Submitted by Tim Price, Director of PFP Wealth Management and Sovereign Man [11]contributor
Guest Post: What Is The Consequence Of Printing Money That Nobody Wants?
In a week that saw Britain slide into its first double-dip recession since 1975, we quite fittingly also saw evidence of the sort of insular bigotry and protectionist narrow-mindedness that one associates with that same ugly, painful decade, when Barry Sheerman, Member of Parliament, said:
"I'm getting increasingly worried about the free movement of people across Europe. It's a very competitive world out there, and my constituents resent that."
The signs of unravelling are not confined to British shores. French voters in the presidential elections shocked markets by
(a) favouring the socialist Francois Hollande; and
(b) giving almost a fifth of their votes to the far-right extremist Marine Le Pen.
Meanwhile in another turn of the sovereign debt screw, Spain was downgraded toward reality. And the Dutch government collapsed altogether.
Amazingly, the people of Europe just don't seem that keen on austerity. Yet it's worth asking-- why hasn't the recession of today produced the same sense of crisis from the 1970s?
Chris Dillow of the Guardian newspaper suggests that average real wages are much higher now, so although standards of living are falling, they're falling from a much higher level that softens the pain (even though the real pain of austerity hasn't even really arrived yet).
But there is one outcome from the 1970s that is genuinely to be feared... the risk of which seems to be rising every day, if it has not indeed already arrived: Stagflation.
Stagflation-- the utterly painful combination of stagnating growth and steep inflation that marked the 1970s-- and will be the natural side effect of extended central bank quantitative easing during a period of widespread deleveraging.
In other words, stagflation is the consequence of printing money that nobody wants.
Moreover, an outbreak of serious stagflation will decimate conventionally managed debt and equity portfolios. And given that most people invest with the crowd, with conventional investments or conventionally managed portfolios, stagflation will wipe the savings and livelihoods from untold masses.
But, we live in strange times-- times, for example, that reward bankers handsomely for bankrupting the economy. This is why the likes of so many politicians and financial commentators are able to insist with impunity that central bankers should 'keep printing more money' despite never having provided a scintilla of evidence that such tactics work.
Case in point-- in a letter to the Financial Times from April 26, 2012, economist Roger Alford remarked:
"The utterly disparate time horizons and the very different experience and skills required... make it virtually impossible for any one person to have the experience and depth of understanding to provide effective leadership [as head of a major central bank]."
Intellectually constrained by his faux science "profession", Mr. Alford does not take this argument to its logical conclusion: if the institution is so difficult to govern and the role so difficult to effect, why have it in the first place ?
We know the answer to this question. Central banks exist to protect the banking system and to finance the government's debts at all costs... even if it means bankrupting the taxpayer and productive economy.
Yet the urgent need for austerity and an insoluble sovereign debt crisis make for uneasy bedfellows.
By definition, we cannot shrink our way back to the sort of growth required to service the West's accumulated debts. Something has to give.
That something will ultimately be social and political disorder on a continent-wide basis, particularly as the taxpayer becomes increasingly frustrated in his obligations to fund the rapidly growing and untenable costs of Big Government.
Such disorder is almost universally feared-- by politicians, by markets, by institutions. As the London-based marcoeconomic research consultancy Capital Economics recently commented:
"The last thing that the markets need right now is increased political uncertainty at the heart of Europe at a time when the economic outlook is already bleak..."
The only reasonable response to this is: tough. If social and political disorder is what it takes to shift an unsustainable status quo in which vampire banks and clueless bureaucrats suck the life out of the productive economy, bring it on.