News & Analysis
Drop the Cash From Helicopters!
Narrow M1 data for April is the weakest since modern records began. Real M1 deposits – a leading indicator of economic growth six months or so ahead – have contracted since November. They are shrinking faster that at any time during the 2008-2009 crisis, and faster than in Spain right now, according to Simon Ward at Henderson Global Investors ... "China is in deflation," says Charles Dumas from Lombard Street Research. Yes, consumer price inflation is 3.4pc – though falling – but consumption is a third of GDP. Fixed investment is 46pc, and here prices have dropped 3.5pc in six months. Export prices have dropped 6.6pc ... All the BRICs need watching. India's industrial output fell 3.5pc in March. The country seems caught in a 1970s stagflation vice. Brazil has softened too, with car sales down 15pc and industrial production contracting in March. The bad loans of the banks have reached 10.3pc, higher than post-Lehman. The bubble has probably popped already, but hoteliers in Rio are hanging on. The European Parliament has pulled out of the UN's Rio forum on sustainable development in June because the rooms are exorbitant. "We are short the vastly over-vaunted and over-owned BRICs," says hedge fund contrarian Hugh Hendry. – UK Telegraph
Dominant Social Theme: If only we could print as much money as we want. That would make the banks happy, anyway ...
Free-Market Analysis: Ambrose Evans-Pritchard has gotten to the heart of the matter in a recent article on monetary contraction (see above). He rightly points out that less money is circulating but then comes quickly to a Keynesian conclusion that more money will provide the antidote.
Because of all of the conflicting information surrounding this subject, it takes a long time to figure it out. But one thing is for sure: "Printing" money is not the solution.
Unlike many, Evans-Pritchard has gotten the problem right in the past. For a variety of reasons, money is not circulating around the world.
But the solution is not to print more of it! What the power elite that controls central banking around the world simply doesn't want to explain is that trying to shove more money into the larger economy is a nonstarter.
The world is full to the gills of money that is not circulating already. If money sits in bank vaults uncirculated because people don't want to borrow, then the "economy" will not expand, locally, regionally or nationally.
The distortions of the current system need to be removed. The largest banks and financial facilities need to compete on an even playing field and rise or fall on their own merits. This STILL has not happened, some four years into the financial crisis.
Now, as well, there has been some suggestion in the past that central banks are in a sense discouraging the circulating of money by basically paying banks to let money sit on the shelf.
We would not count out this possibility. It's our contention that the powers-that-be are likely driving the world into a kind of planned depression, one that includes Europe, the US and the BRICs as well. Evans-Pritchard seems to see somewhat the same picture – regardless of the "planning" part:
The BRICS helped save us in 2008-2009. If we now face a global crisis on all fronts – and such an outcome can still be avoided – it will test the mettle of world leaders. Interest rates in the G10 are mostly zero already, and budgets are frighteningly stretched.
Sensing what is coming, Citigroup's chief economist Willem Buiter says global central banks have not yet exhausted their arsenal. They can "and should" crank up quantitative easing (QE), buy everything under the sun, and do "helicopter money drops".
I would go even further. Sovereign central banks have the means to defeat any depression thrown at them by launching mass purchases of assets outside the banking system, working through the classic Hawtrey-Cassel quantity of money mechanism until nominal GDP is restored to its trend line.
The problem is not scientific. A world slump is preventable if leaders act with enough panache. The hindrance is that the Euro Tower still haunted by Hayekians, and most G10 citizens – and Telegraph readers from my painful experience – view such notions as Weimar debauchery, or plain Devil worship. Economists cannot command a democratic consent for monetary stimulus any more easily today than in 1932.
Pritchard believes that central banks ought to print money and then buy up diseased assets – specifically financial ones. Presumably he must believe this because he writes for the UK Telegraph.
But we do not. And so we are free to point out that if an asset is diseased to begin with, merely buying it up with more money-from-nothing is not going to make the asset healthier.
This is merely a recipe for prolonging the pain until the larger economy gradually rights itself. But in truth this will never happen.
Gradually, as a result of intensive money printing, the powers-that-be will blow more bubbles and create what appears to be a recovery but shall not be.
And that is best case. Worst case, economies stagger on while central bankers continue to print money and further inflate the system. Inevitably, then, the system provides even fewer jobs while living expenses go up.
Conclusion: The problem is admirably stated in this article, but not the solution. The real solution is to let the larger economy unwind and let failing firms go out of business. Printing more money only prolongs the pain.