A Cure Worse than Any Symptom
The UK announced this morning that it was going to print money to stave off deflation and get consumers buying again.
It seems to make sense, doesn’t it?
Print more money and everyone will have more money to buy more ‘stuff’ to keep business in business and allow people to keep their jobs. One could even describe it as a virtuous circle. Unfortunately it is a load of bunk.
Printing money indiscriminately fuels inflation, debases currencies and destroys nations. If you have your doubts, take a closer look at Zimbabwe. The results of poor monetary policy are displayed nightly in crystal clear high definition on your plasma television for all to see.
Perhaps you think Zimbabwe is an anomaly. Consider then the contribution that debasing the denarius made to the fall of the Roman Empire or France’s multiple failures with livres, assignats and paper francs. History is littered with the corpses of failed monetary policy. In fact, every single fiat currency that has existed prior to the current batch was eventually destroyed by its government.
With the printing presses now fired up in the UK, this toxic snake oil could spread like a plague across moribund economies throughout the world.
It might make people feel okay for a while, but ultimately the cure could indeed be worse than the symptoms.
To put it simply, the world is undergoing a massive de-leveraging. This is necessary because there was too much borrowing and people lived beyond their means. The only cure is to work the excesses out of the system. This can be done swiftly, letting the market do its brutal and painful work; or it can be a slow, throbbing ache that never seems to go away thanks to excessive government intervention.
Both hurt (a lot), but one hurts for much, much longer than the other.
If you doubt it, consider the case of Japan: a productive nation that got carried away in the excesses of the 80s. Property prices reached stratospheric levels and the share market soared. Some 20 years later, the Japanese stock market is less than one fifth (20 per cent) of its all-time high and Tokyo property prices are a fraction of their previous levels.
In fact, Japan has been in and out of recession multiple times over the intervening years, during which the government has gone to extraordinary lengths to stimulate the economy through infrastructure spending and interest rates at almost zero per cent. They have however, resisted debasing their currency because they know of the catastrophic consequences of doing so.
Economist Joseph Schumpeter succinctly described the dangers facing governments across the world when he wrote, “policy does not allow a choice between depression and no depression, but between depression now and a worse depression later: inflation pushed far enough would undoubtedly turn depression into the sham prosperity so familiar from European post-war experience, and would, in the end, lead to a collapse worse than the one it was called in to remedy.”
Wise words that our Government and many others should be mindful of.