If, after last week's rather confusing Inflation Report, you were after clarity from the Bank of England, I'm afraid you're going to be disappointed. The minutes to the Monetary Policy Committee's meeting earlier this month underline just how tricky their job is at the moment. While all the members were unanimous that rates should be left at 0.5%, they simply could not agree on what to do with Quantitative Easing – the programme of asset purchases through which it is pumping cash into the economy. The Governor and most other members of the Committee voted to extend the programme to £200 billion. But David Miles, one of the MPC's newest members, wanted a slightly idiosyncratic £40 billion extension (so far the programme has been increased in £25bn increments). Just as intriguingly, the Bank's chief economist, Spencer Dale, wanted to suspend the asset purchasing programme. Three way splits are very rare at the Bank, and invariably symbolize moments of deep insecurity about the direction of policy. The last was in July 2008, when Tim Besley proposed raising rates to ward off apparent inflationary forces and Danny Blanchflower voted for a cut. … But while it is at least gratifying to understand last week's befuddlement a little better now in retrospect, the fact remains: we now have an MPC which seems as confused as anyone else out there about what to do next – hardly something to inspire confidence in markets. The next few months are likely to be rather bumpy ones in the gilt and currency markets as people try to get their heads round this disturbing fact. – UK Telegraph
Dominant Social Theme: Honest uncertainty?
Free-Market Analysis: We've pointed out on numerous occasions that putting elderly (white) men (mostly) in a room with a time limit and letting them decide the quantity and price of money is a bad idea. In fact, if we proposed it that bluntly most people would reject it out of hand. If we then pointed out that this is exactly what central banks do (see above excerpt) and that if the old men can't reach a conclusion, then a consensus is basically forced upon the group (since they have to make some sort of decision) people might well deride the process as insensate and even juvenile.
Yet, honest-to-goodness, this is exactly what DOES happen. And as we predicted, the old men are having increasing trouble – now that they've put trillions into the system – figuring out when to withdraw the "stimulus." When major central bankers poured trillions into the staggering Western economies and stock markets, they were (eventually) celebrated as bold visionaries and courageous gunslingers. This is what is happening to banking luminaries such as the Fed's Ben Bernanke. We recently analyzed an article in the Washington Post that hailed Bernanke as a creative individual and courageous banker because of all the money he'd printed.
But from our point of view, the hard part is not printing money but knowing when to remove it. The whole mechanism of central banking lends itself to inflating the money supply. That's actually how those closest to the money spigot benefit. The money that is printed has the most impact when it is fresh, before its inflationary effects have been felt by the larger economy, before it has been discounted. Thus, those who run central banks (and, no, they are not saints) have every reason to print money NOW knowing that YOU will pay for it later.
Removing the money before it does indescribable damage to people's pocketbooks, homes and retirements is another issue entirely. In fact, as we have pointed out, it likely cannot be done with any precision. Removing money from the economy bit by bit (sterilizing in central-bank speak) in a manner that does little or no damage is akin to winning the lottery 360 days a year. You are doing nothing but guessing, in our opinion. And you have to be very fortunate to guess correctly.
How could it be otherwise? Every time you make an adjustment, the market adjusts back. You, the central banker, detect a trend, but as soon as you address that trend it changes. This was perhaps the great free-market economist Ludwig von Mises' greatest insight, that whatever fix central planning comes up with for a specific problem will not be applicable shortly after it is applied because humans themselves will change their behavior to accommodate that governmental solution. Only the market itself has the flexibility to properly address human action.
This is not, as we can see from the above article, a merely hypothetical consideration. Now that the Bank of England has to do something besides stimulate, the wise old men are in a quandary. The data they are using can obviously be interpreted different ways (which is why there are three different opinions). And the conclusion they did eventually reach must therefore have been some sort of compromise, imposed or otherwise. This means a CONSENSUS was reached about how to fix the price and quantity of money for a certain time period. But it isn't necessarily the RIGHT SOLUTION. It is merely a compromise between men.
Has the West entered a new and more dangerous part of the economic crisis? The "befuddlement" of those charged with printing money (and removing it from the larger economy) at the Bank of England would indicate so. The amount of money that has ALREADY been printed to try to salvage the current system is astonishing. It is beginning to circulate now, and it will doubtless cause hyperinflation if left unchecked. But the central bankers who printed the cash have no way of knowing how much to remove and when. This is why we regularly write that a private market-based gold and silver standard is far preferable to the lamentable command-and-control monetary system we have got now. And if we are correct in our analysis, the "bumpy" times ahead will make such a standard as we regularly mention increasingly attractive to an increasing group of sophisticated investors and business people.