Saturday Ramble: Watch out for the mashed potato machine
Hold the front page! The printing presses are rolling and will not stop any time soon.
The Age of Quantitative Easing has begun in Britain, and true to our swashbuckling past, it’s the real thing.
Fiddlesticks to purchasing assets by issuing gilt-edged bonds that add to public borrowing. That’s only for wimps.
The United Kingdom of Great Britain and Northern Ireland is made of sterner stuff. Money will be printed — i.e. conjured from rarified air — to buy up government debt from the private sector. It’s the full Monty of central bank testosterone-fuelled, do-or-die, Charge of the Light Brigade assaults on reality. Lord Cardigan would be proud.
It’s also a bit like a snake eating its own tail. Sooner or later it will reach its stomach and face a great dilemma.
The idea is that virtually cost-free money can be created to buy bonds and commercial paper, thus increasing the money supply at a stroke. Too good to be true? It’s the people in charge that spook me.
An increased money supply will get people spending again and banks lending. That’s the theory. Like all great intellectual ideas, especially those that have never been tried before, the notion has to be fitted to the circumstances. Financial engineers don’t have a very good record at this kind of thing.
Why, for example, will people buy houses when they are falling at nearly 20 percent a year? Why, also, will they start purchasing big ticket items when price fluidity on the downside is proceeding at a cracking pace? Tell me why banks should lend to businesses that have few customers for their goods and services and are shedding staff by the busload?
The endgame is said to be the sucking back of all that money once the green shoots of recovery begin to appear. But what if it’s a dead cat bounce? Will they then reverse the process? It will look more like one of those old Charlie Drake comedies when the industrial mashed potato machine goes wrong.
In theory, sailing an aircraft carrier full of money into British waters and spraying it onshore in a mighty torrent, then hoovering it all up again when things get better, is a feasible proposition. But only if your name is Heath-Robinson.
The idea that cost-free cash is neutral to all indicators except broad money (M4), takes more suspension of disbelief than a Whitehall Farce. Remember, it’s the public sector that is charged with reversing the process. Can we trust Gordon Brown to loosen his grip on “money for free”?
Nothing that has happened over the past 12 years gives us any reassurance that they won’t become addicted to this neat magician’s trick. I can even imagine Gordon Brown musing, “Why didn’t I think of this before?”
The problem is inflation, of course. Slip on a stray banana skin and hit the button a little too hard and we’re back in the 1970s era of 35 percent hyperinflation. Experience teaches us that bananas are a peculiar feature of this administration, and not only at the Foreign Office.
There are too many variables in the equation for my liking. Too many things that can go wrong. Too few sterling characters who can be counted on to do the right thing by the country. Too many charlatans and snake oil salesmen. It’s a nightmare of dodgy open positions and foggy imponderables.
I just don’t trust a Labour government to carry out this exercise with skill and panache. It has awful echoes of the shadow banking operations that got us into this mess in the first place.
But an even worse fate could befall us. Faced with a Canadian-style meltdown at the next General Election, Gordon Brown could become a Dr Strangelove creature intent on destroying the system which he knows will never be his by popular mandate. That will show those Sassenach Tories!
You heard it here first before anyone else thought of it.