Sunday, 7 November 2010

The coming economic winter - quantitiative easing, inflation and the crashes that are yet to come...

An economic winter is coming.

There are two business columnists in the Sunday Telegraph who I always read – and who seem often to be describing a different world. Such is, I know, the stuff of economics and finance. For every economist saying one thing we can find you one – or even 364 – who disagrees. Such is the case with Liam Halligan, Chief Economist at Prosperity Capital Management and Tom Stevenson, Investment Director at Fidelity Investment Managers (the two columnists).

So when they say the same thing we should take notice. Here’s Liam:

“That’s why QE (quantitative easing) will be blamed for so much more than “unfair” currency devaluations and for imposing a “soft default” on America’s creditors. This crazy money-printing is going to be seen as the primary cause of western inflation, food riots and a commodity price spike.”

All pretty polemical and typical of the Halligan style. Instead we can have Tom’s more measured, investment-advice:

“This is the so-called “Bernanke put”, whereby investors believe that if the worst comes to the worst the Fed’s helicopter will simply drop a load more newly printed dollar bills to bail them out.”

All told pretty high falutin’ stuff – not for the likes of us peasants toiling at the computer face. And, like the proverbial boiling frog (which on this occasion has nothing to do with Denholme), we’re not going to notice until it’s too late. We’re not going to see how our Governments – in a deliberate act – have set on a course of creating inflation so as to reduce the real deficit. It won’t hurt.

Or as our friend Liam puts it:

“So, in other words, QE has benefitted some pretty formidable interest groups – insolvent banks, public sector unions and cowardly politicians.”

The one group who emphatically do not benefit from QE is that group containing people without large debts, people living on fixed incomes, those reliant on savings, pensioners…in fact most of the population.

And what is worse is that QE isn’t working.

Far worse than that, the short-term, selfish decision to protect banks and the public sector now threatens to see a return to managed trade, to protectionism and to the misery of international stagnation – even depression.

“The US last week stoked the simmering tensions by unveiling plans for another $600bn (£370bn) of quantitative easing (QE) on top of the $1.7 trillion already in place. The dollar crashed in what is being seen as the latest round of competitive devaluations, as nations seek to debase their currencies to help domestic industry.”

With this comes calls for limits on current account surplus (oh, to have one of those!) – limiting it by agreement – to 4% of GDP. Or at least calls from the US:

Geithner last week sought to "reach a common understanding" with proposals that are likely be at the centre of discussions in Seoul. He raised the prospect of using current account targets as a way of reducing the imbalances, suggesting a 4pc of gross domestic product (GDP) benchmark. Under his plan, countries with persistent deficits would have to boost savings and those with lasting surpluses would have to cut export reliance.

Unsurprisingly, both China, with a 4.5pc surplus, and Germany, with a 5.1pc surplus, would have to take immediate action. In a damning riposte, Cui Tiankai, a Chinese deputy foreign minister, said the US plan harked back "to the days of planned economies".

It has become a strange world when the Chinese Deputy Foreign Minister is lecturing the US about the dangers of planned economies and managed trade.

At some point we have got to make the banks fess up – get them to lay out the extent of their liabilities on the table and let a few things die. So long as US and UK central banks protect their financial industry through QE – and it’s for the banks interests not ours, dear reader – we face the prospect of a new inflationary bubble in stocks, property, commodities or even tulips that will drive another economic crash.

An economic crash that will be accompanied by managed trade, protectionism, destabilising tax increases and untold suffering for poor people everywhere.

It may not be a good investment strategy not to fight the Fed. But it’s good politics – we should fight the Fed all the way to a world economy based on making, doing and trading things rather than on the fiction of central banker control. Those central bankers – urged on by the panjandrums of the public sector (who wish to protect their sinecures) – are favouring their friends at the expense of those who do that making, doing and trading. And this isn’t just bad economic policy, it’s just plain wrong.



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