Let’s dive into the mailbag again and see what Capital and Conflict readers have been saying. There’s been a lot of talk about ‘People’s QE’. Take this, for instance:
My initial reaction to the proposal of John McDonnell of a “People’s QE” to print lots and lots of money to finance capital spending was probably the same as most of your other readers. Stupid and economically illiterate.
However, since then, I’ve been a little less certain. My problem is – Greece. At the height of the crisis prior to accepting the EU “solution”, there was quite a strong consensus that the Greek people would be better off leaving the euro, defaulting on their impossible debt (which they will probably do in the end anyway) and re-adopting the drachma.
This would immediately result in a devaluation of their currency and loss of savings for many but could end up giving Greece a chance to grow itself back to solvency.
That course seems remarkably similar to the McConnell one in that it would lead to devaluation and loss of savings – both of which are also likely under the “negative interest/cash ban” route – but could provide much improved public facilities such as schools and hospitals, assuming the money isn’t wasted on massive pay increases for public servants!
I don’t buy this argument fully but it has got me thinking.
It’s an interesting point. And it’s worth thinking about. The underlying thing for me is that all actions have consequences. So printing money and handing it over to any one – a banker, a builder or just a bloke on his way to the pub – will have second and third rate affects you cannot predict.
Some of them might be good. GDP might go up.
Some might be bad. Inflation could pick up and make life difficult for savers and pensioners.
The core point is that you cannot truly understand the consequences of this kind of thing. No one does. You can’t interfere with something as complex as the economy and expect to predict precisely what will happen. You don’t know who you’re going to save. You don’t know who you’re going to screw.
You can only guess.
I suppose that’s the real problem for me, on a personal level. Anyone that pushes this sort of scheme and pretends they know with certainty what will happen is lying. But, in order to get the scheme accepted… you have to pretend you know exactly what will happen.
Morally, that just seems messed up to me.
But never mind what I think.
I was talking to John Stepek, editor of MoneyWeek magazine, about this just the other day. John thinks there’s a fairly good chance that all this money printing is actually deflationary – it’s warping people’s worldview enough to make them hoard more money, not spend it.
John made his case – much more eloquently than I have – like this:
I’ve always thought that a neglected aspect of the problem with low interest rates is the impact on the psychology of investors and savers.
Part of the point of low interest rates and financial repression is to force savers – people with capital – to take more risks with their money. But this entirely ignores the psychology of savers.
If you are saving money, it’s because you want to keep it for something. Maybe it’s not for a specific goal. Maybe it’s nothing more than a shock absorber, or a safety net.
And perhaps another human being – a central banker, or an economist, say – would look at that, and they’d say that you’re acting irrationally. That you should be making more of your spare capital. Maybe they’d even argue that you don’t deserve to earn a ‘real’ return on your money because you’re not taking any risks with it.
But this cuts to the core of the whole problem with economics. People aren’t solely profit-maximising rational actors. We aren’t machines, and we aren’t homogenous. We all need different things at different times to make us feel secure and comfortable with our situations.
And if there’s one driving force that you can’t underestimate, it’s the human craving for security.
If you come along and target all the safe havens for savings, then how does that make people with savings feel? If you tell them that to preserve their ‘real’ (after inflation) purchasing power, they have to take risks with their precious capital, then what does that do to their behaviour?
Do they feel inclined to spend more money? Or does it increase their propensity to save, to compensate for the higher risks their money is exposed to? I suspect it’s the latter.
That’s a pretty destructive policy when you think about it. On the one hand, you are actually increasing the desire of people with capital to ‘hoard’ it rather than spend it in a way that might be economically beneficial.
The point is, it’s so difficult – no, it’s impossible – to understand the real effects of this kind of intervention on the wider economy. On decision making. On psychology. On people’s motivations.
This kind of stuff can’t be measured easily. So economists ignore it.
Big mistake.
By the way, if you’re interested in what John thinks you should be doing with your money right now, you should have a read of an interview he gave to Dan recently. In it, he talks about exactly where he reckons you should have your money. It’s worth a read.
One final thing – have you been tuning in to our C&C radio shows recently? They’re free. You can listen any time you like. In fact, this week we had Bill Bonner on the show.
If you’re interested, there are a couple of ways you can listen – the best one being through iTunes. Just follow this link to listen.
Category: Economics