Wednesday, June 03, 2009

The Bank of England's medicine is not working

Edmund Conway correctly points out that the 'quantitative counterfeiting' program is failing.

He suggests that we are heading into Japanese-style stagflation, one of the three options long predicted by AngloAustria (along with Zimbabwe style hyperinflation, or a complete total economic meltdown caused by very large interest rates).

However, Mr Conway goes on to say two other interesting things:

The one crumb of comfort is for those terrified about the impending threat of Zimbabwe-style hyperinflation: with quantitative easing still not working prices are hardly likely to get out of control. The Japan-style scenario of sticky deflation still looks like the larger long-term threat. At least for the time being....

...This credit crunch ain't over yet. And more worryingly, the Bank's drastic efforts may not even be working. Time to hope and pray the QE programme starts yielding results, and fast.
I presume by the first comment he means people like me. However, I am not 'terrified' by hyperinflation. I am just quite coldly rational about the Austrian analysis which tells us quite clearly that 'quantitative counterfeiting' will lead to massive inflation, and if pumped up hard enough, to crack-up-boom hyperinflation (e.g. Weimar Republic, Zimbabwe, etc.).

The BEST option we can hope for, with the current policy, is Japanese stagflation. And that's why Mr Conway's second comment is even more interesting. Because if Bank of England insiders are thinking what he is thinking, that it is 'time to hope and pray the QE programme starts yielding results', then they will only be able to see one course of action, now that quantitative counterfeiting has so obviously failed.

And THAT will be to do a lot more of it. Hence, we are walking ourselves into Zimbabwe, stage by dreadful stage.

Does anyone really think Robert Mugabe wanted hyperinflation? He is a really intelligent man who believes in nationalism and socialism, and his Keynesian economists will have advised him that quantitative counterfeiting was the best way to go, to help boost the economy of Zimbabwe. Hence, we are where we are, with Zimbabwe being the basket case of Africa rather than the former bread basket of Africa it used to be.

The best option is to kill off QC right now. That will then induce much larger interest rates, circa 10%, plus an incredibly painful and sharp recession. However, if everyone holds their nerve, this will be over in about 18 months, give or take six months either side. Malinvested companies will go to the wall, with their bankruptcies clearing out debt and leaving a pool of resources in place which can be better placed by more successful entrepreneurs, and although it won't be pretty, we will come through to the other side in more-or-less one piece. The other beauty of stopping QC, is that the UK government will overnight run out of the money which the BoE is pouring into the economy, and will therefore be forced to sack hundreds of thousands of government employees.

This necessary removal of consumption and release of productive assets, will also spur the recovery.

There are two other options, of course. The first is to let QC rip until we have massive inflation, let's say for two more years, and then to introduce my preferred plan above, along with really massive interest rates, in the 25% range. Yes, this will also eventually 'work' to create a recovery, but the massive induced recession will be bloody indeed, taking down many companies who would have survived a much earlier recession, wiping out completely the savings of most of the tax-paying population, as they try to survive this gargantuan mess, probably putting millions of public sector employees onto the street, in a possibly revolutionary situation, and possibly therefore stimulating military dictatorship.

The final option will be the government inducement of some horrific war, perhaps in Pakistan or somewhere else in the Middle-East, the re-introduction of the draft, and the slaughter of hundreds of thousands of boys and girls on the altar of socialism, to clear the 'surplus' demand brought on by all of this Keynesianism.

(Which incidentally makes me ask the question, if military conscription is re-introduced into Britain, will it also be compulsory for girls, as well as for boys? - It would hardly seem 'fair' if it wasn't - but I digress.)

I don't think even British politicians want that, however, but neither do they want to endure a proper recession. So the Maturin Towers view is that quantitative counterfeiting will continue, to create a Japanese-style stagflation, but that this will grow into massive inflation. At that point, war, military dictatorship, or hyperinflation will beckon, so the British political class will step back and then induce the necessary recession. The longer they leave this, the bloodier this will be, and the longer it will take to recover from.

So let's just do it now. Let's just do it and get it over with.

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