Fashionable Economics 192


The ludicrous thing was that Britain had a AAA rating in the first place.

It is four years since I started pointing out the blindlingly obvious, that quantitive easing would cause inflation and devaluation. Four years ago this blog had far fewer readers than it does now, and I am quite proud of that piece, so do read it.

At the time it was a deeply unfashionable view – in part because it was New Labour doing it, so all the BBC and Guardianista media were backing quantitive easing. Even when I wrote this two years ago:

Inflation as measured by the retail price index remains stubbornly at 5.2%, despite all the obvious deflationary pressures on the economy and continuing weak consumer demand. Strangely, the attempts to explain this being offered by media pundits all miss out quantitive easing, or to use a more old-fashioned term, printing money.

It is deeply unfashionable to hold to the view that simply to create more money reduces the value of the money already in circulation in relation to the supply of available goods; but that is what all history tells us (the benchmark example being the rampant inflation after Spanish opening up of the New World greatly increased the amount of gold coinage in circulation). Common sense tells us that too. Otherwise we could simply solve many of our problems by printing another couple of trillion pounds.

A couple of years ago, I suggested “Enough quantitive easing and we can eventually get back to stagflation”. We are just about there. Why have none of the experts noticed?

nobody much agreed.

Fashion in economics is fascinating. Now every financial pundit on the BBC and Sky has noticed that quantitive easing causes devaluation and inflation. Suddenly they have remembered that if you create a lot of something, it decreases its unit value.

Hey, but the banks have the money that was created, and bank bonuses are back to normal. So all is fine.


192 thoughts on “Fashionable Economics

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  • mike cobley

    This is what you get when you’re a country under occupation by the Empire Of The Bankers. Its a singular empire – it has no borders, spans no defined territory, has no military, but it does have all the money!

  • Justin

    Hurray! All is fine! …..wait a minute – do I detect sarcasm?

    In all seriousness the Economics of the world are so screwed at the moment that in most newsrooms it’s all populist economics that makes the news. The only questions asked is “who can make the shitstorm outside sound the sweetest in the nicest possible sound bytes?” Truth tellers are deemed alarmists and get might be lucky to be acknowledged years later when the inevitable question of ‘What went wrong” is asked and answers are inevitably ignored once again.

  • MJ

    “the banks have the money that was created”

    Yes. It wouldn’t be so bad if the money was spent on something useful, like investing in infrastructure or maintaining public services. Printing money is fine if it’s done as an alternative to borrowing rather than as well as. Borrowing involves private banks doing the printing then charging us interest for the service. It’s a monumental scam.

    “has no military”

    Not true. It has the military forces of the USA, the EU and Israel at its disposal.

  • Anon

    Surely QE isn’t about fixing anything? Just papering over the bad debt for now until… Until what – that’s the real question.

    http://www.youtube.com/watch?v=QIWg6CyVKk0

    Robert Hirsch – The Impending World Oil Shortage: Learning from the past

    The US is doing its best to fill itself with more holes with speculative investment propelling ever increasing drilling rates but the Red Queen problem of running faster to stand still will catch up with them and the industry knows it even if some investors don’t.

    Ben Bernanke wrote academic papers on the 70s oil crisis and how to keep the economy afloat during oil shocks.

    Hirsch doesn’t seem to think shale will save us. Despite being one of the world’s leading experts on fusion he doesn’t seem t think that will save us either,

  • Anon

    Jimmy Carter Crisis of Confidence Speech 1979 – http://www.youtube.com/watch?v=KCOd-qWZB_g – where Carter sets a new way forward. This speech is a must watch even if you recall seeing it a long time ago, watch it again.

    Instead Reagan and Thatcher were elected and the North Sea and Prudhoe Bay were pumped as rapidly as possible and as cheaply as possible and the resources squandered. And now here we are.

    The key decisions that led us here were made decades ago.

  • Anon

    http://www.pbs.org/wgbh/americanexperience/features/primary-resources/carter-crisis/

    We are at a turning point in our history. There are two paths to choose. One is a path I’ve warned about tonight, the path that leads to fragmentation and self-interest. Down that road lies a mistaken idea of freedom, the right to grasp for ourselves some advantage over others. That path would be one of constant conflict between narrow interests ending in chaos and immobility. It is a certain route to failure.

    President Jimmy Carter

  • Fred

    Iceland had the right approach. They let the banks default and sent the bankers responsible to prison.

    Their economy is recovering, ours is sinking.

  • Malcolm

    Was just about to ask about Iceland. Their economy doing as well as I hearing or mostly seeing in memes on Facebook? If it is really should be getting more mainstream coverage.

  • Fred

    “Was just about to ask about Iceland. Their economy doing as well as I hearing or mostly seeing in memes on Facebook? If it is really should be getting more mainstream coverage.”

    Their credit ratings are still worse than Britain but they are rising while ours are falling.

    Plus they have the satisfaction of knowing those responsible are behind bars not awarding themselves 12% pay rises and huge bonuses out of tax payer’s money.

  • Ben Franklin -Machine Gun Preacher (unleaded version)

    Iran has the right idea. They hang their fraudulent bankers.

    ‘Fashion’ is a sort of zeitgeist. Groupthink is preferable to independence because no one wants to be labeled an ‘outlier’, or a pain-in-the-ass, or out-of-fashion.

    The only reason currency exists is because people believe it has value. The Fed and IMF have been authorizing the slurry of printing to keep the boats afloat. When some start to jump ship, it undermines the public fallacy. Just like the Dot.com boom at the turn of the century, our WW economic system s based on belief, without any genuine foundation of collateral to back up the paper and dross metal symbolism.

    The world economy is but a shadow. It has little substance to support it’s phantom menace.

  • Courtenay Barnett

    @ Craig,
    “It is four years since I started pointing out the blindlingly obvious, that quantitive easing would cause inflation and devaluation. Four years ago this blog had far fewer readers than it does now, and I am quite proud of that piece, so do read it.”
    Printing money and releasing it into circulation without:-
    1. Co-relation of the money supply to gold or other precious metal will cause inflation and a devaluation over time; and
    2. Production in a physical sense or services that earn money being absent or declining will not find an answer in quantitative easing. This merely kicks the can down the road and the problem is greater when next the same underlying economic issues are to be confronted again.
    America has been trying the easing formula, but has one advantage over all other countries , and has been able to do this for a while. The US dollar as the world’s reserve currency permits this temporary recklessness.
    Zimbabwe does not have that privilege and the consequences of recklessly printing money and the immediate results are there for all to see.
    Over time, with a contracted manufacturing sector and too much money chasing non-produced domestic goods and services – not surprisingly, the consequence is inflation.

  • Habbabkuk (La vita è bella!)

    Re Iceland : several commenters have stated that bankers in Iceland have received prison terms. Is that really correct – can anyone link to a source for this claim, please?

    The former PM was tried on a number of charges but was only found guilty of (a minor) one, I think, and didn’t get a prison sentence.

  • Clark

    http://en.wikipedia.org/wiki/Iceland_banking_crisis#Convictions

    Baldur Guðlaugsson, Permanent Secretary of the Ministry of Finance, was sentenced to two years probation by the District Court of Reykjavík for insider trading. The case was remitted to the Supreme Court of Iceland which upheld the ruling.[167]
    Aron Karlsson was sentenced to 2 years in prison by the District Court of Reykjavík for defrauding Arion Bank in real estate dealings.[168]
    Lárus Welding, CEO of Glitnir, and Guðmundur Hjaltason, Managing Director of Corporate Banking of Glitnir, were sentenced to 9 months in prison by the District Court of Reykjavík for a major breach of trust. Out of the 9 months, 6 are probationary for 2 years.[169]

  • Je

    To think how bad it would be without North Sea oil. The reason for the deficit of course is inflated public sector salaries and pensions – thats where the money goes. Six months sick on full pay etc. £million payoffs for NHS reorganisation at the mo’. All that hasn’t been touched.

  • Habbabkuk (La vita è bella)

    @ Clark re. translation :

    from the Shorter 0ED, 1973 : “To plead : to address the court as an advocate on behalf of either party”

    Perhaps “plead” should be “pleaded” for the past tense?

    Your alternative translations are OK as well, especially the first one (“represented”)

  • Habbabkuk (La vita è bella)

    @ Clark re. jailing Icelandic bankers :

    Thanks for that info.

    If we take out Aron Karlsson (because his case appears rto have been one of straightforward fraud and not specifically linked to the general econolmic and financial mismanagement), we have a grand total of 3 individuals sentenced, of which only 3 actually did time (a grand total of 6 months between them). Moreover, your source doesn’t mention the really big beasts – eg, David Oddsson (former PM) and those dashing young banking super-tycoons (eg the Kaupting Bank boss)with the unpronounceable names.

    All in all, not enough to justify FRED’s comment at 16h26 “….and sent the bankers responsible to prison…” and FRED’s further comment at 17h32 “…the satisfaction of knowing those responsible are behind bars…”.

    Poor old Fred, he never gets anything quite right, does he. Probably thinking too much about Lord McAlpine to focus properly on the task in hand.

  • Mary

    Even funnier is this BoE video which attempts to explain how the prestidigitators do their trick.

    http://www.bankofengland.co.uk/education/pages/inflation/qe/video.aspx

    Will the arrival of Mr Carney from Canada in July change anything? I put a search for ‘printing money’ on this document which contains his answers to the Treasury Committee on 7th February 2013 but I got nil response!

    http://www.bankofengland.co.uk/publications/Documents/other/treasurycommittee/other/carneytsc.pdf

    Remember he has been in the UK before when he worked for Goldman Sachs.
    Masters of the Eurozone graphic http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/04/Goldman%20Europe%20New.jpg

    Mrs Windsor checked the stock in December before the new boy takes over.
    https://i.dailymail.co.uk/i/pix/2012/12/14/article-2247578-167F9E1E000005DC-624_634x394.jpg

  • Habbabkuk (La vita è bella)

    @ Fred himself (17h32)

    “Their credit ratings are still worse than Britain (sic) but they are rising while ours are falling”.

    Technically correct, but a silly comment to make. And meaningless :

    Iceland’s credit rating was at rock bottom and there is nowhere for it to go but up.

    THe UK’s rating has (just – and by one of the three big agencies) been lowered one notch. One should therefore say “it has fallen” and not “it is falling”, which gives the impression that Fred has a crystal ball and knows that there will be further falls. (BTW, this happened to the US and France without affecting their borrowing costs).

    Stick to four letter words, Freddie boyo, you’re better at them.

  • Habbabkuk (La vita è bella)

    The Queen is probably trying to find the dirty rats hiding amoungst the crates.

    I hope she will be succesful and then I think Prince Harry should have a go at them.

    *********

    La vita è bella, life is good! ( get rid of traitorous vermin!)

  • Je

    Fred – there’s a standard pie chart here.

    http://www.ukpublicspending.co.uk/budget_pie_ukgs.php

    £127.2 billion goes on pensions.

    The NHS gets £104 billion. About 60% of that goes directly on pay. Much on the rest goes on buying services – where again pay will be a large proportion, so the actual figure will be higher. It includes 2 GPs who got about £475,000 each. As I said before they’re making payoffs of up to £1,000,000 during the reorganisation – which is 4x the statutory mininum – giving money away for zilch.

    Education gets £91.7 billion. I would guess the pay element is larger than in the NHS, but I couldn’t find a figure. One primary school headmaster earned £276,000, which is absud. Pay will also be a massive part of other departments spending.

    £47 billion goes on interest.

  • Jay

    The money system is all smoke screen. Money and wealth is bullshit, our selves in society arw so much more in society than a meaningless concept that is money.

    We are focusing on the wrong kind of wealth.

    Compassion, durability, ethos, hard working good samaritan.

    Money is Bullshit.

    Have a nice day tomorrow.

  • Herbie

    “Iceland’s credit rating was at rock bottom and there is nowhere for it to go but up.”

    Not quite. It could stay the same.

    The point is that it’s hardly “meaningless” that Iceland, in taking a very different economic course to UK, is now improving whilst the UK is still declining.

    That seems quite significant, actually.

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