SOME UNSEASONAL REFLECTIONS ON MONEY

Several comments and questions on my last essay deserve a thoughtful response, which

is the theme of today’s essay.

You may recall its references to today’s dependency culture - the “expectation

syndrome” that fuels the size and cost of welfare programmes as the state’s tentacles

infiltrate every crevice of society under banners of “the state owes me a living”;

“policies should be geared to job-creation”; and all to be funded by “taxing the

wealthy”.

The essay, titled “How the Crisis Unfolds”, described, in some detail, the money-printing

mechanism, or Quantitative Easing (QE), adopted by the Treasury to pay for this

phenomenal largesse, particularly the great 2020 state-sponsored binge still under way,

with more mountains of funny-money.

I also explained the divisive social consequences of fiat money-creation and the inflated

currency’s inescapable loss of purchasing power.

QE & “Helicopter-money”: any difference?

Some readers asked how, if at all, QE differs from so-called “helicopter money”. Well,

while the ultimate effect of any form of currency destruction is much the same, the

respective processes and the time-frame of their impact do indeed differ.

The QE process involves the creation of massive liquidity in the money markets, reliably

taken up by commercial banks, pension funds, insurance groups, major corporations,

local government treasuries and other “first receivers” among favoured City institutions

- all having to find outlets in which to invest, or simply spend. Lavish bonuses,

dividends, share options, deals galore, all create asset-price inflation in equities, UK and

overseas properties and myriad luxury assets, before gradually filtering down into the

wider economy that most of us inhabit.

In essence, QE makes extensive use of secondary financial markets for the purpose of

absorbing the newly created money into the economy over an undefined extended

period.

By contrast, as its name suggests, “helicopter money” by-passes the money markets

altogether. It has come into its stride during the pandemic, its astonishing generosity

being lavished by the Treasury, or that custodian of the nation’s taxes, Her Majesty’s

Revenue and Customs (HMRC). It hardly matters which department of state serves it up,

but all that electronically generated money is simply “helicoptered” directly into the

bank accounts of people, firms and companies.

Indiscriminate largesse

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Naturally, attempts are made to relate benefits to needs, but in some cases the process

finishes up being unfair. For example, a business owner who just happened to cash in a

pension fund before Covid struck would now receive nothing from the state on the

grounds of “having enough to live on”. But had the pension fund instead been left

undrawn, new money would be flowing straight into his bank account. Similarly, much

state-supported lending has been skewed towards “zombie” companies, merely

delaying their demise, while starving smaller, dynamic businesses of much-needed

finance.

There are so many “schemes” being dreamed up, almost on a daily basis, that it’s

difficult to keep tabs on them. Some readers justified this unbalanced extravagance with

comments such as “no one saw the virus coming – at least those worst affected are being

assisted even if there are some blunders.” That’s the prevalent humanitarian view.

But make no mistake, once those holding the levers get accustomed to the breezy

power, the plaudits, the instant popularity that comes with hosing money in every

direction, it’s a short walk to irreversible addiction. Indeed, this style of unbridled fiat

money creation is more pernicious than QE, and more effective in achieving total

currency destruction.

Evidence in abundance

We know about the Weimar Republic in 1923, when the central bank was forced to

replace the worthless deutschmark with the new “rentenmark” – fixing an exchange

rate against the dollar by the simple device of deleting twelve zeroes! We have

witnessed purchasing poser destruction in Yugoslavia, Hungary, Syria, Zimbabwe,

Venezuela, Greece, North Korea and Argentina – where a bankrupt regime ruined the

economy by printing money to fund welfare to secure votes - while repeatedly

defaulting on debt repayments.

Argentina is a beautiful country, endowed with vast supplies of natural resources. It was

a tourist heaven with a superb climate and a happy people. But a friend, who knows that

country, tells me that the last time a reformist regime attempted to instil a dose of

reality it was hounded out of office for seeking to “inflict austerity”.

The journey from bountiful to basket-case was swift. It was marked by (i) debasing the

currency at the rate of between 30% and 50% per annum by indulging in rampant

money-printing; (ii) mafia-style bribery and corruption at state level; and (iii)

continually threatening to nationalise the means of production. Socialism on steroids.

Prices quoted in dollars

For governments to conduct affairs of state idiotically is almost expected. But when

people become instinctively aware that their currency has been destroyed they will find

other ways to trade: hotels, shops and restaurants in Buenos Aires thus display their

prices in US dollars. Yet only 20 years ago the peso and the US dollar were close to

parity. It is no wonder that wealthy citizens are not crazy enough to invest in their own

country, preferring to keep their money in safer locations, adding to an uncontainable

flight of capital resources.

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The government eventually bowed to political pressure, allowing its citizens to

purchase US$200 each week at the so-called “official” rate of 82 pesos to the dollar.

Naturally, this was a pure guess, and the black-market rate settled at double that. Many

citizens survive by buying their weekly quota of official dollars, and promptly disposing

of them on the black market. Demonstrating once again the flawless intersection

between human nature and economic law, most notably when the regulatory policies of

state are plainly asinine, having to resort to still more regulation whenever confronted

by natural law.

The French lesson

When we had a home in France we witnessed exactly the same debacle. When right-ofcentre

leaders Chirac and Juppe attempted to moderate excessive pension and welfare

provision the whole country was brought to a standstill by widespread strikes and

blocked motorways. Chirac called an election, hoping for a public-backed mandate for

some modest reforms, but socialists under Mitterrand were elected instead, signalling

the end of any curtailment of state spending. Macron, to be fair, has attempted reform,

but the obstructive venom of Gilets Jaune diehards opposed any meaningful reform,

calling for wealth taxes instead. Maybe it’s in their genes: to the French, every state

giveaway morphs into an inalienable right!

“Liberté”, absolutely! “Fraternité”, sure! “Egalité”? Now there’s the devil!

Jogging along with modest inflation – really?

Other readers asked why, after 10 years of QE and repeated warnings of destructive

hyperinflation, we appear to be jogging along quite nicely with modest inflation and a

functioning currency. Well, 10 years ago, particularly in the US, freewheeling lending

practices by banks came very close to destabilising the dollar.

Banks indulged in massive debt creation supported by fake collateral values. They

hounded thousands of impecunious borrowers, offering absurdly lax terms for homeloans

that they could not afford to service, let alone repay. The banks “sliced and diced”

these near-worthless mortgage instruments, parcelling them (after throwing in a few

higher-grade securities to fool the rating agencies) and selling the parcels to other

banks. This game of “pass-the-poison” went on until the system ran out of suckers.

Financial institutions left “holding the baby” had to be bailed out by – yes - that brilliant

device of “quantitative easing”!

At the time I expressed the view that both the dollar and sterling would have been

strengthened if the banking wide-boys caught up in this illicit frenzy had been allowed

to go to the wall. Citizens fleeced would have been eligible for aid, and the culprits

should have been sent up for a dose of painful correction. Banking institutions under

new management – indeed the whole financial system - might also have regained some

public trust. But in the event lily-livered chiefs caved in, allowing millions of ordinary

citizens to be punished by the theft of purchasing power, while enriching the echelons

of first receivers.

As it happens, we are not jogging along with low-rate price inflation. For starters, none

of the official indices is accurate. The Office of National Statistics is well-practised in the

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rigorous art of deceptive selection to arrive at the “number-you-first-thought-of” (2 per

cent).

Now try this: if you are hoping to assist a daughter or son purchase somewhere halfdecent

to live you will be reeling from the shock of current price levels of even the most

modest abode. No inflation? Really? And how are savers, suffering the novelty of zeroreturns,

able to sustain living standards?

A desolate landscape beckons

We should in any case stop thinking of purchasing power destruction solely in terms of its

price-inflation manifestation. The post-Covid economic landscape will be littered with

crippled businesses of all sizes, leaving a trail of bad debts that emanated from the

government’s own loan schemes; and thousands of commercial loans already designated

“non-performing” will inflict untold damage to counterparties. Will recourse to the only

panacea that government knows – more and more magic fiat – be repeated? Or will

Chancellor Sunak recognise at last that the devastation wrought by well-intentioned, but

unbridled, debt creation cannot be remedied by….. still more debt creation?

Even he now confesses that if this madness continues we shall be staring currency destruction

in the face.