Some weeks after the start of World War I, all
the protagonists of Europe realized that they
couldn't continue warfare for more than a few
weeks without running through their gold-backed
money. So they went off the gold-standard and
started printing money ad lib to buy as many
armaments as they needed. At the end of the War
(1918), the result was that the German mark had
depreciated four times (that is, there were four
times more banknotes than in 1914), the French
franc (and other Allied currencies) had
depreciated three times and the English pound two
times (we also sold big assets in America to make up).
In order to compensate for the depreciation,
Keynes proposed after the War that the pound
should go back onto the gold standard with a
revised value of about 1/8th of the free market
price of 1oz of pure gold. (Before 1914, the
pound was worth 1/4 of the price of 1oz of gold.)
Other things being equal, and allowing for the
necessary repair and modernization of railway
locomotive & shipbuilding machinery, coal mines
and cotton spinning in the North of England (four
huge exporting industries and profit earners
before 1914), full employment of the returning
soldiers would have resumed at nominal wages
twice as high as previously (but in real
purchasing terms not a great deal different from those earned before the War).
Keynes was attacked by Treasury officials,
politicians (even Labour Party ones as well as
Tories!), the Bank of England and the merchant
bankers of the City of London. However, Keynes
was still a young college lecturer, he belonged
to a rather silly Bloomsbury Circle, as yet he
hadn't published any of his masterpieces, so he
was taken no notice of. Yes, the Establishment
wanted to go back onto the gold standard (because
that was what had made the industrial revolution
succeed in England) as much as Keynes but only on
the same terms as existed before the War (i.e. at
a rate of £4 to the gold ounce) when the UK was
the greatest Imperial Power the world had ever
seen. We had colonized a quarter of the world's
surface, we owned most of the world's heavy
shipping, we were fast developing the modern
technologies on a broad front (e.g. electrics,
radio, airplanes, etc), and most of the world's
trade passed through London (either physically or
via distant bills of exchange) and we had loaned
billions to the other fast-growing countries of
the world (e.g. America, Germany, Japan). In
short, the English pound (the first currency to
be gold-backed by legislation) had been of
unparalleled security and provenance, and if it
were to be restored as a gold-backed currency
then it had to be at the pre-1914 rate.
But the Treasury officials, politicians, the BoE
and the merchant bankers of the City of London
didn't have the courage to do this immediately
because it would have meant the destruction (by
taxation and sterilization) of a great deal of
the inflated wealth of the upper middle-class (in
and around London) and those who had benefited
from armaments production. Instead, the
establishment set about it by stealth over a long
period of years by raising interest rates and
thus steadily reducing credit and new money. But
this also meant that the great pre-war exporting
industries of the Midlands and the North were
deprived of enough investment to modernize and
re-equip their worn-out machinery. Millions of
workers were not able to be re-absorbed.
Even when the BoE finally persuaded the
government to go back onto the gold standard (at
an attempt at a pre-1914 standard of £4 to the
ounce) in 1926, there were still too many
depreciated pounds in circulation (which the
"flappers" of the London upper-middle class and
the South generally enjoyed spending!), and the
interest rate was still too high to modernize our
exporting industries. Consequently we had huge
unemployment in the North. The half-cocked
attempt failed and we had to come off the gold
standard again in 1931. Worse still (as regards
any hope of full recovery), the government had to
start printing money again in order to maintain a
semblance of welfare for the jobless and the old and sick.
What the UK did in the 1930s is exactly the same
as what the US Fed, the Eurozone, the UK and many
other countries are doing now by way of
quantitative easing. Money-printing, so far, is
just about keeping the show on the road. But
money depreciation (inflation) is building up
again and there's no economic growth or
development in sight. We face either a currency
catastrophe or a long, slow depression until the
enormous load of debt is written off and the
creation of money is taken out of the hands of governments.
What's interesting and very significant is that
many of the non-advanced central banks of the
world, hitherto nil purchasers of gold have been
quietly buying gold since 2008 in increasing
amounts every year -- last year it was 500
tonnes. (At about $3 trillion, this is not a lot
so far, but it is at least a sign that some
central bankers, unlike Bernanke [personal
confession to a Congressional Committee], have
been reading their history books about the way that the gold-standard works.)
Keith
At 15:13 11/09/2012, Arthur wrote:
Central bank money machines fail to spur global economy
* by John W. Schoen, NBC News
* Sept. 11, 2012
*
<http://www.readability.com/articles/2dzlncoq?legacy_bookmarklet=1>Read Later
Stelios Varias / Reuters rile
By John W. Schoen, NBC News
Economics 101 says a massive dose of easy money
is supposed to be a reliable cure for a sluggish
economy. For the first time in decades, the
prescription isnt working, to the rising
frustration of central bankers in the U.S. and Europe.
Four years and more than $2 trillion after the
Federal Reserve opened the money spigots
following the financial collapse of 2008, the
U.S. economy remains
<http://economywatch.nbcnews.com/_news/2012/08/01/13054652-economy-may-be-permanently-stuck-in-slow-growth-mode>stuck
in the mud.
Fed Chairman Ben Bernanke, in a widely-watched
<http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm>speech
last month in Jackson Hole, Wyo., defended the
central banks past decisions to churn out
record-breaking volumes of cash -- a process
known as quantitative easing -- saying the
policy had prevented a much more painful
recession. Bernanke also left little doubt that
more money may be coming, as early as this weeks regular Fed policy meeting.
"It is important to achieve further progress,
particularly in the labor market," Bernanke
said. "The Federal Reserve will provide
additional policy accommodation as needed."
Maintaining steady job growth is half of the
Feds so-called dual mandate, the other being
inflation control. Based on
<http://economywatch.nbcnews.com/_news/2012/09/07/13728411-weak-jobs-growth-beyond-governments-control>Friday's
monthly jobs report, showing fewer than 100,000
new hires in August, the Fed has a lot more work to do.
All of which has Wall Street convinced its a
pretty sure bet that the Fed is about to fire up
its money machine once more, forcing cash into
the system by buying hundreds of trillions of dollars worth of bonds.
That employment report kind of nailed it, said
Michelle Girard, RBS senior economist. The Fed
laid out the criteria: we need to see a
sustained and substantial improvement. And that
labor report didnt show it. So the Fed is going
to have to make good on their intentions.
But roads paved with good intentions dont
always lead to good places. Though investors
have bid up stocks on the theory that another
massive wave of cash has to go somewhere,
theres widening doubt that another money flood
will boost growth or create more jobs.
What central banks everywhere are doing is
trying to make sure people are not focused on
the world breaking apart, said Dinakar Singh,
CEO of TPG-Axon Capital. Ultimately I don't
think lower rates make that much difference
anymore. There aren't that many people left that
haven't borrowed money -- companies or people --
but would if rates were lower.
On top of another massive money drop, the Fed
may extend its stated promise to keep interest
rates ultra-low further into the future. Some
market watchers, and a few Fed policy makers,
have expressed concerns those moves could do more harm than good.
Even as low rates have failed to spur growth,
theyre penalizing savers. Insurance and pension
funds have been hit hard by record low returns
needed to fund long-term obligations. And, at
some point, the Fed will have to start selling
its massive holdings in bonds, forcing rates
higher and producing a drag on growth.
Discussions about that "exit strategy," frequent
following the Fed's first round of bond-buying,
have all but disappeared from recent Fed deliberations.
Europes central bank, meanwhile, is also
embarking on its second round of bond buying to
try to head off a deepening recession. But the
ECB's easy money efforts appear to have had even
less impact on the eurozone crisis than its American counterpart.
Central bankers there face a different, and
thornier, set of problems. So far, theyve been
badly hampered by restrictions on their mandate
preventing them from intervening to help bail
out specific countries in trouble.
Theyve also been hamstrung by politics, as
wealthier northern nations led by Germany have
opposed the kind of big-money stimulus pioneered by the Fed.
Further action could be hampered by a German
high court ruling expected this week on the
constitutionality of a key bailout fund. No
matter which way the court rules, central
bankers in Germanys Bundesbank -- along with
millions of that countrys voters -- will likely
oppose further ECB proposals to flood the
continent with money, much of it coming from Germany.
The Bundesbank is now becoming the voice
increasingly of conservative Germany, said Jim
O'Neill, chairman of Goldman Sachs Asset
Management. Its the early stages of heading
toward what ultimately will be some referendum
in Germany on a closer euro in which Germany, as
part of its DNA has to support the others.
ECB intervention to drive down interest rates
could worsen the crisis by protecting
free-spending governments from the financial
market punishment needed to enforce tighter budget controls.
Its massive support may well discourage
profligate governments from meeting their fiscal
objectives, said David Rosenberg, chief
economist at Gluskin Shiff. Italy is already backsliding on this front.
Central bankers in China, trying to revive a
slumping economy by pumping more money into the
system, face yet another set of problems this
time around. Following a series of monthly data
showing Chinas once-hot growth winding down,
Beijing last week announced a series of new
infrastructure projects to try to reverse the downturn.
But the measures are much more limited than the
massive stimulus undertaken following the 2008
collapse. That spending spree left China with
more roads, bridges, airports and rail lines
than it needs. Now, as growth has slowed again,
inventories of raw materials and finished goods are piling up.
Additional government lending and spending risks
igniting another round of the kind of consumer
inflation that swept through China in 2010,
forcing up food prices and inflating a rapidly expanding real estate bubble.
Chinese consumer price inflation appears to be
moving higher again, bumping up to annual rate
of 2.0 percent last month from 1.8 percent in
July, and is likely to rise above 3 percent
early next year, according to Mark Williams,
chief Asia economist at Capital Insight.
This wont prevent further stimulus if the
economy remains very weak, but it does make
large policy moves less likely, he said.
Faced with an ongoing global slowdown, though,
central bankers around the world are loathe to
do nothing. Despite the limited impact of
dumping more money into the economy, even
easy-money skeptics at the Fed will likely go
along with another round, according to Neal Soss CSFB chief economist.
Even those who doubt the efficacy of monetary
policy under current circumstances may well feel
obliged not to disappoint financial markets, he said. First, do no harm.
Jim McCaughan, Principal Global Investors CEO,
explains why further Fed easing is not the best policy decision.
More money and business news:
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Keith Hudson, Saltford, England http://allisstatus.wordpress.com
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