In Berlin June 1922, Alia Schmidt paid 3 German Marks for a really nice loaf of bread. A very quick six months later, the same loaf of bread cost her 700 German Marks. The German decision to print money caused inflation to skyrocket. No one was happy and Mrs. Schmidt had to stop eating bread.
In Tokyo 1994, Makishi Satou paid a whopping 217 Japanese Yen for a delicious McDonalds hamburger. A very long 18 years later, Mr. Satou is still enjoying hamburgers, yet he is only paying 216 Japanese Yen for this very same delicacy.
The Japanese decision to print money resulted in zero inflation. Yet, despite a full belly, Mr. Satou and others are not at all happy with their money printing experience and the subsequent -77% decline in their stock market and the -90% fall in their property market.
Today, future economic historians are lucky enough to both see and experience what will happen as Europe (lead by Germany), Japan, Great Britain and the United States fully engage in the biggest, coordinated, money printing experiment in the history of the Universe. In its simplest form, only three scenarios are possible:
1) Money printing has absolutely no impact on prices rising or falling
2) Money printing results in a return to the 1922 German experience
3) Money printing results in a return to the modern day Japan experience
No worries though - the very competent hands of today’s central bankers, on the surface at least, appear quite confident that their money printing games will successfully engineer a very serene road to prosperity. The mere mention of the probability of scenarios 2 or 3 occurring are casually dismissed as easily as an offering of a third espresso.
However, what should make you a little concerned is that central bankers in both 1922 Germany and 1990 Japan came to the very same conclusion before they commenced their devastating money printing strategies.
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What would your solution have been in 2007 then Frank, theres no doubt that QE is not an ideal policy response, but what are the alternatives when faced with economic, political , social and democratical collapse?
we should have never got to the state we got to in 2007 - that's not just hindsight. there were plenty of warnings from people that the credit boom and associated asset price bubbles and debt was out of control in the preceding years. i was reading what they were saying at the time and read about the start of the credit crunch many months before it officially started.
central bankers were ultimately responsible because they allowed it to continue and threw petrol on the flames every the boom looked like ending (bursting of the dot com bubble, 9/11).
but to answer your question, i would have done the opposite of what the central banks have done since the credit crunch started, i.e. raised rates and allowed asset prices to correct (so the phoney wealth created by the credit boom could be destroyed) - in other words take the medicine. greed and vested interests in the babyboomer generation (in power surprisingly enough) couldn't stomach that though, so the debt responsible for their ill-gotten gains was instead transferred to their children and their children's children.
it would have been very painful, yes, but it would have been a much better (and fairer) solution than what we got, and given us a much better chance of real recovery. what we've got now is zombie economies that are unable to recover because they are still drowning in debt (and that's with massive stimulus measures still in place). there will be no real recovery imo until the pain is taken - Japan of the last 25 years will look like a boom compared to what's ahead for the UK, Europe and the US. globalisation further compounds the problem - it's difficult enough to compete with the emerging world as it, and far more difficult when hamstrung with debt.
Hey Frank, I tend to agree with you on most accounts actually on the causes, but the medicine is where I have differ slightly.
It is clear that the "irrational exhuberance" fuelled by loose monetary policy and lax regulation on financial markets fuelled an economic bubble the likes of which has never been seen before.
However I feel that people are still too wedded to their traditional left vs right political beliefs when pointing fingers. Depending on your allegiances, it was either reckless spendthrift socialists or greedy free marketeers that are the root cause of the current predicament we now face.
I agree, Central bankers whose job it is to oversee the economy could not have been more inept when it came to the overseeing of the economy back in the naughties. It still bamboozles me these central bankers who spend all day every day looking at economic data on micro and macro levels failed to recognize the weaknesses and stresses in the system.
Also politicians have a massive responsibility to shoulder as they were in charge of regulation , expenditure and organising how the country`s economic system should be structured.
Individuals in charge of large banks and insurance companies also bear a great deal of responsibility as these businesses privatised profits in the boom years yet left the tax payer liable for the losses when the crash arrived. No mention of the glory of free markets when the shit hit the fan so to speak.
Finally the general population who all borrowed on their credit cards and took out highly leveraged mortgages. Sure they can be accused of being somewhat greedy, living beyond their means and perhaps overindulging , but at the end of the day the gereral public vote for political leaders who in many cases have studied PPE at Oxford and cambridge, these politicians then appoint highly educated fellow scholers and academics from the same prestigous institutions to serve as the on the board the bank of England.
If every politician from all sides of the house , central banker, high financier, respectable media outlet, bradsheet newspaper etc tell you its ok to borrow money and "invest" for your future in property should you really not trust their judgement.
Obviously in 2012 we are now alot more skeptical of our political and business leaders but it has taken a crises of this magnitude to reveal their ignorance and complacency, and perhaps ours to a large extent.
I dont want to sound like a broken record but in my opinion its a cyclical argument.
The politicians endorsed light touch regulation, the banks allowed individual, businesses , investors and even soverigns to load up on cheap money thus fueling the bubble, people and businesses borrowed agains their paper profits, banks lent even more against their paper profits, governments spent their paper profits etc etc.
Anyway the point is now do you inflate or deflate away the massive burden of debt. If you think increasing interest rates is the way Frank, I would advise you to pay a visit to Ireland or Spain or any one of the club med countries where the social fabric is threadbare.
Its depression economics, you borrowed money on a morgage, interest rates go up to maintain price stability, people spend more money servicing their debt, less consumer activity leads to lower gdp, Lower gdp = greater soverign debt burden, Markets stop buying soverign bonds, firms stop hiring and start firing due to decreased demand, money supply decreases in response to banks fear that debtors will be unable to repay loans, meanwhile your debt is getting greater as your wages are being deflated to ensure your economy remains "competitive",increase in non performing loans, bank stuck with balance sheet of non performing loans, run on banks, stock market collapse, wealth destruction of the like not seen since the great depression..... Its an out and out debt spiral in these countries.
The alternative, not ideal but more palatable, inflation ( not hyperinflation ) squeeze on living standards due to weaker currency , less imports as sterling buys less, low interest rates allow households and businesses to pay down debt, healthier balance sheets for both households and businesses, households and businesses continue to spend albeit at lower levels due to inflation, asset prices levels supported helping consumer confidence, unemployment nowhere near levels seen in some european countries.....debt eventually eroded and a general adjustment in living standards to compensate.
I know its far from ideal but at this stage of the game whats the alternative course of action?
I studied the great depression a lot and the problem there was that nobody did anything to stimulate the economy so it got into a negative spiral. I studied Keynes a lot because of this but I think the modern issue is there is too little productive capacity in the economies, they are not dynamic enough. A lot of the populace have forgotton that you actually have to do something to make a contribution to the economy. I think the problems and answer is politicial.
I'm not sure about can kicking though, I think you need a real crisis now and again to reset the bar. There is a lot of propping up going on for a system that is quite clearly flawed. I think the recission has helped a bit but the underlying issues are still not resolved.
mh,
i agree with all you say on the causes, but you have to remember that it's the private banks that run the show (who ultimately represent the super rich) - central banks invariably do whatever the private bankers want (history proves that), and politicians (not necessarily because they are corrupt) also do the same (because they don't really understand the issues and because they are afraid of taking tough decisions as they don't want to do unpopular things and risk electoral defeat).
it's a frightening scenario really and deeply undemocratic and corrupt.
i don't agree with the solutions currently being adopted - it is essentially another way of transferring money from poor to rich. inflation hits poorer people, and those without assets, much harder - while those who have large debts (normally through greed, get indirectly bailed out).
Ireland and Spain are having their busts which hurts, but when they've reset they will be far better positioned for real recovery.
Yea I can understand the argument for a great reset, theres no two ways about it asset prices from stocks to bonds and property are clearly all artifically inflated due to the easy monetary policies being employed by the BOE and the FED.
I just see the effects in some of these peripheral european countries where deflation has basically impovrished the entire populus from top to bottom.
Its easy to say lets just take the pain now but when youre talking about a generation who have played by the rules, ie worked hard, invested their money in pensions and their homes to only see their value collapse sometimes up to 75% from the top of the market and see blue chip stocks like national banks be nationalised thereby wiping out their lifes savings thats more than just bankers and speculators youre hurting, its almost every stakeholder in the economy!
The point im trying to make is that yes bankers have been bailed out but so has every stakeholder in the economy in both the UK and the US.
I dont know what the answers are and I understand your point of view but I think if the BOE took the same stance as the ECB there may just be social breakdown in the UK as seen in the periphery.
could be time to get the pitchfork out superfrank (Tyler)
mulberryhawk wrote:I think if the BOE took the same stance as the ECB there may just be social breakdown in the UK as seen in the periphery.
it's not the ECB that's caused the problems in the periphery - the ECB has massively loosened policy recently (lending unlimited amounts to banks at 1% is effectively the same as QE) - it's the fact these these countries cannot compete whilst in the Euro (the credit boom just masked that fact for a time).
"recently" being the operative word after trichet and stark raised rates in response to the libyan oil shock last yr....the ltro only allows banks to access liquidity but it is not getting out into the general economies.
I agree competitivness is a massive issue also under the common currency but at least the BOE and the FED are loosening monetary policy supporting the economy while in theory their governments slash spending.
Its surely QE via the back door, the FED and BOE are effectively buying govt debt off bank balance sheets increasing liquidity which the banks are supposed to lend out into the economy. The ECB is also accepting bank assets as collateral in return for liquidity which in theory they should either lend into the economy or use it to buy their govt bonds in a carry trade thereby driving down bond yields.
Anyway I agree with alot of what u say in general just maybe your prescription would be a bit more germanic than mine:)
