19, and Economic Perspectives – 60]

There can be little doubt that tenacity is a great virtue. It means holding on to something important, something you believe in, no matter what. The trouble with tenacity, however, is that it does not necessarily rely on principles. Clinging to a piece of driftwood in the torrent as it hurtles downriver is sensible enough in the circumstances, and certainly requires great tenacity, but there is little point at that stage in considering how sensible it was to get into that situation in the first place – that, after all, would require an understanding of the principles that applied.

No matter how obvious, this logic is universally disregarded by economists and politicians who persevere with policies that lead to wealth destruction, resource misallocation and market interference. Here lies ample evidence of tenacity: these illustrious authorities cling to the driftwood of yesteryears’ policies as if those previous failures didn’t really happen – and as if, this time, they will miraculously succeed.

Deeply embedded corruption

In extreme cases like Zimbabwe we now find that the corruption, which consumed virtually every institution of state under Robert Mugabe, remains as entrenched as ever; and the violence visited upon protesting demonstrators has taken on a degree of savagery that matches the very worst found anywhere.

 

baseless promises of reform

 

Early promises of political and economic reform made by Mugabe’s successor, Emmerson Mnangagwa, are now shown to have been utterly baseless – while Zimbabwe’s long-suffering citizens, only 5% of whom have formal jobs, struggle to survive without fuel, water, medicines and bread, enduring power cuts lasting 18 hours at a stretch.

Its Finance Ministry’s response to this chaotic picture has been simply to hide the truth by suspending the announcement of inflation figures when they reached 176% for the month of June alone. For good measure it has also created total commercial anarchy by banning use of the US dollar, and enforcing the use of worthless Zimbabwean dollars.

No lack of tenacity here: an isolated, corrupt and deeply ignorant tyranny clinging to increasingly meaningless vestiges of power that cannot possibly endure; and a beleaguered citizenry clinging to life against all the odds.

For other examples of mindless tenacity we do not need to scour the world’s most savage regions, for we can find them far closer to home.

Repeating the mistakes

By the peak of the financial crisis of 2007-2008 the insatiable feeding frenzy of mortgage lenders in the USA had created a mountain of sub-prime debt that was patently beyond the bounds of any possible repayment. Parcels of mortgages had been sliced and diced and passed around the institutions with a semblance of passable ratings – deceitfully given by conflicted agencies, while unexamined and untested by their auditors.

Chiefs of the Federal Reserve and Treasury then decided, in their wisdom, to prioritise their own credibility by not facing up to what had been happening on their watch. They chose instead to engineer a massive bailout to shield holders of sub-prime detritus from the consequences of their blind greed – despite the fact that it had caused the greatest credit misallocation of modern times – and thereby prevented the mother-of-all-unwindings from running its painfully cleansing course.

They achieved this by embarking on a slicker, but previously untried, version of “mission impossible”. Unlike the fiction, it has indeed proved to be just that: impossible! But tenacity is our theme, and full marks to them, and their followers, for repeating the folly now!

They all caught the habit

Ever since governments worldwide abandoned currencies redeemable in gold or silver, their fiat substitutes have been subjected to steady debasement, differing only in the matter of degree. The financial maelstrom of a decade ago, however, was a game-changer. It was ubiquitous, and hence in a league of its own. Once the US Federal Reserve and the Bank of England had created the template for a new style of money printing, central banks everywhere caught the “quantitative easing” habit.

undisciplined state profligacy

 

Since governments themselves control the money-printing apparatus, they and their close-knit coterie of lending institutions are its chief beneficiaries, inviting undisciplined state profligacy on any scale they deem necessary. But since the newly printed bonds carry an interest coupon that must be honoured, they lower their cost by suppressing rates without regard to the markets’ time preference, thereby masking the true impact of all that new debt.

Monetary chaos – QE’s sardonic inversion

Unfortunately for governments and central banks everywhere this magic formula has no respect for tenacity – for it can conceal the reality of what they are doing only once!

When treasuries attempt to invoke QE’s powers to meet every conceivable financial crisis, no matter how caused, it takes on its own sardonic inversion and monetary chaos ensues.

 

money creation does not lead to demand-creation

 

Contrary to Keynesian theory, unbacked money-creation does not lead to demand-creation; it leads rather to wealth destruction – of which deeply discounted (negative) interest rates are a recent and particularly dangerous manifestation of what the world’s central banks and treasuries are now having to agonise over.

As for the US government’s pretence of upholding the capitalist creed of corporate accountability, in 2008 the beleaguered creditors of sub-prime mortgage-holders were bailed out with artificial money. Although that represented a formidable level of bailout, it has been relatively manageable compared with the amount of fake money the European Central Bank needs to print every time a sovereign member of Club-Med needs to be bailed out – quite contrary, incidentally, to the original Maastricht convergence rules and the EU’s own constitution.

At this level of monetary debasement, economic and political issues collide, threatening the very foundations of the EU project.

Unwinding cannot be forestalled forever

The depth of ignorance driving this farce is clear from the fact that it is all happening at the very time that all leading central banks have been sharpening their skills at quantitative “tightening” – the reverse of “easing” – on the pretext that their loose money remedies have now succeeded, and the crisis is over at last! Well, they can forget that one.

Despite pretence of normalisation in the shape of miniscule token rises in UK and US interest rates, these are already floundering. As for the ECB, I predict no rises at all. Having only last December abandoned its decade-long QE of 50 billion euros per month (!), it will have to crank up its money-printing apparatus again – but with interest rates already at minus 4 per cent, any notion of cutting them further will push the finances of the entire eurozone into a currency failure par excellence.

Mario Draghi’s replacement, Christine Lagarde, shorn of any meaningful weaponry, will face a challenging initiation, to put it mildly!

Other central bankers face exactly the same issues, yet none of them shows any appreciation of the need to resist the temptation to dodge the inescapable unwinding of past distortions.

Nor is there adequate recognition that allowing the free operation of markets is the only route to building the wealth they all talk about but don’t understand.

When original thought is required, tenacity misfires – every time!

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EMILE WOOLF

ECONOMIC PERSPECTIVES 60