Wednesday, Aug 11, 2010
..."you've been warned"
Greg Pytel: Heading towards global Zimbabwe?
Interesting commentary to Newsnight report on the US financial crisis. In a nutshell: QE is a ridiculous idea. It is a borrowing money by a government under a different name. We will pay it back with high inflation in the future.
Posted by ant @ 10:16 AM (1102 views) Add Comment
44 Comments
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1. tpbeta said...
Interesting write-up (and I don't say nice things about Greg Pytel very often.) I don't thing the reporter was suggesting QE would lead to ecomomic growth though, just that it was the hope.
2. ant said...
@tpbeta: Pytel wrote: "Any suggestion - supposedly by some economists - that printing money will result in economic growth, as Ms Munchetty also mentioned, defies belief and rational thinking." Pytel did not write that the reporter suggested it, but the reporter "mentioned" such a suggestion by some economists.
all the best (to anally retentive from, well, anally retentive:-)
3. tpbeta said...
I think it was the 'supposedly' that made me that.
Anally yours (err that didn't come out right)
TP
4. Crunchy said...
Economic growth for central banks.
Does anything else matter.
'Heading towards global Zimbabwe?' Sums it up well if fascism and wars (funded by taxpayers) are not stopped.
5. icarus said...
Any examples of QE leading to inflation (other than asset-price inflation or holding back asset-price deflation by virtue of keeping down long-term IRs through increasing central bank demand for longer-term assets))? It didn't cause inflation in Japan when it was used in the years after 2001. Only expansionary fiscal policy pulled the country out of deflation and facilitated expansion (until the financial crisis struck). The QE = inflation idea seems to be based on a simple quantity theory of money and ignores the extent of unused capacity in the economy - if in the unlikely event of QE stimulating demand and economic growth there'd be an increase in production rather than prices. And can't the central bank drain reserves as needed?
No examples of QE working to stimulate the economy either. But it useful to the banks since it gives them money to gamble on assets and keeps up the price of the assets on their books.
6. enuii said...
In a world of finite resources just where do people think an infinite supply of money will lead?
7. mark said...
Forgot what i typed after 20 tries to enter recaptcha i gave up
8. ant said...
@icarus: ...so Mugabe was just unlucky.
9. icarus said...
Mugabe didn't QE. He just printed. Japan QEd
10. ant said...
@icarus: no, I don't agree. Mugabe QE'ed, Japan just printed.
11. icarus said...
Seen any trillion-pound notes yet?
12. ant said...
Be patient: the massive money multiplier is not going to go away through "economic growth". You will either have to print money or write off banks' liabilities (and who is going to lose on that?), or both to reduce MM to sustainable level. As the MM is absolutely massive reduction through unused capacity, economic growth and (low) inflation is a hogwash.
13. techieman said...
ant - "be patient" - aha! the catch all answer. For how long? .... the trillion pound question.
14. ant said...
@techieman: the financial crisis that started with Wall Street crash in 1929 ended 10 years later with WW2. Whilst we might not see a trillion-pound note, expect interesting "re-adjustments". This crisis has not gone away since 2007/2008. And it is not getting any better.
15. icarus said...
Your post 10 is the hogwash. Japan QEd between 2001 and 2006 - http://www.boj.or.jp/en/type/ronbun/ron/wps/wp06e10.htm
One of the aims was to get "inflation" back up to zero. Where was the hyperinflation? After two or more years of QE M3 in the US is negative with banks sitting on reserves. The Fed put them there and the Fed could drain them. The Fed is desperately trying to convince people that QE will cause inflation in order to get them to spend now before their money loses value. This isn't working, and the low IRs of course reduce demand from savers, who aren't getting any interest on their money.
16. ant said...
@icarus: if in Zimbabwe QE money was still sitting on reserves there would not have been inflation either. The point with QE is that as long as it sits in reserves it effect on economic growth is minimal. Once it leaves reserves and gets into circulation it will get multiplied and then will cause inflation. The latter was Pytel's point. So Japan printed money, did not get inflation, but did not get economic growth either.
17. Amos said...
QE=government buying its own debt using money created out of thin air. The sovereign debt creditor nets off with the debit balance of the sovereign debt purchased in the govt books leaving just the cash created of thin air. Therefore the government has financed its obligations by creating money out of thin air which is now conveniently in the banking system where it can circulate quickly.
Its an act of monumental stupidity.
Weimar leaders did not think their printing was causing inflation the same as our leaders don't realise what is going to happen if QE continues.
18. techieman said...
no ant i am with Icarus here - asking WHEN you/ greg expect the [hyper[inflation to kick in. Not how long is it all going to take to unwind - how long before we see the start of it based on the multiplier effect you are alluding to?
19. techieman said...
and actually Zimbabwe did just print and Japan did QE.... but hey lets not split hairs... cause er what difference does that make ;-) ... innit though!
20. icarus said...
ant - nobody wants to lend and nobody wants to borrow and spend (or invest as long as nobody is spending). So the question is: why is it inevitable that the money will "leave reserves and get into circulation"? It's just pushing on a string. And there are two anti-inflationary factors I've mentioned - a lot of unused capacity and savers spending less because of zero IRs. It boils down to lack of demand as employment and wages slide. On top of that there are no examples of QE causing inflation. And as techie says - "just you wait" is not a good answer.
21. ant said...
@techieman: when through QE, money multiplier is reduced to acceptable level, 5 or so, and banks start lending as normal again. I do not know when it is going to happen as I do not know the current money multiplier and its dynamic. So doesn't The Treasury. If QE is continued, hyper inflation will start according to "bli me" scenario (i.e. "bli me, no one could have expected or predicted that hyperinflation would happen; all typical nonsense of ignorants who could not predict the obvious").
22. ant said...
@icarus: could you define precisely what you mean by "unused capacity" and quantify its value?
23. techieman said...
actually i think it best to sit the rest of this one out.... Good Luck Icarus - you ARENT going to need it!
24. icarus said...
Thanks techie
@ ant 21. You could google something like "unused capacity" or "idle capacity" or "capacity utilisation" to get a flavour of the ways of making this calculation, which can be complex. The World Bank has its own measure, which had capacity utilisation last year in advanced economies at something like a mere two-thirds http:blogs.worldbank.org/prospects/category/tags/capacity-utilization-rates
Your turn now. Why is it necessarily the case that QE money will "leave reserves and get into circulation"?
25. icarus said...
(Posted at the 4th attempt. Getting fed up with reCaptcha)
26. techieman said...
Amos how many times can you say "thin air" in the same post? ok so over to you - when is this going to manifest as hyperinflation? And no it isnt the same as Weimar and Zim. Cause as of now (US) M3 is contracting whereas in both the cases you say it ramped up.
27. ant said...
@icarus: "unused capacity" is an elusive idea when it comes to reality similar to "waste" (and a concept of cutting it). We all know they exist and we can estimate them. However it is very difficult, almost impossible, to make a practical use of them. These are in fact statistical margins of human activities we have to live with. Besides if trillions of dollars of QE were to release unused capacity, the unused capacity would have to be massive. This liquidity crisis is not a matter of just small overrun on money multiplier. It is massive.
If QE money were to sit in banks (as they do now) we would not see any inflation as a result of QE. But then the hole point of QE is to make banks start lending and to start circulating money in the economy. So I think you miss the hole point. Printing money and keeping it locked would not caused inflation in Zimbabwe either.
28. icarus said...
@ant - according to the World Bank unused capacity IS massive.
I re-iterate: There is no hint of the QE money entering circulation. The whole point of QE is to prop up banks and asset prices. Are you saying it's just a matter of time before the money finally gets circulated and ends up inflating prices? When did this happen before? And what are the circumstances under which all this lending and borrowing will take place?
29. icarus said...
Nearly all of the money created is created by private banks in the form of loans. Why do people get so exercised when money is created by governments or central banks?
30. ant said...
@icarus: by massive you mean between 20 - 40 times world GDP? (This seems to be the scale of liquidity hole or more.) If QE money does not enter money circulation, then - as it was on Newsnight - it is "not yet" or otherwise QE is pointless.
@29 you confuse money created as a result of deposit-loan cycle with hard cash
31. icarus said...
What's the difference between money created by loans and 'hard cash'? How does 'hard cash' come into existence?
QE isn't pointless - its function is to support banks and asset prices, not the real economy.
Once again - when is all this QE money going to go into circulation and cause hyperinflation?
32. ant said...
@icarus:
read http://en.wikipedia.org/wiki/Money_supply for starter. Do you know anything about fractional reserve banking?
i.e. QE is pointless then from real economy perspective. But I am afraid it is not that simple.
when liquidity hole is filled up and banks start lending again. If liquidity hole is not filled up banks will not start lending again. And if they do not start lending again, the state of the economy will remain as now.
33. icarus said...
"Do you know anything about fractional reserve banking/" Yes
Still no answer to my question. Given that hyperinflation has not yet followed QE anywhere, when and under which circumstances will this change? What will be the trigger for hyperinflation to rip? Saying there is no point in QE if the money created doesn't enter circulation is not the right answer.
And in your own words, what is the difference between money created as loans and 'hard cash'?
34. Spacemonkey said...
Surely if QE does prevent asset prices/bank balances from dropping then that is by definition causing inflation of those asset prices? They should be dropping but QE causes inflation that results in the price staying up?
I think the reason everyone gets in a flap about it would be because it makes a mockery of the 'free market' system we are told we have.
35. techieman said...
dear oh dear ant - fancy asking that question to icarus!! And then showing him a wiki entry "for starters" - how insulting - and dumb!!
If i go down the pub i know there are certain people i am going to come up against and come off worse if things get heated - so i avoid being confrontational.
Icarus is one of those on here [not that i have .. because you / [one] - assuming you [one] have [has] any sense - "just know[s]"].
36. ant said...
@icarus: ...but doubt that you understand basics of fractional reserve banking.
Your question was answered on numerous occasions (including on Newsnight programme itself). Hyperinflation followed QE in Zimbabwe.
If you come to a shop and pull a £50 note to pay it is hard cash. If you say to a shopkeeper that you will pay £50 (and you don't have it) and shopkeeper believes you this is the money created by you at that moment.
37. tpbeta said...
Icarus @ 29
Exactly. The QE money doesn't begin to substitute for the vast piles of cash - in the form of easy credit - annihilated during the credit crunch. QE seeks to fill that hole. Only if it succeeds will there be inflation. We're nowhere near that point IMHO
38. techieman said...
"@icarus: ...but doubt that you understand basics of fractional reserve banking." wow! Are you a fruit loop ant? ["Insanity is doing the same thing over and over again but expecting different results." ]
Hyperinflation followed QE in Zimbabwe. Erm nope followed money printing.. Go and do some research and then have another go.
Greg often makes good insightful comments. And eventually the HIn scenario may be right (after some deflation, and perhaps more extreme measures) which is why the "how long" question is being raised.
39. ant said...
@techieman: suggest to read more on fractional reserve banking and depleting reserve banking.
Do more research on Zimbabwe (with understanding). Then re-read the comments.
40. icarus said...
@36 - That's not money creation. That's a simple transfer of wealth from the shopkeeper to me. And if the £50 note were a loan from a bank would that note be hard cash?
41. ant said...
@icarus: with respect, read some basic about money supply, credit creation, deposit - loan cycles. Hard cash is created and guaranteed by a state issuing it. Money created by private companies (these may be bonds, shares, deposit certificates) are NOT guaranteed by a state in general (unless exception is made, for example deposit guaranteed scheme up to £50,000 in the UK). State guarantee means that the entire economic system of the country, with a power to raise taxes, natural resources assets, etc is behind hard cash. The higher credibility of a state, the stronger the currency.
By contrast, value of money issued by private companies (or by you, like your promise to pay) generally do not have the same credibility.
It is all a bit arbitrary as same states are less credible than some companies. You should read more on that as I do not want to write a book on the forum (especially that much better material is freely available on various credible web sites).
42. techieman said...
ant - thanks for the suggestions.. but i will pass. I think you are right, we have to agree to disagree, although i am not sure how there can be disagreements with facts, but still i shall be kind [since i do like Greg's writings generally]... here is something for you:
[bit obvious i know] - but the lyrics "dont step on an ant" seem relevant!
43. icarus said...
ant @41 - after your example @36 I don't think you're in a position to lecture me. Since most money is created by private companies (banks) as loans where does that leave us?
And as I've said before, don't get too carried away with loan/deposit ratios. Banks for the last 20-odd years have relied less and less on retail deposits to fund their trading activities.- trader banks in the run-up to the financial crisis turned to the wholesale money markets, including inter-bank markets, funded to a large extent by pension and mutual funds, especially in the US, where there were big tax advantages of putting money into pensiion funds rather than retail deposits or anywhere else,
And you STILL haven't answered the question posed by techie and me - when and under which circumstances is all this money going to enter circulation and overwhelm us? Did you mention 40 times world GDP earlier? That's a lot - about 2 quadrillion £/$/€.
I'm not going to get into another debate but it is precisely state guarantees that caused the banks to expand balance sheets, leverage and risk. Evidence at http;//www.bankofengland.co.uk/publications/speeches/2009/speech409.pdf
44. ant said...
@icarus: This forum is not for lecturing and I would not even dare to lecture you, even outside this forum.
PS. You wrote: "Since most money is created by private companies (banks)." Which money M0, money?:-)