ECONOMIC PERSPECTIVES 92 – DECEMBER 2020

SOME UNSEASONAL REFLECTIONS ON MONEY

Several comments and questions on my last essay deserve a thoughtful response, which is the theme of today’s essay.

You may recall its references to today’s dependency culture – the “expectation syndrome” that fuels the size and cost of welfare programmes as the state’s tentacles infiltrate every crevice of society under banners of “the state owes me a living”; “policies should be geared to job-creation”; and all to be funded by “taxing the wealthy”.

The essay, titled “How the Crisis Unfolds”, described, in some detail, the money-printing mechanism, or Quantitative Easing (QE), adopted by the Treasury to pay for this phenomenal largesse, particularly the great 2020 state-sponsored binge still under way, with more mountains of funny-money.

I also explained the divisive social consequences of fiat money-creation and the inflated currency’s inescapable loss of purchasing power.

QE & “Helicopter-money”: any difference?

Some readers asked how, if at all, QE differs from so-called “helicopter money”. Well, while the ultimate effect of any form of currency destruction is much the same, the respective processes and the time-frame of their impact do indeed differ.

Quantitative Easing’s evil effects

The QE process involves the creation of massive liquidity in the money markets, reliably taken up by commercial banks, pension funds, insurance groups, major corporations, local government treasuries and other “first receivers” among favoured City institutions – all having to find outlets in which to invest, or simply spend. Lavish bonuses, dividends, share options, deals galore, all create asset-price inflation in equities, UK and overseas properties and myriad luxury assets, before gradually filtering down into the wider economy that most of us inhabit.

In essence, QE makes extensive use of secondary financial markets for the purpose of absorbing the newly created money into the economy over an undefined extended period.

By contrast, as its name suggests, “helicopter money” by-passes the money markets altogether. It has come into its stride during the pandemic, its astonishing generosity being lavished by the Treasury, or that custodian of the nation’s taxes, Her Majesty’s Revenue and Customs (HMRC). It hardly matters which department of state serves it up, but all that electronically generated money is simply “helicoptered” directly into the bank accounts of people, firms and companies.

 Indiscriminate largesse

 Naturally, attempts are made to relate benefits to needs, but in some cases the process finishes up being unfair. For example, a business owner who just happened to cash in a pension fund before Covid struck would now receive nothing from the state on the grounds of “having enough to live on”. But had the pension fund instead been left undrawn, new money would be flowing straight into his bank account. Similarly, much state-supported lending has been skewed towards “zombie” companies, merely delaying their demise, while starving smaller, dynamic businesses of much-needed finance.

Nursemaid ‘schemes’

 

There are so many “schemes” being dreamed up, almost on a daily basis, that it’s difficult to keep tabs on them. Some readers justified this unbalanced extravagance with comments such as “no one saw the virus coming – at least those worst affected are being assisted even if there are some blunders.” That’s the prevalent humanitarian view.

But make no mistake, once those holding the levers get accustomed to the breezy power, the plaudits, the instant popularity that comes with hosing money in every direction, it’s a short walk to irreversible addiction. Indeed, this style of unbridled fiat money creation is more pernicious than QE, and more effective in achieving total currency destruction.

Evidence in abundance

We know about the Weimar Republic in 1923, when the central bank was forced to replace the worthless deutschmark with the new “rentenmark” – fixing an exchange rate against the dollar by the simple device of deleting twelve zeroes! We have witnessed purchasing poser destruction in Yugoslavia, Hungary, Syria, Zimbabwe, Venezuela, Greece, North Korea and Argentina – where a bankrupt regime ruined the economy by printing money to fund welfare to secure votes – while repeatedly defaulting on debt repayments.

The Peso and the Dollar

 

Argentina is a beautiful country, endowed with vast supplies of natural resources. It was a tourist heaven with a superb climate and a happy people. But a friend, who knows that country, tells me that the last time a reformist regime attempted to instil a dose of reality it was hounded out of office for seeking to “inflict austerity”.

The journey from bountiful to basket-case was swift. It was marked by (i) debasing the currency at the rate of between 30% and 50% per annum by indulging in rampant money-printing; (ii) mafia-style bribery and corruption at state level; and (iii) continually threatening to nationalise the means of production. Socialism on steroids.

Prices quoted in dollars

For governments to conduct affairs of state idiotically is almost expected. But when people become instinctively aware that their currency has been destroyed they will find other ways to trade: hotels, shops and restaurants in Buenos Aires thus display their prices in US dollars. Yet only 20 years ago the peso and the US dollar were close to parity. It is no wonder that wealthy citizens are not crazy enough to invest in their own country, preferring to keep their money in safer locations, adding to an uncontainable flight of capital resources.

The government eventually bowed to political pressure, allowing its citizens to purchase US$200 each week at the so-called “official” rate of 82 pesos to the dollar. Naturally, this was a pure guess, and the black-market rate settled at double that. Many citizens survive by buying their weekly quota of official dollars, and promptly disposing of them on the black market. Demonstrating once again the flawless intersection between human nature and economic law, most notably when the regulatory policies of state are plainly asinine, having to resort to still more regulation whenever confronted by natural law.

The French lesson

 When we had a home in France we witnessed exactly the same debacle. When right-of-centre leaders Chirac and Juppe attempted to moderate excessive pension and welfare provision the whole country was brought to a standstill by widespread strikes and blocked motorways. Chirac called an election, hoping for a public-backed mandate for some modest reforms, but socialists under Mitterrand were elected instead, signalling the end of any curtailment of state spending. Macron, to be fair, has attempted reform, but the obstructive venom of Gilets Jaune diehards opposed any meaningful reform, calling for wealth taxes instead. Maybe it’s in their genes: to the French, every state giveaway morphs into an inalienable right!

“Liberté”, absolutely! “Fraternité”, sure! “Egalité”?  Now there’s the curse!

Jogging along with modest inflation – really?

 Other readers asked why, after 10 years of QE and repeated warnings of destructive hyperinflation, we appear to be jogging along quite nicely with modest inflation and a functioning currency. Well, 10 years ago, particularly in the US, freewheeling lending practices by banks came very close to destabilising the dollar.

Freewheeling lending

 

Banks indulged in massive debt creation supported by fake collateral values. They hounded thousands of impecunious borrowers, offering absurdly lax terms for home-loans that they could not afford to service, let alone repay. The banks “sliced and diced” these near-worthless mortgage instruments, parcelling them (after throwing in a few higher-grade securities to fool the rating agencies) and selling the parcels to other banks. This game of “pass-the-poison” went on until the system ran out of suckers. Financial institutions left “holding the baby” had to be bailed out by – yes – that brilliant device of “quantitative easing”!

At the time I expressed the view that both the dollar and sterling would have been strengthened if the banking wide-boys caught up in this illicit frenzy had been allowed to go to the wall. Citizens fleeced would have been eligible for aid, and the culprits should have been sent up for a dose of painful correction. Banking institutions under new management – indeed the whole financial system – might also have regained some public trust. But in the event lily-livered chiefs caved in, allowing millions of ordinary citizens to be punished by the theft of purchasing power, while enriching the echelons of first receivers.

Purchasing Power – the all-time loser

 

As it happens, we are not jogging along with low-rate price inflation. For starters, none of the official indices is accurate. The Office of National Statistics is well-practised in the rigorous art of deceptive selection to arrive at the “number-you-first-thought-of” (2 per cent).

Now try this: if you are hoping to assist a daughter or son purchase somewhere half-decent to live you will be reeling from the shock of current price levels of even the most modest abode. No inflation? Really? And how are savers, suffering the novelty of zero-returns, able to sustain living standards?

A desolate landscape beckons

We should in any case stop thinking of purchasing power destruction solely in terms of its price-inflation manifestation. The post-Covid economic landscape will be littered with crippled businesses of all sizes, leaving a trail of bad debts that emanated from the government’s own loan schemes; and thousands of commercial loans already designated “non-performing” will inflict untold damage to counterparties. Will recourse to the only panacea that government knows – more and more magic fiat – be repeated? Or will Chancellor Sunak recognise at last that the devastation wrought by well-intentioned, but unbridled, debt creation cannot be remedied by….. still more debt creation?

Even he now confesses that if this madness continues we shall be staring currency destruction in the face.

EMILE WOOLF

DECEMBER 2020

 

_________________________________________________________