Economics

Central bank money printing knows no limits

Episode 74: GoldMoney’s Alasdair Macleod talks to John Butler – Chief Investment Officer at Amphora Commodities Alpha and publisher of the Amphora Report, as well as author of The Golden Revolution: How to Prepare for the Coming Global Gold Standard. They discuss the huge debt problems confronting Western economies, central banks’ reflation efforts and the significance of the shadow banking system.

Butler emphasises that policymakers will do everything in their power to fight natural deflationary pressures with policy-induced inflation. He argues that when central banks really want to double-down on their efforts to push prices higher, they may consider monetising the entire shadow banking system by taking it onto their own balance sheets in return for newly created cash – a possibility that Butler calls the “nuclear option”.

Butler states that a flexible money supply which can be manipulated at political will is an unsound foundation for finance and global commerce. In the realm of international finance there is still a lack of understanding when it comes to gold. As far as the debt crisis is concerned, there is no free lunch: no magic policy tool that can prevent the rebuilding of savings required when a country has over-borrowed and over-spent.

Alasdair and John also discuss Japan moving from a net creditor to a net debtor, and how this will put upward pressure on interest rates around the globe, which central bankers will likely address with even more monetary stimulus. To protect oneself from the effects of debt deleveraging or currency debasement when such deleveraging is being delayed, one should own real tangible assets that cannot be defaulted upon.

This podcast was recorded on 22 November 2012 and previously published at GoldMoney.com.

4 comments to Central bank money printing knows no limits

  • “They discuss the huge debt problems confronting Western economies…” What huge debt problems? As to the national debts of a country that issues its own currency, disposing of that debt is a doddle.

    Step 1: Stop rolling over the debt and just print money to pay off debt holders.

    Step 2: The above on its own would be too inflationary, so counteract that with increased taxes. As long as the deflationary effect of the latter equals the inflationary effect of the former, there is no net effect: in particular, unemployment stays the same, GDP stays the same, etc.

    Re excessive household debts, they are being paid off at the moment. But even if they were not, I’m not bothered if large numbers of borrowers go bust and some lenders go bust in consequence. They can all go to court and fight each other over who grabs what assets. Teach them a sharp lesson.

    If there are spill over effects – in particular if the fact of households paying down debts has a deflationary effect (which it does) – then government can counter that with a bit of stimulus. No problem.

    In short there is no technical or strictly economic problem. There is of course the potential problem that politicians will make a total hash of managing the above disruptions.

    • Peter Wraith

      And just what exactly does your proposed solution teach the feckless overspending State other than the fact that it can continue to spend, spend, spend, at least to the point where its productive subjects finally give up wanting to pay for what the State has already “purchased” on their behalf and ceases to produce a taxable surplus?
      When will all you State worshipping Communists, who so despise individualism, realise that the State has nothing, repeat nothing, that it has not first taken (usually under the threat of some kind of violence and, these days, usually ‘in advance’) from its productive subjects. Rather than giving such a baleful institution carte blanche via complete control of the means of exchange, it is the opposite – the complete separation of money and State – that is required.
      Long term, what is required is for the State to be obliged to live within its current means – with no deficit spending (because it produces nothing of value to sell) – and with all its expenses paid for out of ‘direct’ and ‘above board’ taxation.

      • So what do you propose doing when the private sector dramatically cuts its spending, and hence the number of jobs it creates? That’s exactly what has happened over the last two years. If you do nothing, unemployment rockets.

        You could of course sit around waiting for wages and the price of almost all goods and services to drop. They’re trying that in Greece right now, and the country is about to implode.

  • Just to recap.
    The s!*t IS going to hit the fan.
    There is NFW out.
    It will be disastrous, not challenging.
    And there is ZERO space for money policy-makers.
    Maybe get yer gun and your gold and ride it out for the sake of the children.
    Did I get that right?

    And, on the Balance Sheet side:
    Unprecedented, if legitimate debt cannot be repaid.
    Illegitimate debt – in the form of shadow-banking collateral of purely a financial nature, without a brick or mortar in sight – is stupendously perched to take down global finance, almost certainly to start in Europe where the debt is sovereign but not the printing press.

    The part I liked was where the nuclear-option, where CBs would take on and monetize the shadow-bankers assets.
    So, as public policy – at what price? I say 15 cents on the dollar – if that.
    Because that’s what they’re worth.
    So, that could be done in the Grand Resettlement of Accounts, and re-privatized.

    More importantly, there is at least one solution proposed out there to deal with all of this.

    In the Research Paper by IMF economists Benes and Kumhof, they propose to exactly deal with the necessary deleveraging and rebuilding of savings called for by Mr. Butler.
    http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

    It is somewhat ironic how the Benes-Kumhof “nuclear” solution squares with the postulation of the debt-saturation crisis, compounded by shadow-banking toxicity, while restoring stability and full-reserve banking to the operation of the national monetary system.
    It’s all in there.
    Though a little wonkish on the monetary-economics side.
    Great interview, though.
    Very demanding of Mr. Butler for “solutions?”.
    Too bad he didn’t have any.
    Thanks.