In the
aftermath of the Financial Meltdown of 2008, Capitalist States began
a process of money printing. In fact, money printing is nothing new.
States always have to print, or mint money, in order for it to
circulate. Its actually the quantity of money minted or printed that
is important. What is really being discussed is printing more money
than is actually required by the needs of circulation, in order to
try to encourage additional spending, and thereby stimulate the
economy. Once again, Capitalist States have always tried to
intervene in the economy via Monetary Policy, but they have usually
done it through interest rates.
During most
of the post-war period, states were able to increase money supply by
changes in Bank Rate. By lowering the Bank Rate, the Bank of England
(or other Central Bank) lowered the cost of borrowing for commercial
banks. This increases the money supply because of the way fractional
reserve banking works. It essentially means that the commercial
banks themselves are able to create money – bank money. Banks know
that of all the money deposited with them, the depositors will only
ever require a fraction of it. That means the Bank only needs to
keep that fraction available to pay out, as cash, to those
depositors. In turn, that means the Bank can lend out the remainder
of the deposit. Its on this lending, and the difference between the
rate at which it lends, and the rate it pays to savers, that
commercial banks make their profits – which is why its nonsense for
the Government and others to complain that the Banks are refusing to
lend, because that's like saying the banks are refusing to try to
make profits!
When, the
Bank lends to someone, they do so by creating a new deposit. So, if
A deposits £100, and the bank knows it can lend £90 of it, it lends
£90 to B, by depositing £90 into B's Account. However, the Bank
now has B's Account with £90 in it. It can now lend £81 against
that deposit, and so on. This “Credit Multiplier” means that an
initial amount of Money of £100, when deposited in the Bank, can
create £1,000 of Money in circulation.
Greenspan
intervened again, cutting rates. Markets recovered, and house prices
began to bubble up again. This process of raising and then lowering
rates continued into the last decade. The market got used to the
idea that, not only if the economy was slowing down, but even if just
the stock market or property market was slowing down, the central
bank would intervene to give it another push. On that basis both
property markets and stock markets continued to bubble up. The
backstop that the Federal Reserve provided, became known as the
“Greenspan Put” - a Put is a Stock Market term referring to an
option to buy shares at a particular price some time in the future.
In 2008, it
became apparent that this means of intervening in the economy was no
longer sufficient. Central Banks have always had other means of
printing money besides simply cutting interest rates. They can, for
example, reduce the proportion of assets that Banks are required to
hold as a proportion of their lending. The Chinese State, which owns
the main banks in China, uses this method frequently to control
credit availability, as well as more direct measures to direct
lending to those economic activities which are consistent with the
Five Year Plan. However, the 2008 Financial Meltdown had been
caused, in part, by reckless lending by commercial banks, which had
given out loans of 125% of inflated property values, often without
any kind of check as to whether the people it was lending to had any
reasonable means of making the necessary repayments. Rather than
loosening the requirements for lending by banks, it was obviously
necessary to tighten them again, reversing the deregulation under
taken by Thatcher and Reagan during the 1980's, which had made such
reckless lending possible.
The other
method for printing money besides simply literally printing more
dollars, pounds etc. is for the Central Bank to buy assets from the
banks, providing them with cash – in fact, an electronic deposit in
the banks' accounts with the Central Bank – in return. This method
– what used to be termed Open Market Operations – is what the
Federal Reserve, Bank of England and other Central Banks did in 2008,
and what they have continued to do since. It is what is called QE or
Quantitative Easing. Although, it is portrayed as being a measure to
stimulate economic activity, and thereby rescue the economy, its main
purpose is to rescue the banks themselves, and Capital in general,
which has large amounts of Money Capital invested in those Banks, as
well as in other Financial Assets such as shares, bonds, and
property.
The Bank of
England, in its recent analysis of the effects of QE, admitted that
the main beneficiaries had been the richest 5% of the population.
That is because, it is they that own the bulk of shares, bonds and
property, the bubbles in which have been kept inflated by the money
printing. In the meantime, it is the other 95% of us, who have lost
out. QE has not had any significant effect on stimulating economic
activity, because, especially in an environment of austerity measures
undertaken by the Government, no ordinary person is going to splash
out on more borrowing, if they are struggling to pay their bills,
face wage cuts, and might lose their job. Firms are not investing,
and will not borrow to invest, for similar reasons i.e. they do not
see any immediate prospect of economic activity improving
significantly. In fact, many firms have lost out directly as a
result of Government austerity measures – witness the 10% drop in
Construction activity just announced.
Whilst QE
has not increased economic activity, it has had other bad effects for
ordinary people. It has reduced interest rates for savers to next to
nothing, hitting older workers, and young workers trying to save to
buy a house, particularly hard. The same effect has reduced
Annuities for Pensions to next to nothing too. A Pension works by
building up a pot of money, which is then used to buy an Annuity.
The Annuity is a fixed amount of money (sometimes with an inflation
linked increase) calculated as a percentage of the pot of money, paid
out as pension each year. The lower the Annuity Rate, the less
Pension you get. QE has also increased inflation, because the money
printing means that suppliers can more easily raise prices, and
because it has caused a devaluation of the Pound, which increases the
cost of imports. Rising inflation, manifest in rising energy and
food costs, is squeezing ordinary workers real wages, whilst it
increases profits, which are paid out in higher dividends to
Capitalists. QE, by keeping the bubbles in stock, bond and property
Markets inflated is also detrimental to workers.
Higher share
and bond prices, mean that workers monthly pension contributions, buy
fewer of these assets, and the yields on them remain low. The
continued bubble in the property market means that large numbers of
workers are unable to afford to buy a home, and the cost of rent is
artificially kept high. In his Press Conference a couple of days
ago, Ben Bernanke, in justifying more money printing, argued that it
would increase property prices in the US, and thereby stimulate
economic activity by encouraging more people to buy homes, and the
attendant furnishings etc. This is economic madness. The general
principle of economic theory, of Supply and Demand, is that demand
for a commodity increases as its price falls, not as it rises!!!
There are exceptions to this rule, but in general, the only reason
that people buy more of something when its price is rising, is
because of speculation. The very thing that caused the crisis in the
first place!
In the US,
demand for houses has stabilised, and may even be rising slightly,
but the cause of that is not that house prices are rising, but
because they have collapsed by between 60-75%!!!! They have fallen
to prices where they have once more become affordable, as things
people want to buy to live in, rather than something they want to buy
on a speculative whim. If another round of QE increases US house
prices, it is likely to choke off that new demand, not increase it!
What Capitalism really needs is a prolonged period of very low house
prices, share prices, and bond prices, so that speculative froth is
removed, and available Capital is invested in productive capacity,
and hoarded money – of which there is literally trillions of
dollars – becomes transformed into Money Capital, available for
such investment. QE, and the alphabet soup of equivalent measures,
is a reflection of the extent to which Money Capital continues to
dominate in the realm of politics over Productive Capital, in the
West. The longer that persists, the more the West will fall behind
Asia, and other industrialising parts of the world.
After, the
QE introduced by the Federal Reserve and Bank of England the
governments in those countries also reverted to Keynesian fiscal
intervention, ensuring that the additional money was directed into
actual economic activity. China, Brazil, Japan and other countries
did the same. The result was fairly immediate, and effective.
Economic activity picked up sharply, giving the traditional “V”
shape of the recovery. In the US, growth at one point was up to 5%
p.a., UK growth rose to 2.5% p.a., unemployment was declining, and
yields on UK 10 Year Gilts were declining, despite the size of the
debt and deficit. In the Eurozone, the ECB, under the influence of
Jean Claude Trichet, a supporter of the so called “Austrian School”
of economics, however, decided to raise interest rates, soon after
the immediate crisis appeared to be over, and to insist that Eurozone
Governments had to be fiscally conservative. Strong Eurozone
economies like Germany could cope with that, weaker economies like
Greece, Spain, Ireland, and Portugal could not. Those like Spain and
Ireland, which had blown up huge property bubbles, which now either
burst, or at least stopped inflating, were particularly vulnerable.
Greece, as a tiny economy, which had borrowed to excess, and used
virtually none of the borrowing to invest in making its economy more
competitive, was the most vulnerable of all.
In the US,
the rise of the Tea Party, representing a virulent form of right-wing
populism, mobilised to push the Republican Party towards the kind of
fringe economic and political positions that previously had been the
preserve of the lunatic fringe of the Libertarian Party, based around
the Neo-Austrian economic theories of Von Mises, and Hayek. They
began to remove and replace Republican candidates with Tea Party
candidates, dedicated to a mindless commitment to oppose any tax
rises, which nearly caused the US to default on its debts last year.
All Republicans were pressed into adopting a similar stance for fear
of losing their seats. Moreover, in the mid-term elections, it
seemed to be a useful approach, because as Obama failed to tackle the
real problems of the US economy, and failed to live up to the
expectations many, misguidedly, had placed in him, the right-wing
populism seemed to garner votes for Republicans.
That,
together with the fact that many States have Constitutional
requirements for Balanced Budgets, meant that Obama's attempts to use
fiscal stimulus to rescue the US economy faltered, as Republicans
scuppered any such attempts where they could. In the UK, the Tories
saw this happen, and spied their chance. Having previously been
committed to at least matching Labour's spending commitments, they
did an about face, and committed themselves to Austerian economic
policies, justified on the back of an incredible misrepresentation of
the state of the UK economy as being on the verge of collapse like
Greece. The Opportunists of the Liberal-Democrats, who had been
opposing such policies even into the Coalition negotiations with the
Tories, quickly ditched those policies and any principles they might
have had, in return for a seat in Cabinet, and a ministerial
limousine.
The
consequence was inevitable. The recovery of the UK economy stopped
in its tracks, as individuals and businesses took the Government at
its word, about the likelihood of economic catastrophe, and certainly
at its word that they intended to deliberately retrench the economy
through their Austerian economic policies. Within months, of them
taking office, the incompetence of the Government had caused the
economy to essentially come to a standstill, and then to go into the
current double-dip recession. During all that time, the Bank of
England has continued its policy of near zero interest rates, and
money printing without any noticeable effect on economic recovery,
and with all the negative effects for ordinary workers referred to
earlier. The beneficiaries have been the Banks and Financial
Institutions, and the Money Capitalists behind them.
Similar
policies in the Eurozone have cratered economic growth there too in
the periphery, although the core of the Eurozone has largely not had
Austerian economic policies imposed on it, (largely because the
underlying problem, in the UK, Greece, Spain and Ireland, of huge
amounts of debt, particularly private debt, did not exist, because of
the different structure of its housing market and larger productive
sector) and has largely avoided recession. Indeed, until the last
few months, the economy in Germany, Sweden and other northern
European states has been growing strongly. The main problem faced by
the Eurozone is how to deal with that huge amount of private debt in
the periphery, just as it is how to deal with the huge amount of
private debt in the UK and US, without destroying the Banks who have
issued all that debt, and who own in return huge amounts of assets,
worth trillions of dollars on paper, but next to nothing in the
market! That is a problem for Germany, in particular, for two
reasons. Firstly, its banks and financial institutions provided a
lot of the lending to the periphery. Secondly, the German economy
depends on being able to export to other Eurozone economies. But, it
is also a problem for the UK for the same two reasons, which is why
the arguments of the Eurosceptics are so remote from reality.
In the US
and UK, the problem has been partly resolved through QE. In the US,
in particular, the Federal Reserve has not just bought Government
Bonds, it has also bought commercial paper, such as Mortgage Backed
Securities (MBS) from the Banks, effectively transferring worthless
paper assets from the books of the banks on to the books of the
State, in return for dollars. In the UK, the Bank of England has
mostly confined itself to buying Government Bonds. The Bank of
England now owns about a third of all the Government debt issued!
That is why, UK Gilt Yields are at such low levels. But, it does not
resolve the main issue, which is the amount of private debt
outstanding. In the UK, Public Debt amounts to around £1 Trillion,
but Private Debt stands at around £2 Trillion. In the US, many
people have walked away from their houses, leaving Banks with
worthless property, to sell at about a quarter of its price, prior to
the Crash. However, there is still a huge amount of mortgage debt in
the US, and added to it, is over $1 Trillion in student debt, and a
similar amount of credit card debt. Unless the Federal Reserve
printed money, and sent a cheque to everyone to pay off those debts,
which it will not do, that debt is not going away. Or, at least, if
it goes away, it will only be through massive defaults, much bigger
than happened in 2008, which would in turn destroy the banks.
The same is
true in the UK. A large part of that £2 Trillion of private debt is
mortgage debt. But, record numbers of people are in arrears, despite
the lowest interest rates in British history! The properties,
against which those mortgages were given, have bubbled up in price to
ridiculous levels. They are like zombie properties, walking dead,
that have the appearance of value, but on the inside are hollowed
out, with no real value other than what is being maintained by the
fiction of asking prices in estate agents' windows, and official
House Price Indices, but whose unreality is demonstrated by the fact
that no one can sell houses at those prices. Yet, not only are the
mortgages of millions of people dependent on the façade of these
zombie properties, but the billions of pounds of additional debt,
credit card debt, store card debt, and increasingly pay day loan
debt, has also been accumulated on the back of it. At some point the
elastic can stretch no further, and as happened with the sub-prime
crisis in the US in 2008, so all of this debt will become odious too.
A small rise in unemployment, the continued rise of inflation,
squeezing real wages even more, a panic in financial markets, causing
a sell off in Bonds, and spike in interest rates, a continued Credit
Crunch, pushing rates higher, as is already happening with rising
mortgage rates; any of these could be the straw that breaks the
camel's back, and causes an avalanche of selling, and the bodies of
the zombie properties crumble to dust, bringing down the zombie
banks, that created them, in the process.
After 2007,
when Northern Rock collapsed, interest rates were slashed, and
millions of mortgage payers benefited by, on average, £7,000 a year,
in lower monthly payments. Yet, although that had an immediate
effect on bolstering consumer spending, in the next year or so, it
has not countered the effects of the Government's austerity measures
over the last two years, and those policies have hardly begun. So,
far only about 6% of the Government's austerity measures have been
introduced! Further job cuts, wage cuts, pension cuts, benefit cuts,
and tax rises have yet to hit the economy. The job figures are a
mirage, hiding the reality of millions in part-time work, forced into
self-employment that pays little more, if anything, than benefits,
and thousands on zero hours contracts. Appearance and reality, as
with the property market can only remain separate for so long.
Alongside zombie properties and zombie banks, we also have zombie jobs in an increasingly zombified economy.
In the
Eurozone, politicians have played a game of hide and seek with
markets for the last two years. They continually announce another
set of new measures that are to be dramatic, and big enough to deal
with the problems, which will be unveiled at an unending series of
meetings of Finance Ministers, only for those measures always to be
far less than spectacular, far less than is required to actually deal
with the problems. Each time, the markets follow the usual practice
of “buy on the rumour, sell on the fact”. So, stock markets and
bond markets rally on the announcement of some new proposed
initiative, and then after its been announced, they sell off again.
The main reason that markets have risen by 30% in the last year, has
been money printing.
Forward To Part 2
Forward To Part 2
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