Wednesday, October 15, 2008

Weimar Republic here we come

MoneyWheelbarrowLeft People here and elsewhere have been asking where all the money comes from to pay for all the world's governments' rescue plans.

Apparently they haven't read Ben Bernanke's comment in 2002 (back when his then boss Alan Greenspan was inflating his way out of the collapse of the Dot.Com bubble and sowing the seeds for this latest collapse):

The US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost...

Author Peter Schiff points out in this CNN interview that Americans blew through their savings in the Dot.Com crash, too few people want to lend to Americans now, so to pay for all those rescue plans Americans at least "are reaching for the printing press." 

And in Europe?  Essentially just the same.  The "responsibility" of paying for the "rescue plans" rests on the central bank's printing press and the wilting shoulders of taxpayers. But unlike the facile reasoning of Bernanke, the printing press does not come "at essentially no cost." As Honorary Professor at the Frankfurt School of Finance & Management Thorstein Pollett explains,

    Under today's fiat-money regime, banks, under governments' auspices, increase the money stock "out of thin air" whenever they extend loans. The money supply is built on credit, which, in turn, hinges on peoples' confidence in banks and banks' confidence in their borrowers' ability and willingness to service their debt.
    As confidence leaves the system, banks refrain from extending loans and demand repayment of outstanding loans, and the money stock contracts. Economies that have for decades been fuelled by ever-higher doses of credit and money fall into depression — that is, declining production, employment, and prices...

The "punch bowl" of never-ending credit expansion has been taken away, and while the hangover is now in full swing the response from all the "rescue plans" so far is to keep the punch bowl topped up and spiked with an increasingly toxic mix:

  • More credit, by increasing the base money supply in the interbank market,
  • Guarantees for financial institutions' liabilities, and
  • Nationalising the world's banks. 

How is it all paid for? 

  • By government sponsored credit, and
  • Money-supply expansion.

In other words, by more of the same.  And the expected result?  Thorstein Pollett again:

... it is hard to see how fighting the symptoms of the unfolding monetary fiasco could solve its underlying cause.

True.  And ...

Starting the printing presses wouldn't solve the debt crisis either. Hyperinflation would cause economic and political damage to the greatest possible extent.

So...

    To qualify as a remedy to present ills, government action needs to be constrained to a far-reaching reform of the monetary systems, which, if implemented properly, would neither cause deflation nor inflation.[1] Markets need to be liberalized to the greatest extent to allow prices to adjust back to equilibrium.
    A return to sound money is needed.

You think that's going to happen?  You think the house of cards can be repaired from the ground up?

Or is it Weimar Republic here we (all) come?

UPDATEBusinessweek magazine explodes the idea that New Zealand can ride out the world financial crisis.  Reports NBR:

    Businessweek has named New Zealand as one of the 13 countries likely to be hit hardest by the global credit crunch.
    New Zealand, which scrapes in at 13th place, is joined on the list by countries like Pakistan, Argentina, Serbia and Kazakhstan.
   Businessweek compares New Zealand to Iceland, saying both countries were favourites of investors playing the yen carry trade...
    But it’s not all bad: “Unlike Iceland, though, New Zealand's banks have strong support because most of them are controlled by bigger banks across the Tasman Sea in Australia.
    “The New Zealand government also is in a stronger position than Iceland's, having run budget surpluses of around 4% of GDP until recently. Even with the country in recession, the government is likely to continue running a budget surplus..."

Maybe Businessweek hasn't read the "economic plans" of either Cullen or Key, since both plan to plunge the government firmly into deficit...

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10 Comments:

Blogger Berend de Boer said...

PC, may I also join with the other commentators to say you have been a really valuable source of insight and information these days? And a rare one, only you and Tumeke have said something worthwhile, while the parrots haven't even tried to explain their readers what's happening.

10/15/2008 01:40:00 pm  
Blogger Berend de Boer said...

Some good news:

New Zealand is among 13 nations named by BusinessWeek as most at risk from the global financial crisis.

10/15/2008 01:43:00 pm  
Blogger PC said...

Thanks Berend. I appreciate that.

And looks like we both spotted that 'good news' at the same time.

10/15/2008 01:52:00 pm  
Blogger Berend de Boer said...

Yeah, just read the article. It's stupid. We're being lumped in with the BB/Negative countries, we're the only one with an A, and that an AA+/stable!!!

10/15/2008 01:54:00 pm  
Anonymous Anonymous said...

Could soon be time to leave NZ then.

10/15/2008 01:56:00 pm  
Blogger davidinnz said...

I don't have time to read all the "right" economists, et al. What is the conjecture for what happens at the end of the printing press cycle (apart from wealthy wheelbarrow manufacturers)?

Does this morph into the IMF and the World Bank taking over all banking and buying up countries and ushering in the New World Order?

10/15/2008 07:32:00 pm  
Anonymous Anonymous said...

Yeah, just read the article. It's stupid. We're being lumped in with the BB/Negative countries, we're the only one with an A, and that an AA+/stable!!!

Like Iceland three weeks ago, you mean?

I've moved what money I have out of the NZD to the pound stirling (thank you Gordon Brown). You should do the same.

When the crunch comes on the NZD - and it will come - it will be fast and brutal.

I don't have time to read all the "right" economists, et al. What is the conjecture for what happens at the end of the printing press cycle (apart from wealthy wheelbarrow manufacturers)?


Oh fuck another state school loser. It ends in armed revolution. Don't you know anything?



Does this morph into the IMF and the World Bank taking over all banking and buying up countries and ushering in the New World Order?


nope - but president Palin will Nuke Tehran

10/16/2008 09:31:00 am  
Blogger PC said...

DavidInNZ, you asked what happens at the end of the printing press cycle.

In a word, if the cycle keeps going: Zimbabwe. Or a crack-up boom.

If printing money could make us rich, Zimbabwe would be wallowing in riches by now.

10/16/2008 09:42:00 am  
Blogger Berend de Boer said...

Anonymous: Like Iceland three weeks ago, you mean?

No, not like Iceland. In 2007, they got a foreign currency rating of A+/Stable/A-1+ and a local currency rating of AA/Stable/A-1+.

We currently have a foreign currency rating of AAA/Stable/A-1+, and local one of AA+/Stable/A-1+.

And we have no banks which went on a buying spree. But I agree, I could have to eat my words tomorrow, the German minister of Finance also said it was just American greed, and had to bail out his country the next day.

10/16/2008 10:23:00 am  
Anonymous LGM said...

Ah yes. How those rotten Euro-socialists like to look down their noses at the "uncultured" and "greedy" Americans. Euros say silly things and then the next day....pffffft. Bullshit artists they be seen to be!

Interesting thing about the Eurozone is how rapidly it descends into extremism and violence given the opportunity. They just love to tear each other apart. Take a look at how things went in Serbia, Macedonia, Bosnia etc. That's just a taste of what they can do. Now consider what would occur if the US packs up and goes home because the US military occupation of Europe becomes too expensive to continue.

That's one possible scenario when the bottom of the collapse is reached. Not so smug then....

A cheerful day to end the working day.

LGM

10/16/2008 12:38:00 pm  

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