A friend recently recommended me a book. A must-read to understand the direction of economic sentiment in the US, apparently.
It’s called The Case for People’s Quantitative Easing by Frances Coppola. She is not the director of Apocalypse Now, by the way.
I haven’t read any of it yet, but I opened it at random page, and read a couple of lines.
What I read was fascinating, but also filled me with a sense of dread.
“Those who oppose QE for the people point to Weimar, Zimbabwe and, now, Venezuela as awful warnings of what happens when central banks are captive to profligate governments. But why should we assume that governments will be profligate?”
That might give you an indication of the tone of the book.
A paragraph later, she writes “central bank independence has become something of a sacred cow, and sacred cows have a distressing tendency to impede rational behaviour.”
Uh oh…
Why this made me scared
I found these two quotes very threatening for one key reason.
The systems that are in place for central bank independence are there as a safety net, in case any leader made it into office who wanted to abuse the incredible power that control of the printing presses would give them.
Parliament was forced upon our own country of Great Britain centuries ago.
The English Civil War was a response to profligacy, in a way.
Parliament and the constitution were designed to put checks and balances on the monarchy.
When you have absolute power conferred on an office that is filled by birth right, there is very little guarantee of good leadership. And so it proved. English kings and queens varied hugely in their management styles and their whims.
Parliament, the rule of democracy and debate, is in place so that no leader can wield too much power. As ridiculous as it looks right now, I remain grateful that there is a debate raging in the halls of Parliament.
Imagine if the lounging figure of Jacob Rees-Mogg were king, and could enact whatever he fancied into law? Or Boris Johnson, or Jeremy Corbyn? The point is that no one has absolute power any more.
Arguments for and against all parties are plentiful, and that’s the point. Checks and balances mean that Boris can’t just do what he likes with no opposition, and nor could Jeremy Corbyn if he were in power.
The systems we have in place, such as central bank independence, are there as a margin of safety. While there is nothing to say that governments won’t be profligate, as Coppola hopes, there is every chance that they might be. They have been before, and it’s always been a surprise.
You think Donald Trump is bad now?
Give him control of the central bank.
What about a highly militaristic leader, who wants to print money to fund a massive foreign war?
So that’s why I’m concerned with the five lines of Coppola’s book that I’ve read so far.
Although I do agree that the current notion of quantitative easing is flawed and has only raised asset prices benefiting those who already held assets – ie, the rich.
Meanwhile, wages have not advanced as fast and so the wealth gap has widened.
This phenomena is credited with causing much of the so-called populism and nationalism that have been increasingly prevalent recently.
That is a problem, and I’m sure the rest of the book does raise some interesting points which might improve the discussion. It’s timely as well, as it looks like central banks the world over are gearing up for another round of QE.
This reminds me of one of my favourite moments from hundreds of hours of episodes of The Simpsons that I watched growing up. Lisa wants to test if a hamster is smarter than her brother, and leaves a cupcake attached to an electric shock machine. You touch the cupcake, you get shocked.
The hamster gives it a crack, gets shocked, and slinks off. Whereas Lisa’s brother Bart spends about 30 seconds repeatedly trying to grab the cupcake, failing to draw the link between that and the shocks he is receiving.
Central banks are having a bit of a Bart Simpson moment if you ask me.
So what?
Both of the quotes from the book summarise an emerging mood, a new attitude to money. People are asking “Why does oversupply matter?”, “Why should it matter that we don’t have the money to pay for stuff?”
These are the kinds of questions that lead either to debt crises or rampant inflation. They always have. Success (in this case QE without inflation) breeds complacency, complacency leads to excess, and excess creates the conditions for failure. And so the cycle goes.
The debasement of fiat money across the globe leads to only one thing, as it has done for millennia. An erosion of trust in the value of money.
All the best,
Kit Winder
Investment Research Analyst, Southbank Investment Research
Category: Market updates