Via Pater Tenebrarum of Acting-Man blog [14],
The insanity that has gripped policymakers all over the world really is a sight to see. There was a time when central bankers were extremely careful not to do anything that might endanger the currency's value too much – in other words, they were intent on boiling the frog slowly. And why wouldn't they? After all, the amount by which the citizenry is plucked via depreciation of the currency every year is compounding, so that the men behind the curtain extract more than enough over time. That they thereby retard economic progress by decades over time as well is not something anyone would notice after all, since we cannot engage in a controlled experiment that proves it to all and sundry beyond doubt. We only know that it is so if we employ sound economic theory. Since sound economic theory is by its nature not statist, it is not employed by the mainstream, and so most citizens are successfully shielded from the truth.
The latest example for the growing chutzpa of these snake-oil sellers is provided by Lord Adair Turner in the UK. To give you a little bit of background: the UK is about to fall into its third recession in a row (a 'triple dip', something that has never before happened) not in spite, but because the Bank of England has monetized a cool quarter of all outstanding gilts, which has allowed the zombie TBTF banks to remain on artificial life support.
However, that is not Turner's conclusion. The policy is evidently failing, so he naturally concludes that there should not only be more of it, but it should become more brazen by veering off into the 'Weimaresque'. After all, we will be able to stop in time, right? We just need a 'little bit of it'. Although Turner for some reason also thinks it is 'not appropriate for the UK' (why not? The UK for some reason 'does not respond to demand and price signals', which would really be a first in economic history…where do they find these people?), he thinks everybody else should do it. According to the FT, under the heading “Print Money to Fund Spending [15]”:
“Lord Turner, the departing chairman of the Financial Services Authority has defended financing government spending by printing money arguing that, within limits, it “absolutely, definitively [does] not” lead to inflation.
Speaking before a farewell speech in London on Wednesday, Lord Turner, who applied unsuccessfully to be the next Bank of England governor, called for “intellectual clarity” in economic policy, including breaking a taboo that permanently printing money to pay for government services is always bad.
“I accept entirely that this is a very dangerous thing to let out of the bag, that this is a medicine in small quantities but a poison in large quantities but that there exist some circumstances, in which it is appropriate to take that risk,” he told the Financial Times.
The tool should have been used in 1930s Germany and 1990s Japan, he said. It should be considered across the world, he added, at a time when banks, companies and households are trying to pay down debts and seeking to return to growth by borrowing more is seen as perverse.
In a direct challenge to the German authorities who shudder at the memory of the hyperinflation of the Weimar Republic, Lord Turner suggested that the absence of monetary financing in the early 1930s, which led to depression, falling prices and the rise of the Third Reich, had been a greater disaster.
“Is [monetary financing] desperately dangerous because every pound of money financed turns into inflation? Absolutely definitively not. There is no coherent rigorous bit of economics that takes you in that direction,” he said.
He did add, however, that the country where monetary financing was least likely to be needed was the UK. There he accepts that more stimulus might lead to higher inflation as the underlying health of the economy is weak and could not “respond to demand and price signals”.
(emphasis added)
Let's count the ways in which this is misguided nonsense. It begins with the title already. 'Money' cannot 'fund' anything. What is required for funding economic activities are real savings and real capital. You could drop $10 trillion in the middle of the Sahel zone and still wouldn't be able to 'fund' anything. Money is merely a medium of exchange and as such indispensable to economic calculation, but it is not a means of 'funding'.
Now to the assertion that “printing money does not lead to inflation”, which is at the heart of Turner's argument. First of all, it may take many years, even decades, before a broad-based inflationary effect becomes noticeable. For example, the US and others 'printed money' and engaged in deficit spending throughout the 1950s and 1960s. There also seemed to be no problem, until the problem suddenly became noticeable in the 1970s.
Moreover, 'inflation' in the sense of an increase in CPI is in any case a problem of secondary importance. Money printing most definitely distorts prices all across the economy – it is relative prices that change, as money is not neutral. This hampers rational economic calculation and therefore leads to capital malinvestment. Scarce capital is therefore wasted, and although there may be a 'feel good phase' (the boom), all the accounting profits generated in the boom will eventually disappear again in a bust. They are an inflationary illusion.
The appeal to the 1930s and Hitler is quite amusing in a way, as Hitler himself was a major inflationist. We already mentioned it: A war on the scale of WW2 would not have been possible without massive inflation and employment of precisely the methods his Lordship recommends. Moreover, the reason for Hitler's rise is ultimately to be sought in the successive abandonment of the gold standard in order to finance WW1. This made it impossible to return to sound money without upheaval, and the 1920's boom ensued when the US attempted to help the misguided policymakers of the UK by leaving interest rates too low, so they could to push through their return to gold at par. This brought on the credit and asset boom of the 1920s, which ultimately led to the Great Depression.
To blame the rise of Hitler on the “refusal to inflate” is especially piquant if one considers that Germany was in the throes of a hyperinflationary conflagration in the year when Hitler was first heard about (he attempted a coup in 1923). Lastly, the 'argument from history', a specialty of Marxists and German historicists, is inappropriate when discussing points of economic theory.
Finally Turner asserts that “we should take the risk” because allegedly, “Is [monetary financing] desperately dangerous because every pound of money financed turns into inflation? Absolutely definitively not. There is no coherent rigorous bit of economics that takes you in that direction,”
This is at best a half-truth. Since money is not neutral, an outbreak of consumer price inflation may or may not happen, that depends largely on many other factors influencing peoples' inflation expectations. However, as noted above, there is no way a sound economic theory can regard inflation of the money supply as 'harmless' or even 'necessary'. Turner is just another snake oil seller.
As an aside, the Knappists, i.e., the 'Modern Monetary Theory' Church [16], think highly of Turner since he came out with this crazy argument. Enough said.