Saturday, 8 August 2009

Printing Money, Inflation, and Spin

With all the 'headlines' & 'spin' associated with 'Quantitative easing' ... do we really understand what it means, and what's really going on ... ?

This post is designed to do just that ... to get behind the froth, the big words, and all the hype/spin to understand what's really going on. ...

Let's start with Quantitative Easing (QE) - a big word used to bamboozle people and to make something sound very complicated when it actually isn't (remember previous ones like this too) - as what it really means is "Printing Money" ! ... well we can start to understand what this might actually mean now, and what it might do ...

So let's move on then ... if we print more money (£notes) to represent the same 'assets', then money (£notes) is effectively 'devalued' and the same asset is therefore now worth 'more money' (£notes) - this is 'true inflation' - or 'monetary inflation' - i.e. the amount 'money' has been 'inflated' without changing any assets at all ...

Hence it should come as no surprise that asset prices (including stocks) have 'risen' as a result of this (QE) - money has been devalued, but the 'value of the assets' are still the same - so there's no point getting carried away about the recent stock market rise (or in the fact that house price falls may have 'stabilised') ...

So why all the 'spin' about the stock market rally and using this as 'evidence' of a recovery? ... well that's part of the overall strategy ... to make 'people', and 'foreign / currency markets', believe that our economy is recovering, when in reality it's not recovering at all (as in reality it's still getting worse - take a look at unemployment continuing to rise for instance)!

Let's take the foreign/currency markets first. At the moment, as far as the currency markets are concerned at least, the spin/scam appears to be working a little, as the despite devaluing our currency, the exchange rates for £notes has risen recently in the belief there are signs that the UK economy is starting to recover! Take a look at the simplified model* below, from 'printing money', through to the 'illusion of recovery', combined with the 'spin' associated with 'Quantitative Easing' (QE), and it's temporary impact on 'currency markets'.

The temporary increase in exchange rates will also temporarily reduces import prices, but the problem with all of this is simple ... without changing what's actually happening on the ground (which our 'leaders' are not!) the spin/scam (just like any other pyramid scheme) won't last ... the 'illusion' and any 'assumptions' will quickly disappear ... and then there's likely to be a massive exit from (and huge reduction in value of) the pound, and hence a massive rise in import costs and 'price inflation' too.

Let's now look at people - starting with the vast majority of people. The spin/scam is designed to bring back 'confidence' again ... and to kick-start the majority of people to 'buy' again. For instance QE (or 'printing money') means the 'value of houses' can continue to reduce, but without 'house prices' appearing to go down (i.e. the value has actually dropped, but it's still 'worth' the same amount of £notes, as the currency has been devalued) - great eh ... and another aspect of the scam to bring back a feeling of confidence again, so people are more likely to spend as well as take on more debt!

Again, this scam is not hard to spot and is quite simple in its construction - the problem is it doesn't change anything on the ground in any sustainable way - and as any pyramid scheme/scam it will also fail and it's likely to enhance the decline in housing speculation further down the line (see my previous post) too ... as it combines with interest rates starting to track rapidly upwards again (to deal with all the growing 'inflationary pressures', as highlighted earlier), and as the debts taken on by Government have to be paid back through higher taxes. Most UK people are currently set to become a lot worse off over the next decade, in terms of the value of their pensions, the money they actually have to spend, and the value of some of the 'assets' (in particular - their house) they currently 'own'. Wage inflation will also attempt to be restrained, by keeping fear and unemployment levels relatively high [nb the problem is the UK Government cannot afford to do this, without cutting Government support or raising taxes even further too ... which will create further problems / unrest].

This outlook is not the same for all people however. For instance it's not the case for current 'leaders' and 'bankers', because as the model above also shows, they will 'profit' greatly once again - from the apparent 'rise' in stock prices (once again without doing anything at all), from reducing all of our pensions, and from the 'interest' people have to pay for any debts they have, or take on in the future. Whilst wage inflation will be held back for the vast majority, current 'leaders' will be 'rewarded' for their efforts in ensuring this happens too.

The application of Poweromics** will become increasing clear, and Ignoromics*** will reduce as more people lose their jobs, become progressively worse off, far more aware of what's going on and step forward to make their 'voice heard' ... a real 'battle of values' will then begin (powered by the internet) ... and a new 'values system', and a 'new economics'****, is likely to emerge ... though those currently in 'power' will fight all they can to avoid this from happening and to maintain 'power' ... so they can continue to 'profit from power' ... [nb many of the laws passed in the wake of 'terrorism', weren't really about dealing with 'terrorism'!]

Hard-working people around the world will soon face a stark choice about the future, and the success & well-being of their community/nation will depend on the choice they make, the values they uphold, and the 'real value' they create ...

We all face challenging times ahead, as history tells us 'change will happen' ... we just don't know exactly how or when ... but given the advent of the internet, 'change' is very likely to occur in many different ways ... and foreign investors / currency markets are unlikely to buy the 'illusion of recovery' for very long too ...

* Whilst more complex models can be used, IMHO the simple model above tells us most of the story, whilst the rest simply adds finer (and arguably unnecessary) levels of detail.

** Poweromics = People using position and power for their own personal gain, based on poor moral values, self interest and greed.

*** Ignoromics = People are either effectively ignorant of the situation (e.g. the overall environment) or not prepared to take responsibility to make sure it changes for the better.

**** Leanomics = People taking responsibility for adding value and continuously improving the situation for others (e.g. customers, communities, overall environment), based upon fundamental values such as trust, honor, responsibility and respect.

Referred to on Stephanie Flanders blog, "QE more to do" (Post 72)