Faust Part 2 by Goethe includes a cautionary tale on
money printing replacing gold with ultimately dire consequences - alluded to
recently by Jens Weidmann. Could this be a warning to all Central Bankers?
Bundesbank President and economist, Jens Weidmann,
hasn't exactly kept quiet about his lack of support for the ECB bond-buying program. But this week
he put it into a context which the public would be able to understand, and
‘shocked' Europeans by relating the program to that of making a deal with the
devil.
Weidmann
refers, as many have before him, to the ‘Faustian pact', called so thanks to
Act I, Part II of Goethe's 1832 play ‘Faust'. In the play the Devil, Mephisto,
convinces the Holy Roman Emperor to print large amounts of paper money rather
than use gold. In the short term, the money printing solves the emperor's
financial problems, but it soon leads to rampant inflation.
Inflation is an invisible thief,
it leads to disposable incomes falling, savings decreasing in value and
interest rates becoming effectively detrimental to those who try to be sensible
with money.
Whilst
Weidmann did not refer to Draghi's, or anyone's money printing exercises, he
warned "If a central bank can potentially create unlimited money from
nothing, how can it ensure that money is sufficiently scarce to retain its
value? ...This temptation certainly exists, and many in monetary history have
succumbed to it".
Mr
Weidmann of course speaks of his own country's historical experience when the
money printing in Weimar Germany led to devastating consequences, something
which just about remains in living memory.
Following
Mr Weidmann's comments, many are arguing that the economy of the
19th century was quite different to that we have now. Therefore, surely we
cannot use such a simple, archaic example to forewarn of dangers in the
monetary system today? Well that's most likely what the wise men in Weimar
Germany thought as well, and maybe even Gideon Gono, Zimbabwe's reserve Bank
Governor during its period of hyperinflation.
If
new money could pay off bad debts, then why has no economy in
history figured out how to make it work? History told Goethe this wasn't a
sensible solution, history since Goethe tells us it isn't a sensible solution,
so why do our bankers think they are suddenly all superior?
Easy
money, as Mephisto shows, solves problems for the short-term, brings praise for
those who action it in the short term, but brings nothing but bad feeling for
those same people from those it affected the most.
When
launching QE, central banks are very much hoping to set off the ‘wealth
effect', low interest rates, higher bank lending - people feel wealthier and so
they spend more. However QE doesn't have a proportional response.
QE,
or any other technical form of money printing, is a practise which demonstrates
the law of diminishing returns, just look at Japan. They've been at it the
longest with nothing but stagflation to show for it.
Chris
Martenson points out that given the median household income in the US is
approximately $50,000 the Fed, by this time next year, will have printed up the
annual earnings of 9,600,000 households under QE3. Therefore, each time the Fed
prints, you have to work even harder the following year in order to recoup the
same benefits as that original $50,000 would have made for you.
As
Eric Fry over at the Daily Reckoning points out, in the last 4 years the number
of Americans on food stamps has increased to 17 million, whilst the number out
of work has increased by more than 3 million.
The
US, which has embarked on a ‘QE to infinity program' has is headed down an
un-trodden road. The US economy is now an experimental economy for which the
citizens suffer.
As
Nasim Taleb says ‘Quantitative
Easing is a transfer of wealth to the rich. It brings
up the housing prices. The state is subsidising the rich, it is the top 1 per
cent that benefit from QE, not the 99 per cent. QE really is flooding banks
with money so they pay themselves bonuses with it. Banks have money and assets
so now they can borrow easily. The poor guy here who is unemployed and can't
borrow is not going to benefit from QE.'
Late
last month, the Bank of England released a report on the ‘Distributional
effects of asset purchases'. Somehow, it finds, without proof, that
without the Bank's asset purchases ‘most people in the United Kingdom would
have been worse off.' It argues that savers and pensioners have been protected
from the potential effects of unemployment, company failure and low economic
growth. All of which we have, but apparently they're not as bad as they could
be.
The
media did notice however, how the central bank acknowledges that QE has seen a
huge transfer of wealth to the already super rich.
The
super-rich love QE, as do the central bankers, and banks. QE provides
a huge boost to asset prices. However this does not mean an increase in the
value of the assets.
This
increase in asset prices is supposed to make everyone feel wealthier. So whilst
those savers and pensioners might be being screwed over by the negative
interest rates and a loss in deposit income, they'll still spend more of what
little money they have because they ‘feel' wealthier. However whilst inflation
may not feel as though it is punishing us now, it punishes past accumulated
assets by making them far less valuable.
QE
seems to insulate banks from the need to address their problems, it does not
allow for a self-sustained recovery. Japan demonstrates this in full. The BoJ
just keep printing money whilst the people feel the full effects.
We
might not be able to perform an exorcism on the economy, but we are able to on
our own finances. It's time we showed we're not ready to make a pact with the
devil but instead can protect our finances from this Faustian pact of which we
are not a part.
What
is the monetary system which the devil persuades the Emperor to leave? As
noted above, one based on gold. Ironically, the only way to gain ‘operational
wealth' during a mass money printing session, as we are seeing now, is
to buy and hold gold and silver.
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