Printing Money – Final Desperate Tactic
The Bank of England is engaging in a massive repurchase of British debt in an attempt to pump cash into a crashing British economy. The Bank of England’s money printing is necessary since Britain has run out of all other options – the vaults are empty and creditors will not buy her debt.
Never in history has a country printed money only for a short period of time; invariably it continues until the country’s currency is worthless and the economy in a state of total ruin. Should the world economy improve and England maintains a functioning economy, her future would still be bleak. The very fact that a nation needs to resort to printing money to stay afloat implies a crushing debt burden that is simply to large to ever pay back. Printing money was the last resort option to sovereign default. The larger question is what happens next, not only in Britain but throughout Europe.
Yes, it is dangerous for the Bank of England to buy up a third of all long-dated gilts. But it would be even more dangerous to allow deflation to run its course in an economy where debt levels have reached such extremes. Debt and deflation are a deadly mix.
We are now faced with the post-debt wreckage. The task at hand is to hold our societies together as best we can.
As it is we have seen industrial production collapse in every region. The drops in January were: Japan (-31pc), Korea (-26pc), Russia (-16pc), Brazil (-15pc), Italy (-14pc), Germany (-12pc). Falls that took two years from late 1929 have been compressed into five months.
Those who say this is nothing like the Great Depression are complacent. Household debt is higher today, and UK banks are in worse shape. (No bank of size failed in the British Empire during the slump). Britain’s economy contracted by 5.6pc from peak to trough in the early 1930s (Eichengreen). Some put the figure at nearer 8pc. We may surpass that this time.
America suffered worse. Real GDP fell 28pc. But the worst occurred in the second leg, after the heinous policy blunders of late 1931. Reading contemporary accounts, it is clear that hardly anybody – not even Keynes or Fisher – realised that the world was slipping into a depression during the first 18 months.
Nobel laureate Paul Krugman says the Fed has been as far behind the curve today as it was then, given the faster pace of collapse. It is bizarre that Ben Bernanke has not started to buy US Treasuries a full three months after he floated the idea, despite a yield rise of 80 basis points.
Given that Germany’s economy is imploding (Deutsche Bank sees 5pc contraction this year) one wonders if the Bundesbank would be less hawkish if the D-mark still existed. Even their hard-money brothers at Switzerland’s SNB are cash printers these days.
So has monetary policy in euroland been paralysed by squabbles at a calamitous moment, blighting every member state? Almost certainly.
Inflate or Default
The huge debt burdens of every sector of the economy and government are being compounded by the sharp reduction in world economic growth. Debts that are too large to be repaid, will by definition, not be repaid.
The debt trap that the world finds itself in can be worked out by economic growth and the resulting increase in incomes to service the debt. If economies continue to weaken, only two undesirable options remain – inflate the debt away (as Britain is attempting to do) or default. Judging by the events in Europe, we are likely to discover just how undesirably these last two options can be.