An entertaining article, choc-a-bloc with Monetarist whitewash, in The Telegraph today.
Apparently Jean Claude Trichet is “inflicting a triple shock of fiscal, monetary and currency tightening on a broken economy”.
Well, at least I agree with the last part. Europe’s economy is well and truly broken, thanks to a decade of loose monetary policy, low private savings, bankster socialism and the fiscal incontinence of our various Kings of Europe, but is Ambrose saying that the cure should be more of the same?
A “deflationary vortex” is what is awaiting us around the corner. Well, I agree things are bad. Monumentally bad. The plane is out of fuel (they never put enough in), and we are lurching downwards – and this is going to hurt. We are facing massive credit deflation in the private sector.
“Spiraling public sector debt precludes further Keynesian spending, so this must come from central bank stimulus.”
Uh, what? Oh please.
Let’s take a step back from all of this aggregate nonsense, and think, in clear, incisive, terms what is happening.
1. Central banks were in control of setting interest rates
2. Given low headline CPI inflation (which is a very problematic measure), policy tended to be looser than the free market would have been, and interest rates were set artificially low. (No central banker would ever keep rates a little too high – that would have risked a deflation shurely, hic, pass the punch bowl).
3. As the price of credit was set artificially low, excess credit was demanded (that bit of ‘A’ level economics, supply and demand curves, sort of work), and was happily met by the banks (thanks be to Mr. Taxpayer for all that free insurance of deposits allowing them to be lent out again and again and again).
4. People bought stuff with that credit, especially houses. Remember house price rises in 2005 and 2006 – did it seem silly or not?
5. Higher asset prices supported more credit creation by our taxpayer guaranteed banksters, which fed into higher asset prices etc
6. Something happened, depositors wanted their money back, and the spiral went into reverse
Excess private sector credit creation was the problem. The market is now trying to correct this mistake, and banks are being forced to call in credit lines that should have never been given out in the first place. Heartless some will say, but it cannot be helped. The damage was done during the period of credit creation and the resultant boom, the best thing to do, now, is to trust the free interaction of people to swiftly reallocate wasted resources from misuse towards productive use. The statist alternative is to try to mask and hide the pain, as the Japanese did in the 90’s. Look where it got them.
Now think a little about what the usually-admirably-free-market Ambrose Evans-Pritchard implies.
“Far from taking steps to offset Club Med austerity [err ‘Austerity? Shouldn’t that read ‘sanity’?] it is winding down its €50bn purchase of government bonds”
The implication here is that we should purchase more of those government bonds, all with newly-created money tokens.
Am I the only one to be horrified at the spectacle of the emperor’s nakedness here? Think about what AEP implies should be done:
1. Private sector credit is being called in, so;
2. The central bank, the guys who got it wrong in the first place, are the guys to deal with it, sooo;
3. The destruction of private sector credit (i.e. banks calling in loans to you and me) should be offset, soooo;
4. They create public sector credit via QE, soooooooo;
5. Public sector credit allows government to do more things than it should not have been doing in the first place
This credit for the purchase of government bonds does not appear out of thin air. It is funded by devaluing all of the privately held money in existence. It does nothing to sort the structural problem of business and consumer loans being called in.
The net result, after all of this, is a smaller private sector and a bigger state (unless, that is, you surrender yourself to a belief in some kind of magical process in the middle, called Monetarism or Keynesianism).
Mr. Evans-Pritchard, why are you so ardently, and happily, proposing a massive expansion of the state?
Very well said! With regards to the economy and monetary policy, wouldn’t it be great if everyone could just lay their cards on the table?
That way, we’d know either A) the real intentions and worldview of these people or B) how clueless they actually are about real economics.
The whole world believes this madness too, it seems.
Brilliant, Mr Tyler: “the best thing to do, now, is to trust the free interaction of people to swiftly reallocate wasted resources from misuse towards productive use. The statist alternative is to try to mask and hide the pain.”
What is the solution? If you follow your line of reasoning the debt deleveraging will result in anarchy. Is society ready for an economic “re-boot” of this magnitude? Of course not.
AEP is not proposing a massive expansion of the state. It boils down to the quantity theory of money. The transmission mechanism is not working as banks re-capitalize and the fear of the impending recession is leading to a fall in the velocity of money.
There are no easy answers, just pain. The question is the speed at which society wishes to re-adjust. The answer is political….
Elastic bank credit has financed a pyramid of investments in sectors that are now non performing. It was only unfeasibly cheap and easy credit that made huge swathes of economic activity justifiable. There is no way, short of magic, that these types of assets can remain anything other than zombies (see Japan). Over time, banks will be forced to accept gravity, and call these loans in, tipping these projects into bankruptcy (see Japan). This will happen, but we can lengthen the process out (see Japan), but the inevitable will happen (see Japan). This is a problem of structure and DETAILS.
Policy makers do not see the detail, they see the shrinkage of credit, so they come up with a solution to keep the AGGREGATE total constant, DETAILS BE DAMNED.
Their solution is to step in and pull on the easiest lever they can find…. create credit by financing Government!
Will Q.E. address private sector credit contraction? Nope.
Will Q.E. address bust businesses? Nope.
Will Q.E. help change the structure, composition and allocation of our scarce resources and capital? Nope
Will Q.E. increase government discipline? Nope.
Will Q.E. allow better access to scarce resources for productive (private) endevour? Nope
Will Q.E. encourage capital to be made MORE available for entrepreneurial activity? Nope
Will Q.E. make it easier for government to sell its bonds? Yes
Will Q.E. make expand the percentage of the overall credit that is allocated to government? Yes
Will Q.E. help the banks out? Yes
Will Q.E. mean that more and more of our net resources will end up being allocated by bureaucrats. Sure will.
Sorry, but I just do not buy the quantity theory of money, and mainstream monetarism, generally. It is the financial equivalent of racism…. “They’re all the same”.
James Tyler inquires: Mr. Evans-Pritchard, why are you so ardently, and happily, proposing a massive expansion of the state?
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Maybe, just maybe because Mr. Evans-Pritchard has a deep-seated desire for an ever-growing statist system with a burgeoning regulatory democracy controlled by the same elites that have now proved beyond a shadow … their capability of self-inflicted terminal stupidity … that they know what’s best for the “subjugated people, the tax slaves.” This is not the first time that this ultracrepidarian, Mr. Evans-Prichard has proposed similar solutions. How unfortunate! He seems to have learned little to nothing in this current world debacle! To listen to the Rx prescribed by Mr. Evans-Prichard is to thrust the world further into the Keynesian elites’ abyss of woe. You really don’t want to go there… Do you?
Let’s hope the real “cool heads” with truth under their calvariums will step forward and not allow such poppycock to endure. Otherwise, we’ll expect another World War (Odds are rising dramatically now!) with indescribable hideousness to ensue, while taking the minds and hearts off of the REAL issues of WHY, thereby leading to the abattoir! History seems to suggest age-old truth – people can’t grasp or learn from the past. And so they just keep paying the ultimate price.
C’est la guerre,
Capt. A.
Principaute de Monaco
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