Wednesday, 11 November 2009

Mr Key’s dirty little secret

If you’ve wondered why the world’s politicians seem so relaxed about their ability to repay the trillions of pounds, dollars and euros they’ve been throwing around in recent months, then rest assured they have a dirty little secret.

And if you’ve wondered why John Key seems so relaxed about the outstanding bill for NZ’s leaky homes – a “bill that is likely to top $11.5 billion” – then rest assured Mr Key has the same secret.  It’s the same secret on which his finance minister Bill English is relying to repay the decades of govt deficits over which he’s now presiding.

That secret can be stated in one word: “inflation.”

dollar_toilet-from-chuck-penzi Except Mr Key can’t keep a secret, and in that respect he’s different to most of the world’s politicians.  They call it “quantitative easing” and figure that as long as they all inflate at the same rate, then no-one will notice because all their currencies will be going down the toilet together. Yet Mr Key (if not his deputy) is happy to admit that he’s planning to inflate his way out of several messes.

Speaking to Guyon Espiner on the weekend about his new plan to get rid of that $11.5 billion leaky-home liability, Key said his plan was basically to inflate his way out. He’s up front about it.  He told Espiner,

“if we can ensure that a homeowner has guaranteed access to funds, and a guaranteed ability to repay . . . we can allow inflation and we can allow rising house prices to let people fix their home and actually move on and move out of the situation.”

Did you get that? “We can allow inflation and we can allow rising house prices to let people fix their home and actually move on and move out of the situation.” Key’s plan to wipe out the billions of dollars of leaky home liability (and by implication the tens of billions of dollars his government is spending that it hasn’t got) is not to address the real problems, it’s going to be to print money – the age-old remedy of quacks, charlatans and short-sighted so-called statesmen.

“Inflation is like sin,” said Frederick Leith-Ross, “every government denounces it and every government practices it.”  Key at least is ingenuous enough to admit it (and astute enough to realise his policies are already allowing house-price inflation to take off).

Let’s get one thing very clear here: New pieces of printed paper bring no new resources into existence. None at all. But by diluting the purchasing power of every existing dollar, inflation take resources from savers (involuntarily and against their will) and gives them to borrowers, gives them to governments, gives them to those the government has chosen (this week) to favour.

The history of the twentieth century’s money is the history of its dilution by governments’ central banks. Ever pound and every dollar is worth now around one-hundred times less than it was one-hundred years ago because of governments printing money. And every government secretly thinks it can control the process – and every bubble, every hyperinflation, every careful “quantitative easing” tells the same tale: they can’t.  (Read Fiat Money Inflation in France to see just how deluded “statesmen” can be when taking this particular tiger by the tale.)

The danger of inflation is great, but the temptation is always greater. “By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”  John Maynard Keynes said that in his instruction manual to thieving governments. Key plans to confiscate openly.

And don’t think this just means he intends inflation to help out people paying to fix their homes.  He intends it to help out his government.   As Stephen Horwitz points out,

    “A clear message of [inflationary policies] is that one cannot separate inflationary monetary policies from profligate fiscal policy, As with counterfeiting, the lure of inflation is that the inflator can acquire real resources at virtually zero cost. It does this not only directly, but also by reducing the value of the government’s massive debt. For political actors seeking votes, or governments seeking power, inflation is a far more palatable way than taxation to pay for new programs or military adventures.“

Mr Key’ dirty little secret is that he knows that.   He just hopes that you don’t.



  1. good article dude, scary for me though, fixed incomes very scary dude, when do you give up and die,

  2. Probably not a popular oppinion but I want to know why I would want to insure all the people who bought leaky homes anyway.

    Yes it might be a bit of bad luck that they got into a financial transaction with a company that screwed up and regulations failed to protect them - but are we to now supposed to provide free insurance to people for every unfortunate thing that might happen to them?

  3. hahaha.... its really very great article thanks for sharing this with us.

  4. Superbly insightful article!

    On a technical note, does that mean the government is looking to print the billions and lend them out to leaky home victims?


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