T
The Byre
- Original Poster
- #1
Have you ever noticed how legislation seems to carry a title that is the opposite of what it actually does? Not only that, but whole government departments carry titles that mean the opposite of what they achieve.
The Serious Fraud Office and the Finacial Conduct Authority carefully avoided investigating the Blackmore Bond wealth management fund, despite being told of irregularities for over two years and thereby acted as covers for possible fraud. The Office for Tax Simplification has achieved new levels of complexity. Every measure to cut bureaucracy seems to end in far more red tape. But now we have the very pinnacle of titular hypocrisy - Biden's Inflation Reduction Act.
He actually is introducing a bill that seeks ostensibly to reduce inflation by a wholesale increase in government borrowing and spending. And he will do this without any increase in taxes - amazing! Within that bill, he will reduce energy costs by forcing more green energy initiatives, instead of allowing more drilling for oil and gas and licensing pipelines.
I expect his next initiative is to claim to be able to levitate.
Everywhere I look, I see governments denying the laws of economics and when it comes to energy, even denying the laws of physics. One junior minister with special responsibility for energy and the environment even told me we could use Scottish wind power to generate electricity and send it to Southern Germany. I told him that it was against the law.
He looked very surprised "Which law?"
So I told him, "Ohm's law, Jules law, the laws of induction and of course many laws of economics!"
He told me that his experts had assured him that it was perfectly feasible. That reminded me of the 17th Century judge who famously said "I get three types of witnesses before my court, liars, damned liars and experts!"
And now we have inflation everywhere in double figures - despite strenuous efforts by government statisticians to carefully measure inflation so as to get the lowest possible figures. They must bend the figures for two reasons -
"Here's a grant, here's a bounce back loan, here's a stimmy cheque, here's a furlough payment! Knock yourselves out kids and stay at home and don't go to work!"
But we're back with them pesky laws of physics again - if it is a river, volume x velocity = flow. In electricity, it's current x voltage = power. In monetary economics, it's money x velocity = nominal GDP. More formally, MV=PY.
This is sometimes called The Monetarist Theory of Economics. Except it is not a theory, but a simple law of the physical world around us. If you leave the tap running, the bath will overflow!
And if you pump out extra currency units without increasing the supply of goods and services, then either each unit of currency will buy less (inflation) or velocity decreases and money moves more slowly (financialisation of assets). What actually happens is we get a bit of both. Because QE and government bonds first moves into bank reserves, the extra currency goes into assets and houses in particular as the housing market becomes financialised. That way, all that extra currency gets multiplied by becoming bank assets called mortgages.
Elsewhere, the additional currency is used to buy other assets such as shares and can be multiplied by margin accounts in which shares are used as collateral to buy more shares. So house prices and share prices just keep on climbing - i.e. they become inflated because the money supply has become inflated. And because these asset prices are climbing on the back of increasing volumes of debt, the debts themselves become financialised - your mortgage becomes collateral for more mortgages.
But sooner or later, that glacier of additional currency melts and joins the real economy as people refinance their houses or downsize or just move house and take out a fresh mortgage. What governments and central banks must never do is bomb people from the skies with helicopter money - grants, bounce back loans, stimmy cheques and furlough payments, or they will cause a rapid rise in inflation.
And if they do all that and pay for all that largesse with government bonds (i.e. debt) then the debt gets multiplied by more debt and those bonds act as collateral for yet more debt. Every liability is someone else's asset and every asset can become collateral for another debt. All those mortgages, loans, debts and company bonds get bundled into securities and act as collateral for more . . . well, you get the idea!
And before you know where you are, it's turtles all the way down!
This is going to be a global recession. Inflation is going to prevent the central banks from reverting to their QE and low-interest song-sheets in the short term. As long as it stays high, they can’t be aggressive – at least until the World's economy goes into cardiac arrest.
Then they may use that as cover to return to QE and we will have stagflation. The continuing inflation means that the bond markets will demand higher yields and that will push down even more on economies everywhere.
As the turtles start to topple and people lose confidence in money, social unrest may follow.
The Serious Fraud Office and the Finacial Conduct Authority carefully avoided investigating the Blackmore Bond wealth management fund, despite being told of irregularities for over two years and thereby acted as covers for possible fraud. The Office for Tax Simplification has achieved new levels of complexity. Every measure to cut bureaucracy seems to end in far more red tape. But now we have the very pinnacle of titular hypocrisy - Biden's Inflation Reduction Act.
He actually is introducing a bill that seeks ostensibly to reduce inflation by a wholesale increase in government borrowing and spending. And he will do this without any increase in taxes - amazing! Within that bill, he will reduce energy costs by forcing more green energy initiatives, instead of allowing more drilling for oil and gas and licensing pipelines.
I expect his next initiative is to claim to be able to levitate.
Everywhere I look, I see governments denying the laws of economics and when it comes to energy, even denying the laws of physics. One junior minister with special responsibility for energy and the environment even told me we could use Scottish wind power to generate electricity and send it to Southern Germany. I told him that it was against the law.
He looked very surprised "Which law?"
So I told him, "Ohm's law, Jules law, the laws of induction and of course many laws of economics!"
He told me that his experts had assured him that it was perfectly feasible. That reminded me of the 17th Century judge who famously said "I get three types of witnesses before my court, liars, damned liars and experts!"
And now we have inflation everywhere in double figures - despite strenuous efforts by government statisticians to carefully measure inflation so as to get the lowest possible figures. They must bend the figures for two reasons -
- Governments and their appointees within the central banks caused inflation in the first place by printing extra money.
- High interest rates will crush the economy and could make the repayment of government debt impossible.
"Here's a grant, here's a bounce back loan, here's a stimmy cheque, here's a furlough payment! Knock yourselves out kids and stay at home and don't go to work!"
But we're back with them pesky laws of physics again - if it is a river, volume x velocity = flow. In electricity, it's current x voltage = power. In monetary economics, it's money x velocity = nominal GDP. More formally, MV=PY.
This is sometimes called The Monetarist Theory of Economics. Except it is not a theory, but a simple law of the physical world around us. If you leave the tap running, the bath will overflow!
And if you pump out extra currency units without increasing the supply of goods and services, then either each unit of currency will buy less (inflation) or velocity decreases and money moves more slowly (financialisation of assets). What actually happens is we get a bit of both. Because QE and government bonds first moves into bank reserves, the extra currency goes into assets and houses in particular as the housing market becomes financialised. That way, all that extra currency gets multiplied by becoming bank assets called mortgages.
Elsewhere, the additional currency is used to buy other assets such as shares and can be multiplied by margin accounts in which shares are used as collateral to buy more shares. So house prices and share prices just keep on climbing - i.e. they become inflated because the money supply has become inflated. And because these asset prices are climbing on the back of increasing volumes of debt, the debts themselves become financialised - your mortgage becomes collateral for more mortgages.
But sooner or later, that glacier of additional currency melts and joins the real economy as people refinance their houses or downsize or just move house and take out a fresh mortgage. What governments and central banks must never do is bomb people from the skies with helicopter money - grants, bounce back loans, stimmy cheques and furlough payments, or they will cause a rapid rise in inflation.
And if they do all that and pay for all that largesse with government bonds (i.e. debt) then the debt gets multiplied by more debt and those bonds act as collateral for yet more debt. Every liability is someone else's asset and every asset can become collateral for another debt. All those mortgages, loans, debts and company bonds get bundled into securities and act as collateral for more . . . well, you get the idea!
And before you know where you are, it's turtles all the way down!
This is going to be a global recession. Inflation is going to prevent the central banks from reverting to their QE and low-interest song-sheets in the short term. As long as it stays high, they can’t be aggressive – at least until the World's economy goes into cardiac arrest.
Then they may use that as cover to return to QE and we will have stagflation. The continuing inflation means that the bond markets will demand higher yields and that will push down even more on economies everywhere.
As the turtles start to topple and people lose confidence in money, social unrest may follow.
