There will be no end to ‘quantitative easing’

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 has not solved the crisis – the economy last year grew by less than 1 percent – but has 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.

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 could the party 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!

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?

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.

This article was previously published at Paper Money Collapse.

5 Comments

  • I think it’s clear that western Central Banks are not so stupid to keep on quantitativizing for stimulating economic engines; they just want to stimulate price inflation to devaluate government debts in real terms (beside finding a way for existing debt to keep rolling over).
    Try interpret monetary policy this way, it’s more consistant than mere rulers’ idiocy.

    • Robert Sadler says:

      Its far from clear – otherwise they would not do it. Counterfeiting benefits the fraudster at the expense of others.

      In a way you are right – this is a way to keep rolling over debt and monetary policy is consistant. Consistantly foolish at best and outright theft at worst.

      Since I don’t believe these people (at CBs)are stupid that leaves you with one conclusion.

  • Michael JR Jose says:

    Of course Mr Schlichter is right – the inflationary slide is ever more slippery and ever more steep – the touching faith that some have in ‘government’, and the wise words of governors of the BoE are part of ‘faith in money’ which some seem to think is all that is required for money to work. (Niall Ferguson would be one of these.) But the real experience of the Germans is that the ‘western Central Banks’, who are ‘not so stupid’, or at least their own Central Bank (no need for caps obviously, but I am quoting accurately, it is part of the ‘faith’ in the system that evokes the caps), during the Weimar Republic hyperinflation, is that they really are that stupid, mendacious, incompetent, and immoral. Zimbabwe did it a couple of years ago, with printed money again. The UK last did it under Labour socialist stupidity in the mid-1970s, and with inflation at an annual 26.9% in 1975, had to go cap in hand for a BAILOUT (note the caps), to the IMF. I was mortified, even as a teenager I knew that this was an embarrassment of a lifetime. We nearly lost our house due to variable interest mortgage payments and did not go on holiday for years. I will not forgot it. To think that now the Conservatives are presiding over the same scenario. Faith? I think not.

  • Paul Marks says:

    A good post.

    Nothing I can think of to add.

  • Robert Sadler says:

    There is a definite irony that Fred Goodwin has his knighthood revoked while Mervyn King is given one. Mervyn King has done more to create and prolong the current crisis than Fred Goodwin ever could.

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