Sunday, May 17, 2009

The Curious Case of Mr Edmund Button

Mr Edmund Conway of the Torygraph is spiralling into mystery again, with his hot and cold interpretations of what the Bank of England is up to. With his hot and heavy 10 reasons to be cheerful article, last week, he once again returns to a cold demeanour with the following article, which sails along an almost AngloAustrian line of calling a spade a spade:

=> Mervyn's strangely serene despite our worrying similarities to Zimbabwe

But then, just before I am about to write a comment praising Mr Conway to the skies, he puffs some more Keynesianism smoke telling us the recession is almost over, in the hot article below:

=> Interest rate slides on flood of cash

Just what is Mr Conway up to? He wouldn't be having his cake and eating it now, would he? Just in case either the Austrian or the Keynesian case comes true?

Well let me nail the AngloAustrian colours to the mast. The first story is accurate. We are heading towards Zimbabwe. The second story is make-believe from the land of Dorothy.

As Mr Conway himself reported a few weeks ago, the 1930s depression itself took many strange turns along its path, with several points looking like 'green shoots recoveries', which in fact marked further terrible falls in prosperity.

We are in the same boat. Quantitative easing has 'appeared' to make us feel 'better off' temporarily, because more money is turning up in people's wallets making them feel wealthier. But this does not represent real scarce resources which they can then command, consume, or direct. It merely represents MORE PAPER.

I suppose if we were termites, we could eat this extra paper, but quantitative easing is only going to lead to one of three destinations:

1. Hyperinflation, causing societal destruction, and possibly even war and revolution

2. Huge interest rate hikes (circa 20%), causing total business and housing collapse, and possibly even war and revolution

3. If we are EXTREMELY lucky, a 10-year Japanese-style stagflation

The supposed 'magical middle ground' that Keynesians such as Roger Bootle are predicting, that the Bank of England will somehow manage to fill the nation's pockets with cash without increasing price inflation or without having to put up interest rates to crushing government-destroying street-filling levels, is pure smoke and mirrors. It ain't going to happen.

The longer we keep going with quantitative easing, the worse both of the first two options will become. (The third option is HIGHLY unlikely because Japan may have stupid political leaders but at least its population knows how to save, unlike the profligate credit card consumers in the UK.)

We should therefore stop quantitative easing right now and then allow the free market to set proper interest rates. AngloAustria estimate these would be around the 10% mark, though this figure increases with every week we continue with the current madness.

This level of interest will then kill off the 'green shoots' we are currently seeing and lead to a terrible (but thoroughly cleansing) recession, which would wipe out all of the malinvestments of the previous decade.

But if left alone, this recession would be over in less than 18 months, as we re-position what capital we have left to begin the recovery, rather than mis-directing yet more capital under the heroin blanket of negative interest rates.

As it is, we are looking, at best, at a decade or more of Japanese style stagflation.

To endure this is bad enough. To endure it having seen that the Japanese tried all of the current Keynesian solutions and failed, is unbearable.

What will it take to persuade the Keynesians that they are wrong? Does it really have to be the economic collapse of the entire western world? Or will just the collapse of the US and the UK do it?

I fear not. Even if the entire world economy did utterly collapse, they would still only say the 'stimulus' policy wasn't tried hard or soon enough.

We are being led into the abyss by fools who have not the first clue about what they are doing. But what do we do about it?


KIt said...

"a 10-year Japanese-style stagflation"

Japan didn't suffer from stagflation: stagnation yes but inflation no. Unlike the UK they are a nation of savers who were able to absorb all the debt the government threw at it. However, I do agree that stagnation is what we have to look forward to.

(Liam Halligan is a better read)

Jack Maturin said...

Well, it's not entirely true that they haven't had price inflation, e.g., back in 2005:

=> Japan Records First Rise in Prices in 2 YearsOr last year:

=> Japan 10-year inflation high flags feared stagflation scenarioBut I get the point, and yes, it is the ability of the Japanese people to keep soaking up government debt that has prevented total collapse.

However, until they stop inflating their money supply, and veering between stagnation and stagflation, their problems will continue, all induced by following the policies of Keynes.

One does wonder how many decades of this they will keep trying, before they give it up.

They must be getting really good at 'stimuluses' now.