There will be no end to ‘quantitative easing’

Printed money

MORE MONEY!!!!! Photographer Graeme Weatherston.

The Bank of England is expected today to announce another round of debt monetization, called ‘quantitative easing’. A majority of economists polled by Dow Jones Newswire earlier this week expect the central bank’s policy committee to agree “to £50 billion ($79 billion) of additional bond purchases using freshly created money to underpin demand and ensure its 2% inflation target is met. Some expect it to go for £75 billion.”

Official inflation is over 4 percent in the UK, so how printing more money is going to help meet a 2 percent inflation target is a bit difficult to grasp, but let us not quibble over such details. What counts is that the Bank of England is the undisputed champ of QE. After the next round of money printing, the BoE will have created new money to the tune of 20 percent of GDP, and will fund more than a quarter of all outstanding government debt via the printing press.

£275 billion of QE so far have not solved the crisis – the economy last year grew by less than 1 percent – but have lifted inflation and thus squeezed real incomes. At the same time, this policy has kept the government’s borrowing costs low and the banks from shrinking and in certain cases from collapsing. As with any policy of monetary debasement, the direct beneficiaries are the state and the banks.

Printed money

AND MORE MONEY!!! Photographer Graeme Weatherston.

This has tradition. The Bank of England was founded in 1694 for the specific purpose of financing the Crown, which at the time was in low standing with its creditors. From its inception the Bank of England enjoyed numerous legal privileges that cemented its dominant position in the nascent but growing British banking system. Among them was the privilege to issue money against obligations of the Crown – a form of early ‘debt monetization’. Of course, the gold standard was a hindrance to unlimited money creation, so whenever the state needed more funds, usually at times of war, the Bank of England was conveniently absolved of any of its contractual agreements to redeem in specie, and kindly asked to fund the state through the creation of new money.

Gentlemen, start your printing presses!

But only after the gold standard was abandoned and the dollar’s gold window finally shut in 1971, the party could really begin. From 1965 to 2007, the year the present crisis started and UK banks began to collapse, the pound has lost more than 90 percent of its purchasing power! Two generations of British savers have been locked in a desperate struggle to sustain the real value of their savings. But hey, why save? Just borrow!

Printed money

MUCH MORE MONEY!!! Photographer Graeme Weatherston.

Such persistent monetary debasement has created a freak economy, in which every high street is littered with the cheap-looking branches of retail banks and in which property speculation is a national pastime. The English seem to live in the smallest and oldest houses of all of Europe but thanks to money-induced housing booms consider themselves to be wealthy, on paper at least, as long as they managed to get onto the housing ladder early enough. Why bother with engineering, once the hallmark of British industrial superiority, when you can flip a few semi-derelict terraced houses with borrowed money?

On a GDP-per-capita basis, 19 countries in the world now generate more income than the UK, but the UK is still world leader when it comes to leverage: according to a study by McKinsey, private and public debt combined stand at 5 times GDP, only Japan comes close.

But when the bubbles finally burst, the overstretched banks teeter on the brink of collapse, and the credit edifice wobbles, the central bankers counter with the only tool at hand: even more and accelerated money printing. The central bankers are the arsonists of this crisis who now pose as fire fighters quickly labelling further monetary debasement ‘stimulus’.

In June 2011, Mervin King, the governor of the Bank of England, was knighted for his efforts during the financial crisis.

Sowing the seeds of instability is now stimulus!

That our prosperity is being enhanced through monetary debasement is one of the most pernicious distortions of economic logic circulating these days, yet it is bravely propagated by the Bank of England’s cheerleaders, the ladies and gentlemen of the economics profession. But in a recent article in the Wall Street Journal Europe they come up with a rather silly prediction: that we will get more QE but that at a very specific point QE will stop.

“Personally, I think we could well end up at £400 billion on asset purchases, even without a European meltdown. The recovery looks set to be far weaker over a longer time period than the MPC expects,” said Colin Ellis, chief economist at the British Venture Capital Association.”

Oh, I hear £400 billion from the gentleman from the British Venture Capital Association. Do I hear 500? 600? Anybody?

“Economists at Citi expect an even bigger effort: they predict the BOE will eventually buy £600 billion of assets.

‘We believe the consensus understates the MPC’s willingness to use monetary policy to support the economy as inflation risks recede,’ Citi economist Michael Saunders said in a note to clients Friday.”

 Ah, fantastic. £600 billion from the man from Citi. Do I hear 800? Why not a trillion pounds of new money?

Well, here is my point: How do these experts come up with those numbers? Do they simply pull them out of their hats? I mean if £275 billion wasn’t enough to fix the economy and now the BoE goes to £325 or £350 billion, why is £400 billion going to be enough, or why £600 billion? If freshly printed money amounting to 20 percent of GDP wasn’t enough to ‘stimulate aggregate demand’, why should 30 percent be precisely the quantity to do it?

Printed money

MUCH MUCH MORE MONEY!!! Photographer Graeme Weatherston.

More specifically, in what way will the economy be different after another £150 or £250 billion of new currency units have been created? Will its present problems be smaller? Will the banks, which overdosed on the previous BoE-fuelled credit boom and had to check into rehab, be any slimmer, soberer and healthier after more QE? – Hell, no. They will not only be as bloated as today, they will be more bloated. That’s is precisely the BoE’s strategy, to fight a hangover by opening another bottle of booze. “There is not a credit boom that a few trillion pounds cannot extend for a few more years.” That seems to be the modus operandi.

Or, will the public debt situation be better? Will the economy have deleveraged and rid itself of an unsustainable debt load? And will the economy then grow without the burden of the accumulated debris from previous cheap-money booms? -No, and no again! Deleveraging is verboten! Credit contraction is verboten! Bringing the economy back to anything that resembles a stable and sustainable structure is verboten! QE is designed specifically to stop the cleansing of the economy’s imbalances.

‘Quantitative easing’ has one objective: to generate headline growth through more money debasement, more credit creation, more balance sheet extension, and more debt! More money, more credit, more debt! If that sounds familiar, it is because that was the growth model of the past twenty years, the growth model that has set us up for the crisis.

The central bankers and their supporters among financial market economists have no other model. More money, more credit, more debt – that is the motto of the fiat money economy, and ever since the last link between state money and gold was severed, all central banks have constantly expanded their balance sheets, constantly bought government debt and created new bank reserves, constantly encouraged bank credit creation and borrowing.

In a fiat money economy, central banks are designed to be ‘quantitative easers’. That is what they do. The only thing that has changed recently is that the disastrous consequences of such a policy are now palpable and that the private sector is reluctant to participate any longer. The drastic acceleration in money printing that is now called ‘quantitative easing’ simply marks the desperate attempt to outrun the system’s desire to shrink.

No, I am sorry, dear experts, but the idea that any of this will stop at £400 billion, £600 billion, or £1,600 billion is silly. You obviously failed to grasp the very essence of a paper money economy. We removed the golden shackles so that there will NEVER be an end to credit expansion and monetary debasement.

Although….there must be an end. But that will come not through a calm measured decision by the MPC, the monetary policy committee that is digging itself an ever deeper hole, it will come when the public begins to lose faith in this charade. But whether that point is reached at £600 billion or at £325 billion, nobody can say.

In the meantime, the debasement of paper money continues.



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Video: Detlev's interview with The Real Asset Company
Video: "Monetary Reform and the Eurozone Crisis"


  1. Kiwi says

    One of your best posts yet Detlev. You don’t hear a lot on the shell economy that is Britain. I often have people say to me “but England is going strong!” Next time I’ll just send them to this post, you can explain it 10x better than I. Thank you.

    I do have a question for you though. To what extent will the collapse of Europe and the US impact on smaller countries, such as New Zealand, which have (relatively) sound monetary policy and less public debt? Are these countries cycles endogenous or are they so tied up in the larger countries that they just get carried through the mud regardless?

    • says

      I guess it will vary from case to case. As a general rule, these places should do better but will not escape the fallout entirely. I have not been to New Zealand myself but from what I know about it (which is not much) it seems like a good place to hunker down and let the storm pass over. New Zealand is high up on a short list of countries I would seriously consider escaping to.

    • says

      Lizzy, that is a tough one. I guess I am quite agnostic about it. I see conflicting forces at work here. After the massive credit boom, house prices are, as a rule, massively overvalued. If we abandoned the central banks and returned to a gold standard (as we should), house prices would come off quite sharply. But with the BoE and other central banks creating unlimited amounts of new currency units, that is not allowed to happy, at least in nominal terms. On a nominal basis – expressed in nominal paper pound units- house prices might not come off at all and could even rise further. However, I seriously doubt that house prices will keep up with, let alone outperform, other prices. The inflationary channels have changed. All prices go up but house prices not more, and probably less, than other prices and overall inflation. I don’t consider houses in the UK a good inflation hedge at this point of the cycle. Additionally, as all these governments go broke, they will tax property aggressively. There is a lot of wealth in property. That wealth cannot leave the country. It is low-hanging fruit for the taxman.

      • Lizzy says

        Thank you. I think it is a tricky one. Yes, values are inflated. But the UK population is growing rapidly and there is resistance to building on green-field sites. Also, the market is highly geographical in nature. London and the SE will pull away even more from the north and projects like Crossrail will enhance the M4 corridor. Rents are rising and I see evidence that more people are cramming into properties, well-located space is at a premium. I agree with you about the tax. CGT on the sale of high-value primary residences would be an obvious hit, following on the plans for “mansion taxes”.

  2. vance says

    Hi Detlev, would it be reasonable to doubt the figures of the MPC et al anyway? How do we know they are not QE’ing a trillion pounds now?

    On a similar point how did the Western world including Germany finance WW2 after there was no money to help the people through the Great Depression and yet there was suddenly unlimited cash to fight a 6 year clash of the titans. Did Hitler/Schact do QE so soon after the Weimar disaster?

    Aren’t financial figures basically meaningless? The whole QE thing is smoke and mirrors for the ‘rubes’, why believe any information provided by the financial mountebanks doing it…?

    Don’t forget to tell me about about why you think FRB is not fraud from the previous posts!

    • says

      Vance, apologies for the tardy response. I think it is unlikely that the MPC is cheating on its QE numbers. I guess there are too many people involved in this process to keep any major fudging of the numbers under wraps. There is also little need to lie as the policy is popular in financial market circles, among the government and state bureaucracy, and many pro-”stimulus” writers in the media. And the numbers are so big already that they are beyond rationalization by the majority of people anyway, maybe everybody. Words like “billion” or “trillion” are, to most people, simply meaningless abstractions at this point.
      As to your point on FRB (fractional-reserve banking) – this is a complicated topic. I cover it in detail in my book Paper Money Collapse, in chapter 2. So, first of all, I would like to refer you to the book. That captures my analysis of FRB better than anything I can do in a short commentary. In a nutshell, my take on FRB is this: FRB introduces an element of elasticity into the money supply. This is disruptive of the functioning of the economy. FRB is risky for all who participate in it (but also profitable as long as it “works”), and it has destabilizing effects on the broader economy. Thus, it is problematic but it is not fraud. Forget about how FRB came about historically. Look at it today. No bank today claims that the money you deposit with it is simply stored in the bank’s vaults, that what the bank does is straightforward safe-keeping. All banks openly tell you that they lend the money to other people. The fact that they pay you interest on your deposited money (at least under normal circumstances) already gives it away. If they conducted safe-keeping, you should pay them. How are they supposed to earn the interest they pay you without lending the deposited money to a third party? — Often people tell me that FRB only works because the mass of depositors don’t understand it. I think this is wrong. How many people understand it or not, nobody can say. The point is this: if the banker were honest and entirely transparent about what he does, would it still be feasible that rational people would deposit money with him? The answer is, of course it is. In this scenario, depositor knows that his deposited money has become a mere ‘reserve’ for the banker to use as a basis for FRB. The banker issues fiduciary media against this reserve, i.e. banknotes or bank deposits, that are supposed to be instantly redeemable in money proper, but that are not backed by money proper. The depositor has exchanged ownership of money for ownership of fiduciary media, knowing that more fiduciary media are now circulating than is money in the vault of the banker. Is this a ponzi-scheme? No, not in the strict sense. Because it is not clear why the depositors (as a group) should demand repayment in money proper (the originally deposited money) at a future point in time at all. They now hold fiduciary media – banknotes and deposit money – and as long as these are accepted by the public in lieu of money proper, they fulfill all the requirements of money, they can be used to facilitate transactions just as money proper does. There is obviously a risk here that the public stops accepting fiduciary media or only accepts them at discount at some point (most likely as a result of over-issuance or concerns about the health of the issuing bank), and thus there is a risk that depositors suddenly withdraw their deposits and the bank collapses. But as compensation for this risk the depositor receives a portion of the banker’s income from FRB as interest on his deposit – at least as long as the bank stays in business. He would not receive this if he put the money under the mattress at home. Additionally, the banker will probably tell the depositor that the risk is fairly small, as the banker has experience with FRB, that he can manage to maintain the ‘correct’ reserve ratio to avoid bank runs. And in toady’s world, the banker could also also say that FRB is subsidized by the state and the risks have been socialized. There is state-run deposit insurance, and a lender-of-last-resort central bank that can simply print enough money to pay out every deposit. This might still understate the risk but none of this is fraudulent. Banker and depositor may simply agree that the risks are manageable and thus come to a voluntary agreement to conduct FRB. Therefore, it cannot be fraud. In the case of fraud I have to assume that making the procedure transparent to all parties involved would immediately put an end to the practice. The defrauded party would simply stop participating. That’s not the case here.
      FRB would be drastically reduced, even in a free market without a state banning the practice, if depositors and bankers understood Austrian business cycle theory (ABCT). This would put an end to FRB (or at least establish a much tighter limit to it) much more effectively than any transparency of banking practices. ABCT explains why the extra lending through FRB must lead to a boom first and then to a recession. The latter will cause problems for the banks and is likely to initiate a shift back from fiduciary media to money proper. FRB thus sows the seeds of its own destruction.
      I do not advocate banning FRB, although I agree with von Mises that a 100 percent gold standard would be the most stable system imaginable. All I want is the state to stop subsidizing the practice and socializing its costs.

      • karol says

        It may be edgy. Still, I believe it is fraudulent in all sense, but the law. :-)

        People still call it “deposit”. However, it is treated as “loan” by banks. People stil say “I have money on my account”. It is not true. Their money is gone.
        Banks are calling their product a “deposit on demand”. It is not true either. A proper name would be a “if there are not too many demands, it is a deposit on demand. And, by the way, we do not know, what “many” exactly is”. I believe that name would twist the general “my-money-is-100%-safe-in-bank” feeling that I fear people have, does it not?
        If all people rightfully claim back their demand deposits, banks go broke. Banks have persistently obligations they cannot fulfil in time and money.
        Yes, it is true, bank runs are rare in good times. Yet, if a bank cannot sustain a run, it is broke. Adn under FRB banks cannot sustain a bank run. In a bank run, banks need yet more money to carry on with payouts to their depositors, coming from money-printing central bank, or taxpayers. So, it IS a Ponzi. You DO need fresh money coming in to carry on paying out. Under law in all other businesses, it would be an ongoing fraud which manifests itself in a bank run.
        Even if the state gives a bank fresh money, the bank still failes on its “deposit on demand” contractual promise. A deposit in such a bank turns to a forced loan. In all other places such a one-sided change of obligations is called a bankrupcty. And, tax payers money are rarely used outside banking for evidently bankrupt companies. :-)
        Of course, more-or-less since the Peel act, FRB has been prefectly legal and undisputed in the UK. And this legal treatment has spreaded all over the world. But in most places and times till then, since Roman times, it was treated as a fraud. Especially when manifested in a bank run. Any deposit-turned-loan business would be treated as a fraud even today. Take the example of warehouse receipts. As far as I know, warehouses have to have all their goods when rightfully reguested. Other behaviour is prosecuted. No central bank saviours. You cannot take money from your employer´s account claiming he did not need it at that time and you gave him interest on the money at the end.
        As for your reasoning that the state reimburses, so no fraud was commited: if somebody misappropriates, steals, etc., anything from you, it is an offense. It does not matter, that you were insured against it.

        The above features are a description of fraudulent behavior made legal by legislation specific to banking. So the bankers are not fraudsters. Not in legal terms, not in current moral standards.

        Finally, I believe interest bearing demand deposist are NOT a sign of enligtened depositors, who vinally realized in full that their bank cannot unconditionally fulfil its obligation and they started to demand interest. People still treat their money as demand deposits. Banks still treat them as loans.
        The reasoning is simpler. Depositors do not have any rational alternative to bank deposits. And it is in every thinking man´s interest (sic) to join this Ponzi.
        There are three obvious reasons for that: First, keeping your money in a bank is risk “freest”. Keeping cash means loosing money. Any other way is much more risky. If something happens, you really get reimbursed. Second, you bear the costs of state “reimbursement” for everybody else anyway. You bear it as a taxpayer or as a forced user of any legal tender throgh inflation. Not joining ponzi means loosing money throuh inflation AND paying costs for insuring the others. Thirdly, using banks really is comfortable. And, a lot of times, required by law (e.g. anti money laundering legislation). So you better join in. And banks compete to attract you. Threfore they pay.

        Sorry for such a “short” comment. I felt I needed to reply. For most of the times I agre with you a lot. :-)

  3. says

    Your observations are in my opinion very sound, sadly we will only come to know the truth when the sh*t hits the fan. How do you envisage making provision to weather this coming man made Tsunami?

    • says

      Brian, that is a difficult question. It is a true challenge and I am thinking about it a lot. The four key questions are, in my view: 1) which assets should you hold, 2) where should you hold them, 3) where should you live, 4) which passport should you hold. I know that most people never ask questions 2) to 4), but make no mistake, people with a lot of money ask these questions all the time (I am not one of them but I, too, think these are the relevant questions). As to 1), I think a sizable allocation to physical gold is essential. Don’t hold all of it in the country where you live. I may address the other questions in a future blog. I usually don’t advertise anything on my website and I am not in the business of giving investment advise. But I like the stuff the people at Casey Research are doing. I quoted Doug Casey a couple of times on my blog. I think he offers some very astute insights. One of his recommendations is to diversify geographically and politically. Sounds like good advice to me.

  4. Azazel says

    This is my question also, what will happen to house prices in GBP. Some woman on channel 4 news just said that the QE has prevented a crash in house prices, as if that was a success. But houses are far to expensive for first time buyers who obviously would welcome much lower prices. If house prices continue to rise Detlev, where do you see the money coming from? Will the banks start lending the wall of money? Will money come out of the bond market and find value in property? It has been said that Greeks have been buying London property as a safe haven from thier own banking system.

    • says

      The money comes from the BoE. The BoE buys the government bonds from the banks and credits the banks’ accounts at the BoE with freshly printed money. This money functions as bank reserves, and this encourages banks to lend, to create extra deposit money via fractional-reserve banking and extend their balance sheets. As we know, the banks are somewhat reluctant to extend their balance sheets (which is one reason QE has caused “only” 5% inflation so far) and they may not be so eager to pour ever more money into real estate loans. That is why I think that QE may prop up real estate prices on the margin but not in the spectacular way that the pre-crisis cheap money boom did.
      Yes, there is probably some flight money flowing into the UK. But buying UK real estate in anticipation of more of this money coming in is a rather optimistic strategy, in my view. After all, the UK is sitting on its very own powder keg. If I were a rich Greek I would look elsewhere.

      • Lizzy says

        I think it depends on your time frame. Property in London and good areas with good schools and transport links will be a sound long-term investment but you have to be prepared to sit it out.

  5. Sam Buker says

    Nice point about the housing inflation hedge idea being low-hanging fruit for the taxman. And I love the QE bidding analogy!

    So what places are on your short list for expat housing and investment until the whole mess blows over? That would be a great post right there.

    How long do you suppose ’til Mervyn King’s knighthood is stripped like a fellow unfortunate banker’s?

    • says

      The whole honours system in the UK has been turned into a dreadful charade. It is a farce. It is now a tool for politicians to bestow favors on their party’s donors and other politically connected people. Additionally, what happened with Fred Goodwin – not that I have much sympathy for him – is another indication of the rise of mob rule. We will see more of that, mark my words. I am just not sure if most people understand what is happening to their money, and when inflation explodes it will probably be blamed on greedy corporations and landlords. Then we will get “price control boards” again – because “the state has to do something to fix it”. So I guess Mervyn King is quite safe. He can escape the blame and keep his knighthood. Of course, he should never have received it in the first place. The Bank of England is a curse on British capitalism. Its role has been predominantly destructive in that its policy of constant monetary debasement has – for many decades – obstructed the proper functioning of the market economy and this has made the British public on the whole considerably poorer. But the government loves the BoE, so do the banks, and so does The Financial Times. And as long as they find unlikable megalomaniacs such as Goodwin to feed to the masses, the establishment is quite safe.
      As to places to hide out, I should do more research on this topic. I may be a bit inconsistent here: While I am a guest in this country (the UK), it has truly become my home. I like the English and I like London, and despite all my concerns about the direction this country is taking, I would hate to leave. As to alternatives, in Europe there is only Switzerland. Outside Europe I would consider New Zealand, Australia, maybe Canada.

  6. David K says

    Great article as usual Detlev!

    I’d like you to take a look at a snippet of a reply fro ma blog at mindfulofmoney regarding this QE business by someone who thinks this system will actually work …eventually. Ihighlights this QE1…n, makes no difference because it will eventually be written off by the government itself (the issuer of the debt). But basically because the Treasury and BOE are functioning arms of the Government of England it all sounds very plausible.
    I don’t know really but it all sounds so very fraudulent, can the British (and no doubt this is what the Americans are planning) actually get away with not paying their creditors who both deomestic as well as external.
    How would you counter such an argument as the one below Detlev?

    QE at £2 bn per working day can be continued indefinitely so long as real gdp remains below the trend projected by Messrs Brown and Balls in 2003 (or was is 2002?) on the basis of 2.8 per cent growth. No need just to soak up deficits. Buy in all the pre-existing debt too and when that is exhausted buy up new gilts issued to replace the “notional” gilts that currently fund central government pensions. Once that is achieved the Bank of England can sell its off-balance-sheet QE vehicle to the Treasury for £1. The Government can then cancel out (almost) all the debt to itself, ensuring that it attains a hitherto unheard-of quadruple A credit rating. Continued inflation will, of course, help in this process but inflation can be controlled by unilaterally raising bank capital requirements pari passu with QE and extending UK stamp duty to all financial transactions, which in turn should limit any risk of gdp ever reaching the old trend line. This old thinking is so negative.

    • says

      Can it be continued forever? Technically, yes, that was my point also. But monetizing all existing debt and then funding further government spending via the printing press – which is what the author suggests – will, of course, lead to inflation. All pensioners, all public sector employees, all recipients of benefits, everybody will be paid with freshly printed money. Is this guy telling me that this will not lead to inflation because we offset it with a stamp duty on financial transactions? (I am not sure this guy is serious, by the way. This sounds so ridiculous, I suspect he is being cynical.) Funding government spending via the printing press and trying to liquidate accumulated debt through ‘debt monetization’ is a sure way towards currency destruction. Look at Weimar Germany, or Argentina, or numerous other examples. Would the outcome have been different if they had raised bank capital requirements at the same time?!?
      But the most important point is this: What does the author think will ultimately be achieved with this policy? Stimulus? Will the economy suddenly be healed and enter a self-sustaining recovery? Why should we expect that? What is the mechanism by which this policy will lead to sustainable growth? Or is this a new economic model in which a large chunk of economic activity is directed by the state and its printing press forever? I guess that has been tried before…..

      • David K says

        You’re right Detlev, I mean what you say just seems so logical (simlar to your taxi experience) and what that guy wrote seems absurd, not least because of what you state as resulting outcomes (namely inflation and currency destruction) but, the idea that you can fund spending and growth by creating paper or typing numbers into a machine is … well, only God (if you believe in him) can create something out of nothing.
        I think where that author is coming from is this MMT or Neo_chartalists theory which again is a product of an elastic monetary system so it’s inevitable that it’s doomed to fail because human beings will always decay and corrupt so need a system to restrict them and bind them as much as possible, as you have covered most comprhensively in your blog postings.

        Detlev I just wondered if you read the foafoa blogs ( who are very pro gold. I think the type of gold system that they advocate is different to the gold standard we had prior to the existance of the federal reserve.

        This standard allows gold to float on say, the ECB balance sheet which it does, and means that it can absorb (in thereoy) an infinite amount of inflation. Say the Euro is going into hyperinflation at some point the price of 1 ounce in EUR would exceed 100 million right then i could take one coin and make myself an euro millionaire; and I would and so would many other gold hoarders. That in itself would prevent the euro from hyperinflating because there would be a demand for EUR and hyperinflation is when there is no demand for EUR.

        This is why I think the Euro is on a cross-roads now, it’s also on the brink, it can go the way of US, UK and Japan and that ultimate demise or it can do things differently better

        Some european nations may reinstate their national currencies alongside the EUR that way the ECB can float the EUR against gold, while member states can adjust their domestic currencies against eur; that would form a link flexible enough to absorb the differences in productivity between member states maybe. Gold will absorb all inflation and release it in times of economical contraction.

        By the way, in addition to your idea of Switzerland being a good place to take cover when this all blows up, what about Sweden or Norway? I heard that Sweden and Norway may become new safe havens replacing the CHF now that it is effectively a euro. Are they relatively safe in your opinion?

        • says

          This MMT stuff is like Keynesianism on steroids. These people have lost sight of the essential economic problem, namely that unlimited wishes and desires are confronted by strictly limited resources. Therefore, the best chances we have to get the most out of these limited resources is for all of us to co-operate on free and uninhibited markets, on which everything is privately owned and (if the owner wants it) traded, and on which free exchange allows for the formation of market prices which are indispensable to coordinate our activities in an extensive-division-of-labor economy. What is essential here? Relative prices and efficient resource allocation! They don’t even feature in MMT. These guys believe that the problem is aggregate demand and positive GDP, at all cost. They believe that the crude macro-economic equations that economists have come up with to describe certain economic processes represent magnitudes that interact with one another in real life, and they believe that there are no limits to how the government can cleverly manipulate these “aggregates” (the budget deficit, outstanding debt, the money supply, inflation, whatever you can find in national account statistics) with the goal to achieve higher “aggregate demand” and thus higher “GDP” (another statistical aggregate – not that it makes you and me – real people!- any happier!).
          This is nonsense.
          No, I have not read that blog. The only solution is that we go back to a system in which money IS a commodity of inelastic supply. My first choice would be gold but, of course, I am happy to leave it to the market. Any other fancy arrangements, such as a gold exchange standard, will not work. Gold is there not to discipline the central bank but to get rid of the central bank!
          I don’t know Sweden and Norway well enough but they strike me as much more socialist than Switzerland.

          • David K says

            Interesting and enlightening comments, thanks Detlev.
            I can begin to appreciate now why that gold exchange stabdard would not work because a Central Bank would still be in place and hence government. While markets may not be perfect I think it’s fair to say the downward spiralling of events that have occurred since 2008 wouldn’t have made it this far

            If a standard were to prevail where we go back to an inelastic commodity acting as money do you believe this would this then make the current fiat systems like dollars, pounds, euro’s redundant and therefore we would no longer need them?
            Or could these co-exist besides the monetary commodity also?

            If that is the case (where fiat money systems are done away with) then this seems like it would be a more fairer system because nobody would then be able to manipulate the system like some countries currently do with their own currencies.- one default monetary unit standard for the whole world.

          • says

            National paper monies will no longer be needed. They will be thrown onto the rubbish heap of history. In any case, future historians will look back on our present era of unlimited national paper currencies under state monopoly, unprecedented currency debasement and debt accumulation, as a time of great folly. — Yes, it will be a much fairer system.

  7. David says

    Detlev, what if the reality is that with an increased understanding of the true risks of lending as well as the more stringent regulatory capital requirements to hold more equity capital against risky loans has effectively reduced the money supply through reduced fractional lending for a given amount of paper money? Then couldn’t the money printing just be seen as compensating for a reducing money supply? And should the fractional lending ratio pick up, can’t money supply be withdrawn by raising interest rates?

    Intuitively money created through printing likely has more inflationary impacts than money created through increased fractional lending, because the latter is effectively still someone’s debt, but in simple terms both are contributors to what is termed the money supply. So if one goes down, can’t the other go up to compensate without debasement? I fear the reality is more complex.

    Thanks again for the excellent website.

    • says

      Fractional-reserve banking activity (FRB) is subdued. That is the reason why massive QE activity has not translated into higher inflation just yet. (Inflation is already high by post-credit-boom standards and it is rising, and most certainly higher than reported.) But the point is that what should happen is credit contraction, deleveraging and deflation. These are the essential cleansing processes after an artificial credit boom. These processes are not allowed to unfold. Healing does not occur. QE doesn’t solve the problem, it actively obstructs the solution. In the meantime it makes matters worse. Banks are not shrinking. (Why should FRB pick up, as you assume, if banks are never allowed to clean up their act and get their balance sheets sorted. Not that I am advocating more FRB! The FRB activity of old will not come back for a long time, I guess.) New imbalances are accumulating. The debt load of the state gets bigger. More resources are allocated by the state, not the market. Inflation will continue to rise, the economy will do poorly, we will fall back into recession, debt levels will grow…..out of desperation, they will print more money. “The economy needs more stimulus!” So we will get ever more QE. The turning point comes when the public gets concerned about higher inflation and/or excessive public debt, and starts selling bonds. The central banks will have to print ever more money and buy ever more bonds as they cannot afford to allow a rise in yields. Then money becomes a hot potato.
      Inflation is the result of money-printing. It does not matter whether that money is printed by the central bank or the private banks via FRB. Both processes create additional debt, by the way. The central bank prints new money and buys debt instruments with it. Of course, they could also buy land, stocks or real estate. We could see that at a later stage of the crisis. But at present, the central banks buy debt instruments.

    • Christian says

      In addition to Detlev’s comment I think it is important to point out the following. The current rate of price inflation is 5%. If in the absence of QE we would have seen a price inflation of lets say -5%, then the actual price inflation rate should be quoted as 10%.

  8. Azazel says

    Detlev, do you have any price targets or ratios at which you would consider exchanging gold and silver for fiat or some other asset like property? In a currency collapse or a hyperinflation, would precious metals purchasing power become massive relative to other assets?

    • says

      As long as we stay on course toward currency destruction and monetary meltdown, I stay with precious metals. In a hyperinflation//currency catastrophe, the ‘value’ of paper money goes to zero.

  9. Rob says

    In the context of hyperinflation (in the US dollar), wouldn’t they ultimately have to re-link it to gold in which case, the amount the dollar as we know it could fall is a function of how much gold we have? Jamers Rickards contents we have ~9,000 tons and we hold ~8,000 tons of foregners gold. If we truly have 9,000 tons wouldnt’ that put the uppper limit of gold at 10-15k depending on how this crisis the US a forced re-monitization of gold?

    • says

      The moment any paper currency is linked back to gold in a firm manner the debasement of paper money stops and the rise in the nominal price of gold (i.e. measured in paper currency) is arrested. At that point, money is again a fixed unit of gold. The U.S. officially sits on 263 million ounces of gold. At current prices ($1,728 an ounce) that is $454 billion worth of gold. In order to back the entire monetary base in the US with gold, the dollar would have to be devalued to a gold price of $10,120 an ounce. The monetary base stands at $2,659 billion at the moment. To back M2, however, which presently stands at $9,640 billion, the gold-dollar exchange ratio would have to be adjusted to $36,700 an ounce. But this is just a snapshot of where we are now. The monetary base and M2 are expanding dramatically, thanks to the Federal Reserve’s policy of currency debasement. In 2011 the monetary base expanded by 29 percent. M2 grew by 10 percent. The gold stock of the US government meanwhile is roughly unchanged from the 1930s! Things are getting rapidly worse for the paper dollar!

  10. says

    What on earth is happening in the UK economy?
    The central bank has been aiding the economy via ultra cheap money to all the economic players I believe.

    Money is one of the prime drivers of any economy, when money has been flowing into the economy in such a way in and around, the question is, are the users of the money putting it for productive purposes?
    I do not think so!

    Assets creation, well, that has not happened to the best extent and that’s why a good growth has been a dream these days in the economy I forecast.


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