It’s hard to figure this economy. At first, it appeared that deflation was the major danger and over the short-term it looks to be a serious problem. We’re in the middle of demand-driven recession in which people simply aren’t buying or borrowing money for major purchases. Consumers are looking to reduce debt, not take on more and the monetary numbers seem to indicate that banks are sitting on cash.
But governments continue to print money and pump it into the economy – and rewrite the rules as they go. From the UK Telegraph:
The Bank of England will be able to print extra money without having legally to declare it under new plans which will heighten fears that the Government will secretly pump extra cash into the economy.
The Government is set to throw out the 165-year old law that obliges the Bank to publish a weekly account of its balance sheet – a move that will allow it theoretically to embark covertly on so-called quantitative easing. The Banking Bill, which is currently passing through Parliament, abolishes a key section of the law laid down by Robert Peel’s Government in 1844 which originally granted the Bank the sole right to print UK money.
The ostensible reason for the reform, which means the Bank will not have to print details of its own accounts and the amount of notes and coins flowing through the UK economy, is to allow the Bank more power to overhaul troubled financial institutions in the future, under its Special Resolution Authority.
However, some have warned that it means: “there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses.”
It comes after the Bank’s Monetary Policy Committee cut interest rates by half a percentage point, leaving them at the lowest level since the bank’s foundation in 1694.
So, both the U.S. and UK governments continue to cut interest rates (in the U.S., Treasury rates are in the negative numbers at the moment). And it’s not eased the crisis. But there’s still the printing press – and secrecy:
With the Bank rate now at 1.5pc, most economists suspect the Government and Bank will soon be forced to start quantitative easing – directly increasing the quantity of money in the economy – in a drastic attempt to prevent a recession of unprecedented depth.
Although the amount of easing is likely to be limited, news of this increased secrecy will spark comparisons with Weimar Germany and Zimbabwe, where uncontrolled use of the central banks’ printing presses ultimately caused hyperinflation.
The Bank said it will still publish details of its balance sheet, but, significantly, the data – the main indicator of the extent of quantitative easing – will not be presented until more than a month has elapsed. For instance, under the new terms of the law, if the Bank were to have embarked on a policy of quantitative easing last month, the figures on this would not be published until the end of this month.
The reforms, which are likely to be implemented later this year, will make the Bank of England by far the most secretive major central in the world, experts said.
So, the hope seems to be that increasing the money supply will not create inflation because economic activity is so low. But two things are very disturbing: First, what will happen when we return to some semblance of normal monetary velocity? With all the extra cash sloshing around, what prevents hyperinflation? In the U.S., the Fed’s printing presses have been running overtime and the Congress wants to spend a trillion or so. In the end, what will buttress the dollar? Or the pound? Both are fiat currencies – grounded only in confidence.
Second, the move by the UK government towards secrecy is a disasterous idea. The world’s present difficulty is directly due to lack of transparency – by the U.S. government undermining the mortgage market and flooding the world with tainted securities. This kicked off a wave of uncertainty about financial markets and a corrosive distrust of the very people charged with oversight. Now, the putative guardians are shrouding themselves and retreating into shadow. And this will further increase distrust and erode confidence.
In my assessment, this entire mess has been caused by a lack of personal integrity. By people who were perfectly willing to undermine the entire world to enrich themselves. And we prattle on about how character doesn’t matter. In the end, confidence is built on character – on people who can be trusted to honor their commitments and obligations. That’s why the idea of credit itself is grounded in morality.
If there is no character, there can be no confidence. That will be the lesson that the world will learn. And a bitter lesson it will be.
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