QE3, QE4,…QE4,000 Are Robbing Us
Sunday, 12th February 2012
BoE hitting our head again
The government is destroying the wealth of savers and pensioners by pursuing short-term economic policies borne out of ignorance and bowing to the selfish demands of noisy, narrow interests. Private sector taxpayers are the first to suffer under a troika of bad policies. But as Greece and the other PIGS show, the public sector will be dragged down too if they insist on beggar thy private sector neighbour.
In summary, the three policies that must be changed to achieve economic recovery are:
I) an end to printing money, or Quantatative Easing.
II) reduction in the size of the state.
III) cease subsidising alternative energy.
The Bank of England will purchase another £50 billion of old government debt from our insolvent* banking system and pay for it by creating new “money” out of thin air. Ta Da! By this magic trick the Bank and the Treasury expect to make the economy grow again. It won’t work because the Bank/Treasury do not, or will not, understand the relationship between money and wealth.
* Insolvent means the system’s liabilities exceed its assets. The banks hold assets (loans to businesses and mortgages) and these assets are funded by bank liabilities, e.g. customer deposits and government bonds. Because of banks’ reckless lending practices, Labour’s “economic miracle”, most of the loans and mortgages are worth much less than their face value, but deposits and government loans remain at face value.
Money is anything that simultaneously serves as, i) a medium of exchange, i.e. you can buy things with it, ii) a store of value, i.e. it will have purchasing power in the future and iii) it is a unit of account, e.g. you can maintain company accounts in pounds sterling. Other things can satisfy one or two of these functions, but if they can’t do all three, they aren’t money.
Wealth is deferred energy. Before civilization, that is when humans rarely had more than one meal stored, wealth was synonymous with the necessities of life, e.g. a pile of dry wood, cured meat or fish, a skin of potable water. Any tribe with these was wealthy because it was not obliged to expend energy obtaining them while they lasted. As civilization progressed – which was only the ability to create more types of stored energy, through farming plants and animals – energy that was formerly used to hunt and gather could then be spent in building better dwellings for the tribe’s members and eventually palaces. Civilization advanced to the point where we have been able to harness incredible amounts of energy, and although we may have forgotten what wealth is, it hasn’t changed its nature. An economy’s wealth grows to the extent that it can harness more energy. It can do this by making the exchange of goods more efficient or by exploiting an external energy source. Conversely, as the exchange of goods becomes more difficult or as external energy sources become depleted, the economy’s wealth will decline.
What is obvious from the definitions of money and wealth is that money is not wealth, although in the right circumstances it can substitute for it. I went to Zimbabwe in 1998 and during my holiday the Zimbabwean dollar (or Zim dollar) was money because I was able to purchase goods and services with it; savers bought long-term investments denominated in Zim dollars and my hotel bill was presented in Zim dollars. Now, none of these things are true because the Zim dollar isn’t even Zimbabwe’s official currency anymore. Zim dollars are not wealth because they do not represent a real claim on stored energy. It is ironic that the only value the Z$100 trillion note has is as a curiosity for sale on the internet. It buys nothing in Zimbabwe.
If money is not wealth, why does the Bank of England believe printing money will generate economic growth? It must be stupid, cynical or mad, or a combination of all three. According to Bank of England statistics the UK’s broad money supply (called M4) at the end of December 2011 was £2.089 trillion. This money represents the total wealth of the country. Adding £50 billion to the money supply, makes M4 (assuming no change since December) £2.139 trillion. How does that make the country wealthier? Has it improved the efficiency of economic exchange or added a new source of energy? Of course not. What the Bank’s asset purchases will do is redistribute wealth from consumers to banks and bankers in the belief that once banks are no longer insolvent, they will start lending again. This is wrong on two levels. The first level of error supposes that money works the way the Bank thinks it does, i.e. as an economically neutral medium of exchange. In theory the economy is in recession because banks won’t make loans to businesses and would-be mortgagors because banks lack the funds to support new loans (all the old loans (the banks’ assets) are worth less than face value). But bankers won’t lend because they are scared to death they will lose their very well paid job in banking. Giving them another £50 billion to punt between one another will make profits on one side of each trade and losses on the other. The profits will earn large bonuses and the losers will have to change banks. A small fraction of the QE will be spent into the economy by the banks through salaries and expenses, but most of it will be locked in electronic vaults.
The second level is the real effect of money, which is not economically neutral. The right to create money out of thin air is the single most important monopoly in a non-barter economy. Money has always been abused since it was invented. Emperors debased gold and silver coins and kings and chancellors printed more money than they had gold to back it. The result has always been destruction of middle class wealth. How can pensioners survive on interest rates of 0.5%? They can’t and since many are using savings, not income from savings, to fund retirement they will run out of capital or have nothing to leave to children.
By creating money out of thin air, the government is following in Robert Mugabe’s footsteps and all that that implies for the savings and investments of those of us thinking about our retirement. What can we use for savings that will still have purchasing power in 20 years? The inflation potential sitting on the Bank of England’s balance sheet is more than sufficient to destroy the efforts of the nation’s diligent savers. They will make paupers and speculators of us all.
After bankers, the other privileged group is the public sector work force, which is heavily unionised and therefore able to extract rent (unearned wealth) from taxpayers. The reason tube and train drivers are well paid is the same reason tube and rail fares are high, i.e. unions keep the supply of labour artificially low and wages high. Also, the media allow public sector unions to propagate the lie that public sector work is intrinsically more moral than private sector employment, often expressed as, “doing the jobs that keep this country running”. This is arrant nonsense – every private sector worker who works and pays taxes is every bit as moral in their actions as those living saints, NHS nurses. Almost as soon as it took power in 1997, Labour increased the number of state employees, from approximately 5.2 million to 6.3 million in June 2010. Standard Leftist ideology, attributable to Keynes, is that all government spending is good spending and if people try to save, the government must use fiscal and monetary policy to compel them to spend. It is wholly iniquitous to favour one section of the economy over another, such as consumption over saving, just as it would be to set policies that favoured exporters over importers – that’s called mercantilism. Keynesian stimuli have adverse consequences, which Keynes glibly dismissed with the comment, “in the long run, we’re all dead”. Thus, Keynesianism is literally a nihilistic philosophy.
The expansion of the state, by creating politically-correct non-jobs and by burdening small businesses with expensive regulations, plays into the hands of career bureaucrats. They are the beneficiaries of metastasizing regulation and also the multi-national corporations who are better able to absorb the costs than small firms. Small firms are better at discovering economic efficiencies and new goods and services that improve economic efficiency, that is the process by which the nation’s wealth grows. Unfortunately, while our political class remains in thrall to big business, it will be impossible for small businesses to expand and add the jobs that are vital to growing the economy.
Wealth comes from mutually advantageous economic exchange, or a cheaper source of energy. Britain’s current oil demand is about 1.7 million barrels of oil per day. A barrel of oil contains the equivalent of 25,000 man-hours of labour. Our national wealth would be improved if the energy provided by oil were replaced by a cheaper energy source, yet the coalition is determined to promote far more expensive energy sources and thereby decrease our wealth. Our standard of living, and the purchasing power of money, even in the absence of QE, is falling because the government does not understand that money can only be a symbol of wealth, it can never be wealth. By compelling the economy to go back to the pre-oil days, our standard of living will go back to the pre-oil days that pertained round about 1900-1910. It seems incredible that politicians would advocate such a move, but that is where the “green revolution” will take us. Instead of wasting our wealth on pointless carbon-free energy, the government should try to solve the problems of nuclear power and research nuclear fusion as a means of solving our energy problems for ever. Malthus was right about his thesis of the population outgrowing its food supply. He was unlucky in that he hadn’t anticipated how energy-rich coal was and how easily exploitable it would be in Britain. Suddenly, the country went from a wood-fired economy to a coal-fired economy, which has 50% more energy per pound, and then to oil which has double the energy density of coal. Unless scientists develop a new energy source to replace oil, we will slide back down the very steep energy curve and Malthus’s prediction will be realised, albeit 200 years later.
Owen Brolly UKIP Bromley February 12, 2012
A big round of appause for Gordon Brown, Alistair Darling and George Osborne. The are well aware of what they have done. They have handed us a debt of some £1400 billion.
see http://www.moneyweek.com | Monday, December 3, 2012, 17:55 Beijing for entire grim story.
Tony Blair, Ed Miliband and Ed Balls think they have done a good job with our finances. It’s why our roads are breaking up and no money to repair them, our pensions have been trashed , our hospitals cannot cope etc etc etc.
What are the chances of us ever paying it back. It will be our children, great grandchildren and great great granchildren who will have to or live in permanant debt.
From Money Week magazine