Thursday, 20 November 2008

Potential Radical Solutions; Suggestion 1


Yesterday we disclosed how the BOE has lost control of monetary policy. They only have the interest rate to control and this is meaningless in the face of LIBOR and CDS and the Bond market.


On Monday, whatever Darling and the media report, the Government will outline the loss of control of fiscal policy. perhaps with debt ballooning to 50% above target for the year.

As a result of the above the pound has sunk, now trading at £1.48 to the US Dollar and £1.20 to the Euro; Osborne's little saga apart there has been little public reaction to this.

When we then consider the issues facing us; deflation of asset values in all classes, capital inadequate banks, low savings, consumer over-indebtedness - we are in quite a pickle. it is very Japan circa 1990-91. They had a 10 year recession and their stock market is now 85% below its peak (=FTSE100 at 800, rather than 4000 as today).

But perhaps the BOE do have an answer. Print money now, deflation is setting in for the moment as global deleverage occurs - so the inflationary effect will actually be countered in the short-term. Plus inflation would then allow the BOE to raise interest rates back to levels which may enourage saving. Asset prices would be reduced in real terms and there would be more money to spend to stimulate the real economy. Also with no need to issue gilts, the government will not need to get into such financial hole as is currently planned.

In the US, The Fed Chairman Ben Bernanke has hinted at the US going down this road to avoid depression. The time to do it is now, in the deflationary window. If we wait until the deflationary period is over we could set-off hyper-inflation.

Thus there is a strong argument for printed monetary stimulus today. Comments?

18 comments:

roym said...

interesting, especially if it would reduce govt borrowings. whats the technical term for printing more money though?

Ed said...

Hmm I have a funny feeling that this is exactly what I was proposing a while back - printing a relatively large sum say £10,000 per voter and sending a cheque. Most will be used to "deleverage" as City types call paying off debt, some will be spent, people will feel a bit more financially healthy.

The danger, as I see it, at the moment is that even with offical rates at zero many people will be deleveraging rather than borrowing or spending.

Anonymous said...

Yes please, I could do with another ten grand to get the S-Class serviced.

Steven_L said...

If Gordon send me a cheque for £10k I'm going to cash it at a pawnbrokers the morning it arrives, then change the cash into dollars, then go to the nearest airport where, providing I get there before midday, hopefully I should have enough to buy a one-way flight out of this mess.

patently said...

Interesting suggestion.

How would we work out the right amount to print? Could be a fine judgement call; too much and hyperinflation would be the icing on the cake.

At least someone is thinking laterally; Brown is just doing more of the same that got us into this whole mess.

Alan Dean said...

Funnily enough I was discussing exactly this with a friend of mine on Monday and I said that she should take note if she hears 'unsanitized' in a financial news report as it is the codeword for "We're just printing money now, like Zimbabwe, because it's the only option left to try".

Sackerson said...

Eric Janszen of iTulip, today:

"Why did the credit markets crash? The credit market is best understood as a transactions network. One node or set of nodes crashes, and in the process transmit the information that caused the crash to other nodes. Entire sections of the network crash and become inoperative while others continue to function, which explains why credit continues to flow almost normally in some credit markets that function as more or less autonomous sub-networks. However, eventually the entire network may fail, with only a few isolated sub-networks functioning, and large sections of the US economy will devolve into operating on a cash-only transaction basis as has occurred in other instances of credit market breakdown in other places in the world.

This was, by the way, why I supported the original stinky Paulson emergency bailout plan. [tk]. Not that I love Paulson or what he represents but after I interviewed Dr. Peter Warburton at the time (See Inside the Whirlpool: Interview with Dr. Peter Warburton $ubscription), who wrote the book on the flawed modern credit system in Debt And Delusion in 1999 and forecast this debacle years before anyone else, I realized that there was a moment when rebooting the first set of crashed credit system network nodes quickly might have prevented a systemic credit network failure. Paulson did not have time to put together an elegant plan or present it well, and Congress gagged and chattered while the network melted down those first few days. Might the $700 billion bailout have worked if immediately applied versus two weeks after proposed? We’ll never know. Now Paulson stands accused of bait and switch, when in fact months ago the time passed when the $700B emergency credit network reboot might have worked. Now he can either return the money and explain “too late” or keep it and try to use it for some other purpose. What would you do?"

Ed said...

No, I think we just have to accept deflation and depression. Our recent prosperity was not based on productivity it was based on borrowed money. Somewhere along the line that money has to be repaid. Printing money is just another way of destroying thrift or as the City boys call it "moral hazard".

Anonymous said...

Printing money may be the only way out but it is fraught with severe hazard. The least is that the whole thing WILL cause hyperinflation, since the idea will be not to solve the underlying structural problems in the UK economy (i.e. to balance trade and balance government accounts) but to perform a paper right-off of existing debts by the back door so that further debt can then be created. It is not the printing of money that will cause the hyper-inflation (because it will only be a swap of cash for debt) but the supposition that paying off the debt will lead to yet more debt spending. If it were not to lead to debt spending we can assume that the government would have to then think in terms of printing excess cash to stimulate spending from savings -m then we would be in a real Zimbabwe situation.

The second, more serious, problem with printing money is that it could lead to a very severe loss of confidence in the pound such that international trade based in the currency became impossible. We would then need to trade items in a barter situation to pay for imports - oil for bread for instance, as Russia had to do after the last Rouble crisis.

It should be noted that the UK printed a lot of money between WWII and 1975 to right off its war debt - did terrible damage to the UK economy over the period but with debt at 250% of GDP and no-one coming to wright-off our debt (as as done for the losers - Japan and Germany) it was pretty much the only escape. It was done very slowoly over a period of 30 years in the hope no-one would notice. It screwed the £ as an international trading currency and left Germany with an open goal on export trade with no UK to compete against as the inflation led to industrial strife.

The fact that we are considering such options as printing money as possibilities is really terrifying. We need to keep our wits about us as individuals. The key to surviving hyperinflation is to see it coming and prepare. Watch out for controls on buying gold and foreign currency - often a precursor to massive money printing.

Mark Wadsworth said...

The whole thing is arbitrary and self-cancelling. At best you could achieve a random transfer of wealth from savers to borrowers, which is what they did by reducing interest rates to well below inflation (in itself self-cancelling - borrowers have more money to spend, which they will probably use for deleveraging; savers have less money to spend).

And even if the gummint were to physically print the money, this is matched by an equal and opposite liability assumed by the gummint - this effect would be most direct if people used the cash to buy government bonds or pay off tax liabilites, let's say.

I am all in favour of sensible tax cuts, but as Laffer pointed out, the best way to stimulate the economy is to promise future tax cuts, not to make one of payments unconnected to anything.

So, sensible tax cuts must be the way forward if we are to work ourselves out of the mess that we are in.

Anonymous said...

Can you explain:

You think now is the time to start the monetary printing presses cos we are moving into deflation. You suggest that no inflationary pressure wil result cos the demand for money has increased so much. So you launch your Money helicopter and start dropping it out the cockpit.

But eventually, as confidence returns, aggregate demand will pick up. What happens then? The excess money will still be in the system. Its not just going to vanish. So the demand for money will fall - cos confidence is returning - and people will spend all this extra money. Result? Chronic inflation. Maybe hyperfinlation. Monetary collapse. I dont even want to think about the social consequences of that situation.

Forgive me if I ignore your advice on this one and move on to sbdy with a plan which makes sense.

CityUnslicker said...

Thanks for all your comments. For all those who think I advocate this, this was kite flying!

We need better ideas than the Government or Oppostion have.

To the two anon's (great comments btw). I do not advocate printing money ad-infinitum. Money is needed now to replace the deflationary destruction we are seeing. My point was at this exact point there is a window where deliberately increasing future inflation in the face of deflation is possibly not insane. Then it would have to stop and interest rates rise to support the pound and savers.

How much should this stimulus be - well I am not close enough to the details but certainly not more than £100 billion in total - which in itself might be too much to sneak away.

The US will likely copy us too if it works, so affecting the dollar and giving us a first mover advantage as the world moves our way. Look how japan has been constrained by huge debt and a strong currency for the past 15 years.

Also, we may get hyperinflation anyway if we hold interest rates below negative for a few quarters. The current monetary and fiscal policy won't work for sure.

Anonymous said...

Yes, Stop Borrowing Money and take control of our own money supply instead of Borrowing it from the International Moneylenders who Own Brown, cameron, Major, Blair etc.
http://adrianpeirson.spaces.live.com/blog/cns!CB609AA4E892F479!121.entry

Anonymous said...

To Cityunslicker:

"Money is needed now to replace the deflationary destruction we are seeing."

Point is any money you print now would still be in the system when when consumer demand for goods and services picks up again and people's preference for holding cash falls and settles back tdown to more normal levels. Your proposal would, therefore, be inflationary. Maybe not today but in the future. We'd simply end up lurching from one economic crisis to another. To suggest that we can scientifically manage the situation to inject just the right amt of money to nudge us back into prosperity and not overshoot the "target" is wrong.

CityUnslicker said...

Anon - we will have to diasgree on this point. Anyway causing some inflation is what we need right now to avoid a deflationary tailspin.

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