It is noticeable that the Covid-inspired devastation has brought out a sizeable crop of (apparently) sane economists who claim that we should stop worrying because it’s all OK, really. The Treasury should carry on printing bonds for the central bank to buy and disperse among banks and other top-grade (crony) finance houses, virtually ad infinitum, because the resulting deficit in public finances will, contrary to what most of us fear, not cause irreparable damage to the economy. So – good news?
In the context of the latest quantitative easing spree, these neo-Keynesian macroeconomists advocate that the treasury bills purchased by the Bank of England should be sold directly into commercial markets, including the Stock Exchange, as a form of selective “demand-stimulus”, while at the same time injecting some much-needed liquidity.
Although this bout of QE is different in that it is intended to benefit employers, furloughed employees and self-employed people, philanthropic objectives will not alter the economic consequences of money-printing on such a scale.
Indeed, it’s obvious that much the new money is following its traditional route into financial institutions rather than the poor and downtrodden. The result, as we now see on a daily basis, is a bull-driven stock market with prices climbing, albeit erratically, once again to a 2-year high. But…..what (by definition) you can’t see is the mirage: nothing real is underpinning that stimulus.
Pursuing the notion that the Treasury can print money “like there’s no tomorrow” is the surest way to abolish “tomorrow”. It’s the old story: the latest stock market hike is due to treasury-engineered asset-buying, without a thought for hazard of money-led demand that has no corresponding production to spend it on – that’s the other key economic actor: supply!
The QE wealth transfer explained
Make no mistake, inflated asset prices supported by nothing more “human” than fake, government-induced demand, reflect a monumental wealth transfer from people who work for their living (or, those who government is supposed to be helping) to the “first-receivers” of the QE largesse.
We need to understand how this works. In every QE cycle the initial money-creation will unjustly enrich those who first get their paws on it – but what may be less obvious is how the rest of the people, the silent majority who inhabit the real economy, are penalised. How do they, in real terms, “lose out” from this transfer of wealth?
The answer is that “inflation” is usually thought of only in terms of rising prices. But the phenomenon of rising prices is simply a result of the real inflation – inflation of the money supply. Putting it another way, when money is created out of thin air while the supply-side is static, the inexorable result is a slow wave of price rises as the new money filters through the economy. Thus it comes about that its last receivers are the ones who finish up having to face the increased costs of goods and services: their earnings, their savings, their pensions – all have suffered a loss of purchasing power. That’s the real meaning of “wealth transfer”.
Adherents of macroeconomic theory maintain that it is capable of collective action under which the major economic actors are deployed to achieve the government’s stated objectives – such as full employment; achieving steady and sustainable growth; and stable price levels. Might as well add “sliced bread”!
In my last two essays I attempted to demonstrate that macroeconomic collective action merely expresses an amalgam of “good ideas”. The fuzzy objectives of this collective wish-list can never be achieved because the academics who plan it inhabit a top-down fantasy world with zero-grasp of what unhampered economic creativity can achieve through individual human action played out on the grand stage.
For example, in the macroeconomic world the state’s inability to pay its creditors (largely us) is soluble by resorting to the printing press – a recourse that would land a citizen in jail on counterfeiting charges.
But today’s macroeconomic adherents go further, even promoting deficit financing by the state as a positive means of achieving full employment – such as investing in projects today that produce higher returns in the future. In this way unworkable state-driven investment policies lead to gross malinvestment and capital destruction. This process infiltrates larger and larger sectors of the economy, which is already crippled by this succession of misconceived interventions.
The “herd” philosophy – an update
“Herd immunity” was initially rejected as the optimum anti-virus strategy. Yet, ironically, we are now being penalized big-time by “following-the-herd” to find our unsteady way back to sanity. The herd-leader declared that we must be “guided by the science”. But neither he nor his team registered that the science amounted to no more than a range of hypotheses, at once plausible yet mutually inconsistent.
When ministers asked the experts whether the respective policy options were risk-free, the predictable response was that, in the absence of knowledge, nothing is risk-free. But politicians need to act, and when there is nothing sufficiently reliable for them to base their policies on, they resort to the “precautionary principle”. Since it’s logically impossible to “prove” a negative, key decisions, carrying massive social consequences, are made – not on the basis of evidence, but on the basis of absence of evidence. The philosopher Bertrand Russell once confronted the following argument: “Belief in God is rational because there is no evidence that He does not exist.”
Lord Russell responded that, using this line of reasoning, one should also believe that there is a small teapot orbiting Jupiter. Since there is no evidence that that there isn’t such a teapot, we should believe that it exists. “But”, he added, “no one believes that this is sufficiently likely to warrant taking it into account”.
Guided by science? Forget it!
When child health experts pointed out that assessments of the impact of school closures on the spread of the virus were based on experience with flu, whereas Covid-19 had a far more limited impact on school-age children, they concluded that the science in favour of school closures was “very weak”. Although the government’s scientific advisers had originally opposed closure of schools, their resolve crumbled in the face of what they imagined to be “public pressure” – a classic illustration of not being guided by the science.
The court of public opinion is a fickle forum and only a political nincompoop would try to terrify the public into acceptance of warped conclusions emanating from that space. What really surprised ministers and experts was the apparent public readiness to accept lockdown. Surprised? What about human nature? The prospect of being paid for not working was a lure too great to ignore!
Oh Dear! But where was the leadership? Where was the resolve? Where were the choices and risks explained? Where was the public trust? Why were we suckered into lockdown before enquiring, on as informed a basis as possible:
“But will it be worth it?”
The Goodnight Vienna Audio file