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Printing more money to save a failed system

Publication Date : 21-09-2012

 

Monetarists - not kings or queens, or presidents or prime ministers - rule the world, for the worse rather than for the better.

It is not known who has given Mario Draghi, the president of the European Central Bank, a license to undertake "outright monetary transactions", the European version of perpetual money printing.

Draghi will be committed to an "unlimited" bond buying programme to save the euro and prop up the sovereign debts. This unlimited bond buying programme will be accompanied by clear steps to create the "Federation of Nation States", or the "United States of Europe".

Draghi is a pure monetarist, one who believes that money printing can save a drowning economy.

Across the Atlantic, the US Federal Reserve has also announced a third round of money printing, known officially as quantitative easing (QE3). Ben Bernanke, the Fed chairman, says the Fed will be targeting the weak labour market by purchasing mortgage-backed securities to the tune of US$40 billion a month to stimulate the economy. Another $45 billion will be spent per month to purchase long-term US Treasuries, to hold down the long-term interest rates, which are already at an abnormally low level.

The US Fed has a strange dual mandate - managing price stability and ensuring full employment. It is a bizarre theory to hold that monetary policy, or money printing in plain terms, can bring about full employment. However, the Fed is now ignoring price stability, in spite of rising food and fuel prices, and is focusing on adding fresh liquidity and holding the rates down further to stimulate the labour market.

Bernanke also belongs to the monetarist camp, which equates money printing with economic growth and employment. Most people now call QE3 "QE infinity", since the Fed plans to intervene in the financial system indefinitely until the labour market improves. Since the previous two rounds of QE, which can only buy time, have failed to improve economic conditions, how can QE infinity turn the economy around?

Dr Paul Krugman, a Nobel prize winner in economics, has infamously called for massive stimulus - both fiscal and monetary - to reflate the Western economies, even though they are saddled with a mountain of debt that will never be paid off.

In Asia, the Bank of Japan has long been manufacturing money out of thin air. It has just announced an eighth round of money printing to prop up the ailing Japanese economy. The Bank of Japan is to purchase 10 trillion yen of bonds to add further liquidity into the financial system. Now it has 80 trillion yen of bonds in its portfolio, equivalent to 20 per cent of Japan's gross domestic product.

Bank of Japan Governor Masaaki Shirakawa said on Wednesday - against this wish - that Japan is now maintaining the easiest monetary conditions in the developed world. "I do not think that you could argue that the Bank of Japan is less bold than the Fed," he said.

The Japanese economic bubble went bust in 1990 and the economy has not recovered since, in spite of heavy-handed government intervention through both fiscal and monetary means. Fiscal intervention, including the cost of maintaining the country's welfare system, now brings the Japanese debt up to $14 trillion or 230 per cent of GDP. Aggressive bond buying by the Bank of Japan has driven interest rates down to the 0 per cent mark - the first central bank in the rich world to do so. The monetarists also rule over Japan.

The problem with the Keynesians and monetarists is that they don't allow the economy to go through the normal, albeit painful, process of restructuring and debt reduction. The bubbles built up before the busts in Japan, Europe and the United States. Instead of undertaking a restructuring, the US Fed, the European Central Bank and the Bank of Japan have chosen a convenient path of money printing.

We all know that money printing sows the seeds of hyperinflation. It will destroy the global economy. It seems that since the European Union, the US and Japan have all gone bankrupt, they want the rest of us to go down the drain with them.

It is time for a new regional financial architecture to be created, to move away from the global dominance of the Fed, the ECB and the Bank of Japan, which exist to prop up the banks' balance sheets rather than helping the real economy to recover.

US$1 = 78.2 yen

 

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