Other • What are the economic consequences of all this money printi
What are the economic consequences of all this money printing by central banks?
Posted on 19 October 2012
Hyperinflation, mass unemployment and a total loss of confidence in paper money are the logic consequences of money printing that is unlimited or out of control. History has many examples of governments that turned to the printing press to finance themselves. Take the UK today for example.
In this financial year the Bank of England has bought £62.5 billion of government bonds, almost two thirds of the £100 billion issued by the British Government. That brings total government bond purchases by the BoE to £366 billion out of a total bond market of £1.2 trillion, so the UK central bank now holds 31 per cent of the national debt. Borrowing from yourself by printing new money? How sustainable is that?
Ask officials and they will tell you that these bonds will one day be sold to the private sector. But who would want to buy UK bonds on this scale? Either the central bank owned bonds will be held until maturity and then rolled over, or eventually cancelled. And what will the currency be worth by then?
If this all sounds very risky, then that is because it is. The UK holds up the pound sterling as a great asset by comparison to the pain being felt by some eurozone members. But its financial position is far less sound and the pound sterling a smaller and less liquid currency than the hated euro. Then again the UK is hardly alone.
Total US Government spending at all levels is approximately 40 per cent of GDP and, unless economic conditions improve this will increase further. Unfunded liabilities of the US federal government total $61.6 trillion. Based on Generally Accepted Accounting Principles economist John Williams has forecast US federal government insolvency and hyperinflation by 2014.
As economic commentator Ron Hera concludes in his recent paper: ‘Insolvency of a sovereign nation becomes inevitable once new borrowing is required to service existing debt, but the Minsky moment only arrives when (1) further borrowing becomes impossible and also when (2) monetization results in rejection of the currency.’
Can the US Government navigate its way around this Minsky moment? Well that’s what the coming debate about the US ‘fiscal cliff’ will be all about. Rebalancing US national taxation and expenditure is critical to starting to dig the US out of its debt hole. Carry on raising it and that Minsky moment is the endgame.
It is quite possible that the US will still manage this, unless it takes what seems to be the easy path and avoids a recession in 2013 only to face national bankruptcy the following year.
We can also wonder about the outlook for the most heavily indebted nations (Japan and the UK, not actually the eurozone candidates). It could be that only the most indebted face bankruptcy and the others finally realize what they have to do to avoid the same fate.
For investors this is not an easy time to say the least. Hyperinflation is death to the normally safe options of bank account deposits and government bonds. Equities also usually take a very hard initial hit and then recover. Real assets like real estate, commodities and especially gold and silver tend to do much better. Oil ought to be another stand-out winner.
But we are heading into uncharted waters and that means the unexpected can and will occur.
Statistics: Posted by yoda — Fri Oct 19, 2012 9:09 am
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