Have you noticed how the word ‘trillion’, in whatever currency, has become part of everyday vocabulary?
No one writing about Western economies bothers mentioning puny little millions any longer, and thousands might as well be dirt under our feet. Even the billion, until recently thought to be a fairly respectable monetary unit, has fallen by the wayside.
We, meaning Westerners, are so rich that we think in trillions now. Isn’t it absolutely wonderful?
Well, to realise exactly how wonderfully rich we are, stage this simple experiment.
Take a £10 note to an off-licence and buy a bottle of wine (drink responsibly, I must add). Then take another £10 note and add a few zeroes to the numeral 10 with a black felt-tip pen.
Now, to get an instant grasp of modern economics, go to the same shop, triumphantly waving your banknote – in the face of hard reality.
You’ll find that your new wealth will only buy exactly the same bottle you previously bought for £10. Turns out you have more zeroes, but no more money.
This admittedly crude example illustrates the fallacy of quantitative easing (QE). It also makes a mockery of the decision by the European Central Bank (ECB) to inject €1.1 trillion worth of life into the eurozone’s moribund economies.
The measure is, to expand on the wine analogy, akin to using alcohol as a treatment for alcoholism.
It’s irresponsible spending funded by borrowing and the printing press that’s largely responsible for the current near-catastrophic plight of the eurozone.
The rest of the responsibility rests on the shoulders of the subversive schemers who used the explosive prop of a single currency to play political games with the economy in the first place, but this is by the bye.
QE is an excellent tool for stimulating growth – not of the economy, that is, but in the politicians’ approval ratings. It’s a short-term solution, some wallpaper masking the growing cracks in the masonry. It’s also a crowbar making the cracks wider.
While the term QE is of relatively recent origin, the underlying concept has been in wide use for a century, and the Brits shouldn’t feel smug about the eurozone’s death throes.
We ourselves provide a nice illustrative example of what QE does to the economy. Among its many disastrous consequences one instantly springs to mind: QE devalues money and overvalues assets.
In most people’s cases, it keeps their real income down and their house prices up – provided they already own a house.
After all, most people are paid in money, not assets. And money is worth less and less. For example, before the advent of QE as a standard peacetime measure, £100 pounds in 1850 equalled £110 in 1900, a negligible inflation of 10 percent over half a century.
That meant British subjects could confidently plan for their future, anticipating that hard work accompanied by a lifetime of thrift could make them independent not only of want but also of the state.
And a baby born in 1850 with a silver spoon in his mouth, the worth of that utensil being, say, a solid middle-class income of £500 a year, could live his whole life in reasonable comfort even if he never made a penny of his own.
Conversely, if we look at the next century, £100 in 1950 equalled £2,000 in 2000 – a wealth-busting, soul-destroying inflation of 2,000 percent.
This meant that the silver spoon would quickly drop out of the mouth of a similarly hypothetical baby born in 1950: unless he grew up to be successful at his job or shrewd with his investments, he would be poor.
To take another Anglo-Saxon currency as an example, in the last 100 years the US dollar has lost 95 percent of its value, a marginally better, though still abysmal, performance.
This has been accompanied by an inordinate growth in property prices. In the last 50 years, asset inflation in Britain has outpaced money inflation by a factor of 10, which explains why workmen’s cottages of yesteryear have become ‘luxury homes’ in the jargon of today’s estate agents.
Empirical knowledge is a rather lowly cognitive tool, but it’s perfectly adequate in economics. In other words, the economic past is a reliable predictor of the future.
And the past predicts that the fantastic, or rather phantasmagorical, sum of €1.1 trillion coming the eurozone way courtesy of the ECB will have a disastrous long-term effect.
The rich, who own most assets, will become richer, and the ‘poor’, those who depend on income for their livelihood, will become poorer – and more resentful.
This recent fit of QE epilepsy is thus tantamount not only to an economic bomb but also a social one. When it goes off, it’ll scatter the fragments of the eurozone all over the world, and we’d be naïve to think that we won’t be hit.
“Bonanza for Britain” screams a headline in The Times, which only goes to show how low the paper has sunk in its intellectual content.
“The stimulus will herald a new era of cheaper holidays and cut-price imports for Britain, experts said,” explains the paper.
One wonders exactly how expert those experts are. Real experts would have added that any long-term economic calamities in the EU will only bypass us if we are no longer in it.
As long as Britain stays in this awful contrivance, its problems will be ours, if only vicariously. The eurozone is, after all, our major trading partner, accounting for 44 per cent of our exports.
As their money is devalued by the short-sighted infusion of €1.1 trillion, and as the pound strengthens against the euro, Europeans won’t be able to afford our goods any longer, which is bad news for our economy.
The lower holiday costs notwithstanding, it can become good, or at least indifferent, news only if we redirect our exports to the other continents, all of which thrive as Europe stagnates. But to do so, we must leave the EU – effective immediately, and never mind the referendum.
The QE thus becomes a QED, or would do so for any responsible government. Don’t you wish we had one?
P.S. Most of the numbers used in this article come from my book The Crisis Behind Our Crisis, which, in an attempt at sound economics, I commend to your attention.