Mechanical

The UK Has Officially Gone Insane

We're in trouble. Serious trouble. The Bank of England is going to try to print money to ease the economic crisis. Anyone with even a marginal background in economics knows why this is a disaster. What astonishes me is that I don't see the press howling over this one.

The problem is simple. When the government starts printing money and injecting that into the economy, people have more money. Unfortunately, that means they spend more money. Suppliers raise their prices. Why? They have higher demand and can do that. Even if you think they're being greedy, their suppliers will raise their prices. Lots of people are going to raise their prices and inflation sets in. The more money the UK government prints, the worse the inflation will be.

  • So can't the government freeze prices?

    So what happens when the price of your goods is frozen and the supplies for those goods cost more? You go out of business.
  • So can't the government turn around and freeze those prices?

    Not if you have an international economy where many goods and services are supplied outside of your country.
  • Ah, but the price of those goods and services aren't affected by our printing money, so they'll stay cheap.

    No, you've just trashed your currency and undercut its value internationally. You can't afford those goods and services at the exchange rate for your money. (See Zimbabwe for a delightful example)
  • But the Euro means no exchange rate with other EEA nations who've adopted the Euro!

    Ah, but we haven't adopted the Euro, have we? And if we did, we'd be taking other EEA countries down with us. This national disaster would turn into an international crisis.

What's worse is that I suspect the Brown government won't stop this ludicrous idea.

The UK has officially gone nuts. No economist would seriously suggest this. As an act of desperation, it ranks up their with going to a loan shark to help paying off your bills. Everyone's going to be screwed. Prices are going to go up much faster than wages and people will struggle even harder to make ends meet.

I am trying to hang on here. I have almost two and a half years before I can apply for citizenship but I'm scared that this government is going to make the intervening time a living hell for me. I just can't believe this idiocy.

You know how to deal with this economic crisis? I'll give you a hint. Somewhere there's a farmer in Tibet saying "there's a global economic crisis"? He raises his own food and keeps to himself. I am not arguing that countries should be isolationist, but they should be more self-sufficient (there's a big difference, but I'll be Rush Limbaugh types won't be able to figure it out). By focusing more on local economies, we can have some level of protection when another economy collapses.

But why won't this happen? Because there's no incentive to. Global financial systems ofter huge rewards and the people who play them have little risk. If they lose a few billion dollars, it's not their money they're losing. And why do politicians allow this? Because there's no downside for them, either. If they play along and let these institutions assume too much risk with other people's money, they leave office for a nice, fat, private sector jobs. And if the economy gets hurt by this? They leave office for nice, fat, private sector jobs. The revolving door of government ensures that they'll do what the business tell them to do.

So the UK government needs to focus on local, sustainable economies and let the economic crisis run its course. There's no way that the UK government is going to come out of this as a island of wealth and stability in a search of financial turbulence. The best we can do is mitigate the damage, work with other countries to repair the damage and admit that they can't print money to get out of this mess.

Is the UK economy going to collapse completely before I can get citizenship? If the BBC were to lay me off (not likely, but you never know), it's not going to be easy to get another job right now. I'm really, really worried about this. On the bright side, I can apply for permanent residency in June 2010, so if things hold together that long, I should be OK.

Hmm ... time to look for a wife (with EEA citizenship, of course :)

  • Current Mood: pessimistic pessimistic

I’ll give you a hint. Somewhere there’s a farmer in Tibet saying “there’s a global economic crisis”? He raises his own food and keeps to himself.

Do you read John Robb? He talks about this under the banner of Resilient Communities, as he’s nicknamed it. The idea is that governments won’t do it, but at a more local level of single communities it can be done so long as the locals have their smarts about them. Here’s a recent example. (His weblog is rather laden with his own self-coined jargon, but if you read along for a while, you’ll figure it out soon enough, and it’s entirely worth the while.)

The point is that modern communication technologies allow rapid sharing of innovations so that local production can provide a high standard of living, removing the downsides of pure isolationism while retaining its benefits.

Interesting point about printing money. The way I see it, inflation is caused whenever & however additional currency is created (and that includes the more normal way of it being created as debt, by the banks, except that this way perpetuates a cycle where more debt then needs to be created to create more money to pay off the previous debts... sheesh... ).

http://video.google.co.uk/videoplay?docid=-9050474362583451279

I think the whole financial system is seriously, seriously, screwed, and needs an overhaul. Good point about the need for some degree of local self-sufficiency, though. The global system is unstable as hell.
Before you start looking for a blast shelter, do remember that, in the scheme of things, they aren't printing that much right now. At the end of January, the British M4 money supply (equivalent to the US's M3) was £1,991,411,000,000. (The Bank of England's website has a database you can query to get these numbers.) They're planning to print £150,000,000,000. That's about 7% of the current money supply. It'll expand via the money multiplier, but if it's true that banks aren't lending right now, the money multiplier will be much weaker than normal.

The problem comes if we end up in an inflationary spiral, where inflation is strong enough to produce nasty conditions that can only be alleviated through more inflation. I don't think that will happen in the UK; I just don't see any conditions that could lead the country into one. We'll see two or three injections of new cash, prices will rise a little, the banking crisis will settle down, and the new money will lay the groundwork for the next crisis in five or ten years. In other words, it's business as usual.

Helicopter Ben back in the US, on the other hand, might end up between a rock and a hard place if the market in Treasury debt—which looks a lot like a bubble to me right now—collapses. The US would end up with a lot of debt, a lot of pressure for spending, and no way to pay for either except by printing—but the inflation would only make Treasuries more expensive to sell...

Incidentally, Ricardo's work on comparative advantage showed that there is not just no incentive to be self-sufficient, there's actually a pretty strong natural incentive against it. It's interesting stuff—take a look.
Ricardo's work on comparative advantage was also fundamentally flawed, but being at work, I can't go into it at length right now.

As for the US, there's an interesting idea for promoting inflation: if you have enough inflation and you can get a "balanced" budget, debt owed in US dollars is easy to pay down is said inflated dollars. It would be a nasty stunt to pull and could ruin the US's credit rating, but it might be an awful last resort (probably only used when our unfunded liabilities such as Social Security come due).
I'm wondering about that myself. My money's in HSBC and they've been struggling. I've got a fair chunk there, too. The government allegedly protects it, but if the money's devalued, it won't matter.

Anyone remember Germany in the 30s?
Hmm ... time to look for a wife (with EEA citizenship, of course :)

If I wasn't married already, you'd be second in line :)
So, what you're telling me is dump my holdings in Pounds, then...

And I'll buy them later when it is 1:1 and then I can afford to visit you...

OK.
We're in a Liquidity Trap
I can't speak to whether printing money is a good idea, but I'm quite certain that people spending more right now is a bloody good idea. So if printing more money gets people to spend more, then good, because that will encourage credit to start flowing again.

I'm not sure about the UK, but it's quite clear now that in the US and many other countries, we're experiencing a liquidity trap (http://krugman.blogs.nytimes.com/2008/11/15/macro-policy-in-a-liquidity-trap-wonkish/). In a nutshell, what that means is that, usually to get out of a recession the Fed (US) lowers interest rates in order to encourage people (and companies) to borrow—and spend.

Right now, however, no one is spending, and the Fed can't lower interest rates any further, because they're already at 0. That means that government has to do something to get people to spend. The best option is generally spending on development and whatnot—projects that create jobs where people are paid and can spend their money. But if it happens that printing more money can have the same effect, even a little bit, it just might help.

—Theory
Re: We're in a Liquidity Trap
You are correct that no one spending money is a bad thing, but the problem is the source of money that they're spending. Let's say you have a town of 20 people and they each have $100. That's $2,000 in the economy. You have two people in this town who sells clothes and the major business in this town has gone broke.

In this scenario, people will be afraid to buy new clothes because they're afraid of running out of money and they people who sell clothes now can't afford to buy other goods. So not only are people delaying purchasing other goods, but two people (10% of the population!) have no money to spend so the people who would sell to the tailors now have less money, so they can't afford to spend more. This is a knock-on effect that ripples through the economy.

So the town council decides to print money money as a "stimulus" and give everyone and extra $10. First, if things get really bad the people know that this might be a one-time deal, so they may simply hoard the money and not spend it, meaning that the council has wasted resources. Further, many people, seeing that money is simply being printed, now realize that the value of their currency is diluted. Where there was once $2,000, there's now $2,200, meaning that each dollar is now worth about .91 cents (particularly when you realize that money is a proxy for labor and the amount of labor is a constant at any point in time).

But let's say everyone has an extra $10 dollars from the council's actions and rushes out to spend money on clothes. The two tailors now have to spin up production again, but there might be a high enough demand that they can't supply everyone with new clothes because the tailors have limited supplies. They can try to ration the clothes to "first come, first serve", but in practice, this isn't what happens in economies. In reality, the tailors would simply charge more for their clothes because of the higher demand. Even if they didn't want to, the people who want clothes first or want to ensure that they get any clothes due to limited supply (since more people are now demanding clothes) might offer more money, thus driving up prices again. The council could try price freezing, but what happens if the materials that the tailors need cost more? The tailors lose their profits. Even if the council freezes the price on the materials the tailors need, that still fails because no town lives in isolation and many goods and services are purchased from the outside world. The council can't freeze those prices and the outside world will charge more when they see a devalued currency.

So we avoid price freezes, but the tailors still need supplies to provide everyone with clothes? They've stopped producing, so they might go to the cloth merchant who is now in the same position. You can't provide unlimited amounts of cloth, so the tailors offer more money to ensure that they're the ones who can sell or, at the very least, that they're the ones who get the cloth first. This is a bad economy so they want to sell while they can. This knock-on effect pushes prices up throughout the economy.

This is what printing money does.

What would have been better for the council is to start a jobs program. They borrow money and offer that to unemployed people to dig a new drainage system, repair homes and so on. Because the money is borrowed and needs to be paid back, there's no extra money being injected into the system. Further, because people are being offered jobs instead of a a lump payment, there's a feeling (particularly with a robust government able to sustain this in the long-term), that these jobs might last for a while and people are less likely to hoard the extra money.
Re: We're in a Liquidity Trap
I wrote a long reply, but then LiveJournal said it was goo long. So I made it a full blog entry on my blog. You can read it here (http://www.justatheory.com/politics/economy/is-printing-mony-stimulative.html).

—Theory
Krugman Speaks
Krugman just posted on this issue (http://krugman.blogs.nytimes.com/2010/12/15/what-is-money/).