“Sticking to Your Guns” – and Other Failed Strategies

Economic Perspectives – 60

Emile Woolf, Going Postal
Zimbabwe tells Robert Mugabe to go! Solidarity March, 18 Nov 2017, Zimbabwean-eyes CC Licence

There can be little doubt that tenacity is a great virtue. It means holding on to something important, something you believe in, no matter what. The trouble with tenacity, however, is that it does not necessarily rely on principles. Clinging to a piece of driftwood in the torrent as it hurtles downriver is sensible enough in the circumstances, and certainly requires great tenacity, but there is little point at that stage in considering how sensible it was to get into that situation in the first place – that, after all, would require an understanding of the principles that applied.

No matter how obvious, this logic is universally disregarded by economists and politicians who persevere with policies that lead to wealth destruction, resource misallocation and market interference. Here is ample evidence of tenacity: these illustrious authorities cling to the driftwood of yesteryears’ policies as if those previous failures didn’t really happen – and as if, this time, they will miraculously succeed.

Deeply embedded corruption

In extreme cases like Zimbabwe we now find that the corruption, which consumed virtually every institution of state under Robert Mugabe, remains as entrenched as ever; and the violence visited upon those involved in any form of protest has taken on a degree of savagery that matches the very worst found anywhere.

Early promises of political and economic reform made by Mugabe’s successor, Emmerson Mnangagwa, are shown to have been utterly baseless – while Zimbabwe’s long-suffering citizens, only 5% of whom have formal jobs, struggle to survive without fuel, water, medicines and bread, enduring power cuts lasting 18 hours at a stretch.

Its Finance Ministry’s response to this chaotic picture has been simply to dissemble the truth by suspending the announcement of inflation figures after they reached 176% for the month of June alone. For good measure it has also created total commercial anarchy by banning use of the US dollar, and enforcing the use of worthless Zimbabwean dollars.

No lack of tenacity here: an isolated, corrupt and deeply ignorant tyranny clinging to increasingly meaningless vestiges of power that cannot possibly endure; and a beleaguered citizenry clinging to life against all the odds.

For other examples of mindless tenacity we do not need to scour the world’s most savage regions, for we can find them far closer to home.

Repeating the mistakes

By the peak of the financial crisis of 2007-2008 the insatiable feeding frenzy of mortgage lenders had created a mountain of sub-prime debt that was patently beyond the bounds of any possible repayment. Parcels of mortgages had been sliced and diced and passed around the institutions with a semblance of passable ratings – deceitfully given by conflicted agencies, while unexamined and untested by their auditors.

Top representatives of both central bank and treasury decided, in their wisdom, to prioritise their own credibility by not facing up to what had happened on their watch. They decided instead to engineer a massive bailout to shield holders of sub-prime detritus from the consequences of their blind greed – despite the fact that it had caused the greatest credit misallocation of modern times, and prevented the mother-of-all-unwindings from running its painfully cleansing course.

The US Treasury and Federal Reserve then embarked on a slicker, but previously untried, version of “mission impossible”. Unlike the fiction, it has indeed proved to be just that: impossible. But tenacity is our theme, and full marks to them, and their followers, for repeating the folly now!

They all caught the habit

Ever since governments worldwide abandoned currencies redeemable in gold or silver, their fiat substitutes have been subjected to steady debasement, differing only in the matter of degree. The financial maelstrom of a decade ago, however, was ubiquitous and hence in a league of its own. Once the US Federal Reserve and the Bank of England had created the template for a new style of money printing, central banks everywhere caught the “quantitative easing” habit.

Since governments themselves control the money-printing apparatus, they and the close-knit coterie of lending institutions are its chief beneficiaries, inviting undisciplined state profligacy on any scale deemed necessary. But since the newly printed bonds carry an interest coupon that must be honoured, suppressing rates without regard to the markets’ time preference hides the true effect of all that new debt.

Monetary chaos – QE’s sardonic inversion

Unfortunately for governments and central banks everywhere this magic formula has no respect for tenacity – for only once can it conceal the reality of what they are doing!

When treasuries attempt to invoke QE’s powers to meet every conceivable financial crisis, no matter how caused, it takes on its own sardonic inversion and monetary chaos ensues.

As I pointed out in EP 59, unhinged money-creation does not follow Keynesian theory, leading to demand-creation. It leads rather to wealth destruction – of which deeply discounted negative interest rates are a recent and particularly savage manifestation that the world’s central banks and treasuries are now agonising over.

Contrary to the US government pretence of upholding the capitalist principle of corporate accountability, in 2008 the beleaguered creditors of sub-prime mortgage-holders were bailed out with artificial money. While that represented a formidable level of bailout, it has been relatively manageable compared with the amount of fake money the European Central Bank needs to print every time a sovereign member of Club-Med needs to be bailed out – quite contrary, incidentally, to the original Maastricht rules and the EU’s own constitution.

At this level financial and political issues collide, threatening the very foundations of the EU project.

Unwinding cannot be forestalled forever

The depth of ignorance driving this farce is seen in the fact that it is all occurring at the very time that leading central banks have been sharpening their skills at quantitative “tightening” on the pretext that their loose money remedies have succeeded and the crisis is over at last!  Well, they can forget that.

Despite pretence of normalisation in the shape of a few token rises in US interest rates, these are already floundering. Just watch: I predict no more rises; rather that the ECB, for example, having only last December abandoned its decade-long QE of 50 billion euros per month (!), will shortly crank up its money-printing apparatus again – but with interest rates already at minus 4 per cent, any notion of cutting them further will push the finances of the entire eurozone into a currency failure par excellence. Mario Draghi’s replacement, Christine Lagarde, shorn of any meaningful weaponry, will face a challenging initiation, to put it mildly!

Other central bankers face exactly the same issues, yet none of them shows any appreciation of the need to resist the temptation to dodge the inescapable unwinding of past distortions.

Nor is there adequate recognition that allowing the free operation of markets is the only route to building the wealth they all talk about but don’t understand.

When original thought is required, tenacity misfires – every time!

© Emile Woolf August 2019 (website)

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