More trouble in the commodity markets overnight. Australian stocks down hard. Look out for our honorary Australian Dan Denning’s analysis of that in just a second.
But before we get to that, let’s check in on our old friend Jeremy Corbyn, shall we?
It’s been a whirlwind couple of weeks for the new Labour leader. He’s dominated the headlines, but on issues that are almost entirely irrelevant.
Whether he’d kneel when he meets the Queen, for instance. Or the fact that he didn’t sing the national anthem. Or that he doesn’t know the words to ‘Auld Lang Syne’.
Wait. I think I dreamt at least one of them up.
Moving on. The headlines might have focused on irrelevant subjects. But that doesn’t mean Corbyn doesn’t have policies and ideas we need to be aware of.
Renationalising the railways is one.
‘People’s QE’ is another
If you’re unfamiliar with ‘People’s QE’, here’s a quick primer. The QE we’ve had so far – let’s call it ‘Regular QE’ – involves the Bank of England conjuring money out of thin air and using it to buy bonds (mostly government bonds).
The idea is that this injection of cash pushes interest rates down and forces big financial institutions to look for somewhere else to park their cash. That’s supposed to get money moving, get the banks lending and the economy up and running again.
Now ‘People’s QE’, on the other hand, involves creating money and forcing it directly into the economy. It’s not a new idea. As Dan, Charlie Morris and I discussed in our podcast a couple of weeks back, it’s a variant on an idea a guy called Milton Friedman had called ‘helicopter money’ (essentially dropping cash from the sky, like a morally and economically questionable Berlin airlift).
The idea behind both is the same. It’s supposed to make people feel richer, go out into the world and spend, spend, spend – stimulating the economy.
It’s just the mechanisms are different
Corbyn wants to do ‘People’s QE’. He wants to try and stimulate the economy by directly financing government debt, creating money out of thin air to pay for infrastructure projects – and perhaps even hand money ‘to the people’ directly.
And he has his supporters. From Ambrose Evans-Pritchard in The Telegraph a couple of weeks ago:
Jeremy Lawson, from Standard Life, gave his blessing to radical action this week, arguing central banks should be willing to fund fiscal stimulus directly, and even inject money “directly into household bank accounts” if need be.
Mr Corbyn’s ideas are a variant of “helicopter money”, the term coined by Milton Friedman, the doyen of monetary orthodoxy, lest we forget.
Friedman did not, of course, mean that banknotes should be dropped from the sky, though they could be in extremis, but rather that central banks have the means to create money to fund tax cuts, or to cover state spending, until the economy comes back to life.
The problem we have with all of this – whether you’re talking about QE for the people, for the banks or for eight-foot lizards – is that the idea of creating money out of nothing undermines the very idea of money itself.
Here at Capital and Conflict we believe in sound money
We don’t believe you can create prosperity out of thin air. When you look at all these interventionist schemes through that lens, they all start to look the same.
Why does sound money matter? Why do we believe you can’t get something for nothing?
I guess most of you already know the answer to that. For me it’s always just been a gut feeling that prosperity and real, hard, productive work are connected. You cannot have one without the other.
The best and most eloquent description of this I’ve ever come across came from Bill Buckler, the ‘captain’ of the Privateer newsletter, which ran for 30-odd years:
One Man Or Woman In Nature:
The best way to reach an understanding of the principles of economics, or politics, or anything else which involves the interaction of people, is to start by taking all the other people out of the picture.
All clear thinking about these problems begins with the idea of one man or woman in nature. Or, to put it another way, imagine yourself in the shoes of Robinson Crusoe.
Starting from such a situation makes it far easier to see the fundamental and irrefutable principles of economics. Here they are:
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- There ain’t no such thing as a free lunch!
- No one can consume more than he or she has produced.
- You don’t get any if there ain’t none.
- Don’t eat the seed corn.
- After food, shelter, and clothing, the most important economic good is TIME!
- All productive work begins between the ears.
I like that metaphor. It simplifies things. I suppose you could argue that it oversimplifies things.
But that doesn’t make the message any less relevant
On the most basic level, you can’t get something out of nothing. People that argue you can are just ignoring the wider effects of what’s happening. Print money to build a bridge and it looks like you’ve created a bridge without really having to pay.
But who really pays? The saver who sees the value of his or her savings eroded? The pensioner whose income doesn’t stretch as far? Regular people who pay more for imports due to a lower currency? Future generations who suffer the after-effects of a monetary experiment?
Someone always pays a price. You cannot create wealth out of nothing.
At least, that’s our view. But what’s yours?
Corbyn isn’t the only one pushing for ‘People’s QE’. It’s getting more and more airtime every day. We wonder what ‘The People’ want. Perhaps you can help. Would you welcome it or not? Do you reckon it’s wrong or right?
Category: Central Banks