Reading today Andrew Lilico on CH I was struck by one of his sentences –
Under reforms introduced in the 1990s by the Conservatives, the British government must cover all its expenditure through either taxation or borrowing. It is not allowed to print money to spend.
Andrew then points out that this measure might soon be changed to fit the times.
When the world’s economy had an inflation-tendency, printing money was instantly problematic. Increasing the money supply faster than the output of the economy by borrowing has arguably been just as problematic in causing inflation, but the game was not to inflate the currency and trigger real world political problems like strike action from workers fearing price rises.
But now all is changing. You can almost smell the oil on the money printing machinery being quietly cranked up around the globe, to plug the gaping holes left by things like sub-prime lending, excessive government borrowing, derivatives, swaps and so on. Deflation of asset prices is occurring now and will no doubt continue as fear stalks the wobbling global financial structures – houses, equities and commodities all falling in one go.
But as a mountain of money is printed to fill the holes that the financial crash is creating, it is very likely that fiscal rectitude will become a quaint idea from a former era, no longer thought of as necessary any more. Inflationary effects will inevitably come along next.
In the past deflationary and inflationary periods were strung out for decades. But like everything else in the modern world, the speed of fluctuation will no doubt increase as the monetary reaction to slump by governments leads to the next boom and inflationary burst.
The economic cycle has not been abolished. It seemed to have been temporarily suspended, but it was a financial trick to keep expanding credit to stop the downturns. With leverage (borrowing and forwards trading) way out of control, the up and down cycles will become accelerated, making real world businesses far harder to run successfully. People will yearn for the security of the dull years when economies took years to give shape and go through their cycles. Now instant remedies will be applied to instantly appearing collapses. No wonder people all over the world are turning to buying bars, and bits of something simple of a thing that they can understand – gold and silver.
The politicians try to hide their guilt behind the faces of the bankers, but it was they who permitted and encouraged the continued lending that created the first 16 year period of uninterrupted growth in history. The bible knows the cycle of life – the seven good years followed by seven bad. This natural flow of growth and fallback had been stretched by economists to create three good years for every one bad year, but it was only the arrogance of the modern world equipped with information technology which tried to do without even one occasional bad year, by endlessly boosting credit to overpower any downturn. Banks were encouraged by politicians to lend even to people who had nothing and were required to provide no share of the price they were borrowing to spend.
Now inevitably those who believed they had created endless economic growth, will be forced to move in and stop the house of cards they built from crashing to the floor. But will anyone believe them all a second time? With every citizen of every developed country now aware that their governments have been living like reckless gamblers, allowing money to be splashed all around, how will they want to live the same way as they have been these last 16 or so years? The borrowers will all become savers, and slump demand. They will want money in reserve in future, not blow it all and borrow yet more.
If governments on the other hand try to inflate their way out of trouble by printing shed loads of money, the ordinary man in the street will want something in his pocket, something which he can understand and which he can trust. It will not be governments, currencies and banks which people will rely on in future, but shiny yellow metal.
THOUGHT – What Andrew Lilico might have mentioned is that the rule about not printing money was part of the Maastricht monetary criteria. The Conservatives were only applying the rules they had agreed to at Maastricht. They will only be able to ignore Maastricht if it is decided on an EU-wide basis that printing money is now going to be OK. Italy, Spain and Greece would no doubt be happy to turn the printing machines, but will the Germans?