The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."
Friday, March 2, 2012
Adam Creighton arrives--the best economic column of the year, so far
Wave of cheap money debauching currencies by:
John Maynard Keynes warned that inflation can lead to governments secretly confiscating an important part of citizens' wealth.
SO-CALLED Keynesianism has enjoyed a stunning revival since 2009. Governments have borrowed heavily to keep their economies ticking over.
But not all Keynes's remarks have been so diligently observed.
This week the European Central Bank conjured up another E500 billion ($619bn) and lent it to hundreds of European banks at 1 per cent a year.
"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency," Keynes wrote in 1919, because "by continuing a process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens".
Alas, the ECB is only catching up with the Bank of England and the US Federal Reserve, where the electronic money presses have spat out more than $1 trillion of new notes since 2009.
That money creation is highly inflationary, morally bankrupt and props up bloated welfare states is too often overlooked.
Milton Friedman said inflation was always and everywhere a monetary phenomenon. Massive, arbitrary surges in money must mean substantial price rises unless economic activity picks up enough to sop it up. The ECB has "expanded its balance sheet" by more than one-third to about E3 trillion since June.
Sure, inflation appears under control for now. The International Monetary Fund expects less than 2 per cent in coming years in rich countries.
And many smart people are lending to the US government for 10 years at interest rates below 2 per cent.
But markets can be poor judges of inflation. Keynes wrote his warning four years before the German hyperinflation of 1923. Long-term bond yields in the late 1910s increased a little to about 5 per cent, but they in no way compensated for the much higher inflation to come. As for the IMF, give me Friedman's axiom over an economic model any day.
ANZ Bank chief economist Warren Hogan points out that in theory central banks could withdraw the extra money they have put in the system, but he is rightly sceptical they will be politically free to, even if they are able to gauge when is the right time.
Banks (and too many economists) cheer every time another round of currency debauchment begins. Perhaps they are confused by their own nomenclature of firewalls, financial resources and balance sheet growth, which obscure gigantic wealth transfers from taxpayers and savers to bloated banks and feckless governments.
More likely, though, banks relish the prospect of more cheap money because it boosts their bottom line and executives' take-home pay. In Europe 800 banks borrowed at 1 per cent this week, courtesy of the publicly owned ECB. They use the money to buy bonds of struggling creditor countries such as Italy, Spain and Greece, which pay more than 5 per cent. "It's the mother of all carry trades," Sydney economist Christopher Joye said.
Apart from eroding public respect for the financial sector, the cheap money bolsters banks that should otherwise be allowed to shrink. In Europe, by artificially reducing the interest rates government pay, it also dulls governments' incentives to rein in bloated welfare states, making deficits less painful. Cheap debt fanned the world's financial problems in the first place.
But what's the alternative if we are standing at the edge of an abyss but for the wise injection of funny money? Some of this is fear-mongering, as it is in the interests of banks, governments and officials to maintain the status quo.
Letting banks with garbage assets fail, or European countries default, would certainly cause economic pain. But the long-term benefits of restoring sound incentives to our governments and financial institutions, outweigh any short-term costs.