The Lemon Fool

There is a lot of money printing going on to counteract the virus effect (well, that's the excuse).

Do you think that things will go along nicely in the next, say, five years or so, or do you think that money printing will possibly accelerate to the demise of the current fiat money system.

This question seems to be the elephant in the room that not a lot of folks are addressing.

Your thoughts will be greatly appreciated.

Many thanks in advance for your replies.

scotview wrote:There is a lot of money printing going on to counteract the virus effect (well, that's the excuse).

Do you think that things will go along nicely in the next, say, five years or so, or do you think that money printing will possibly accelerate to the demise of the current fiat money system.

This question seems to be the elephant in the room that not a lot of folks are addressing.

Your thoughts will be greatly appreciated.

Many thanks in advance for your replies.

5 years seems too short a period to make a prediction of something as dramatic as the demise of the current fiat money system, so no.

scotview wrote:There is a lot of money printing going on.

There always is. Banks do it every time they issue a loan and its being going on like that for centuries.

I am afraid the ordinary citizen will not like to be told that the banks or the Bank of England can create or destroy money. We are in the habit of thinking of money as wealth, as indeed it is in the hands of the individual who owns it, wealth in the most liquid form, and we do not like to hear that some private institution can create it at pleasure. It conjures up a picture of an autocratic and irresponsible body which by some black art of its own contriving can increase or diminish wealth, and presumably make a great deal of profit in the process

Post-War Banking Policy, Reginald McKenna, 1928.

The Right Honourable Reginald McKenna P.C. was a former Chancellor of the Exchequer (1915-16) and ended up as Chairman of the Midland Bank in the 1920s

NeilW wrote:

scotview wrote:There is a lot of money printing going on.

There always is. Banks do it every time they issue a loan and its being going on like that for centuries.

I am afraid the ordinary citizen will not like to be told that the banks or the Bank of England can create or destroy money. We are in the habit of thinking of money as wealth, as indeed it is in the hands of the individual who owns it, wealth in the most liquid form, and we do not like to hear that some private institution can create it at pleasure. It conjures up a picture of an autocratic and irresponsible body which by some black art of its own contriving can increase or diminish wealth, and presumably make a great deal of profit in the process

Post-War Banking Policy, Reginald McKenna, 1928.

The Right Honourable Reginald McKenna P.C. was a former Chancellor of the Exchequer (1915-16) and ended up as Chairman of the Midland Bank in the 1920s

And he was making that statement three years after the UK had returned to the gold standard in 1925 (which it then abandoned again in 1931) rather than when Sterling was a fiat currency.

https://newworldeconomics.com/britains-return-to-gold-in-1925/


https://en.wikipedia.org/wiki/Gold_standard#Abandonment_of_the_gold_standard
Many other countries followed Britain in returning to the gold standard, leading to a period of relative stability but also deflation. This state of affairs lasted until the Great Depression (1929–1939) forced countries off the gold standard. On September 19, 1931, speculative attacks on the pound led the Bank of England to abandon the gold standard, ostensibly "temporarily". However, the ostensibly temporary departure from the gold standard had unexpectedly positive effects on the economy, leading to greater acceptance of departing from the gold standard.

ursaminortaur wrote:

NeilW wrote:

scotview wrote:There is a lot of money printing going on.

There always is. Banks do it every time they issue a loan and its being going on like that for centuries.

I am afraid the ordinary citizen will not like to be told that the banks or the Bank of England can create or destroy money. We are in the habit of thinking of money as wealth, as indeed it is in the hands of the individual who owns it, wealth in the most liquid form, and we do not like to hear that some private institution can create it at pleasure. It conjures up a picture of an autocratic and irresponsible body which by some black art of its own contriving can increase or diminish wealth, and presumably make a great deal of profit in the process

Post-War Banking Policy, Reginald McKenna, 1928.

The Right Honourable Reginald McKenna P.C. was a former Chancellor of the Exchequer (1915-16) and ended up as Chairman of the Midland Bank in the 1920s

And he was making that statement three years after the UK had returned to the gold standard in 1925 (which it then abandoned again in 1931) rather than when Sterling was a fiat currency.

https://newworldeconomics.com/britains-return-to-gold-in-1925/


https://en.wikipedia.org/wiki/Gold_standard#Abandonment_of_the_gold_standard
Many other countries followed Britain in returning to the gold standard, leading to a period of relative stability but also deflation. This state of affairs lasted until the Great Depression (1929–1939) forced countries off the gold standard. On September 19, 1931, speculative attacks on the pound led the Bank of England to abandon the gold standard, ostensibly "temporarily". However, the ostensibly temporary departure from the gold standard had unexpectedly positive effects on the economy, leading to greater acceptance of departing from the gold standard.

But in effect jumped back onto it with fixed exchange rates pegged via US Dollars to Gold under the Bretton Woods Agreement, running from 1944 to effectively 1971- I hated the International Economics course at Uni, I probably slept more than I listened.

ursaminortaur wrote:Three years after the UK had returned to the gold standard in 1925 (which it then abandoned again in 1931) rather than when Sterling was a fiat currency.

The operational process remains the same in all cases.

The myth of gold is all pervasive amongst some people. Bankers know better. Loans always create deposits and always have done.

There is a reason why gold standards fail, fixed exchange rates fail and Bretton Woods failed. The Euro will either fail or set up a proper transfer union.

There is nobody who get to say 'no' and make it stick.

dealtn wrote:
5 years seems too short a period to make a prediction of something as dramatic as the demise of the current fiat money system, so no.

Are you sure about that;

https://en.wikipedia.org/wiki/Hyperinfl ... lation.svg

BoE

Bubblesofearth wrote:

dealtn wrote:
5 years seems too short a period to make a prediction of something as dramatic as the demise of the current fiat money system, so no.

Are you sure about that;

https://en.wikipedia.org/wiki/Hyperinfl ... lation.svg

BoE

Yes.

I think the start points are completely different.

dealtn wrote:Yes.

I think the start points are completely different.

Sure but the point I was addressing was the rate at which currency collapse can happen. What is needed, in most cases, is some form of extreme economic shock. That happened in Germany after the war. Another example would be what happened in Zimbabwe more recently.

Economic shutdown as a consequence of a pandemic is unprecedented in our lifetimes. We've already seen money printing on a huge scale and we are not out of the woods by any means. What if the virus remains with us for another year or two years or the situation worsens? No-one really knows what is going to happen next so I can't see how extreme currency devaluation can be ruled out over a period of 5 years.

I'm not saying it's likely but it's certainly possible.

BoE

A more recent example is Lebanon, it took around 6 months in 2019 for currency inflation to reach 100%, followed about 6 months later by price inflation.
https://www.thenational.ae/opinion/comm ... -1.1056755

What characterises countries with high inflation and hyperinflation?
They have a sharp acceleration in growth of the money supply in order to finance unsustainable overspending;
high levels of government debt;
political instability;
restrictions on payments and other transactions and a rapid breakdown in socio-economic conditions and the rule of law.
Usually, these traits are associated with endemic corruption.

In many ways I think it is about confidence. If the government says they will print money to pay for expenses people will lose confidence in the currency. In the UK this would probably hit first through the exchange rate. The idea of QE is it that is of a capital nature rather than a revenue nature. In theory, therefore, it is reversible.

Bubblesofearth wrote:

dealtn wrote:Yes.

I think the start points are completely different.

Sure but the point I was addressing was the rate at which currency collapse can happen. What is needed, in most cases, is some form of extreme economic shock. That happened in Germany after the war. Another example would be what happened in Zimbabwe more recently.

Economic shutdown as a consequence of a pandemic is unprecedented in our lifetimes. We've already seen money printing on a huge scale and we are not out of the woods by any means. What if the virus remains with us for another year or two years or the situation worsens? No-one really knows what is going to happen next so I can't see how extreme currency devaluation can be ruled out over a period of 5 years.

I'm not saying it's likely but it's certainly possible.

BoE

Devalued possibly against currencies whose governments are not doing the same as us, if all major currencies end up using QE or its equivalent then what??

Charlottesquare wrote:Devalued possibly against currencies whose governments are not doing the same as us, if all major currencies end up using QE or its equivalent then what??

Devaluation against other asset classes. Think 70's but worse and on a Global scale.

BoE

Bubblesofearth wrote:

Charlottesquare wrote:Devalued possibly against currencies whose governments are not doing the same as us, if all major currencies end up using QE or its equivalent then what??

Devaluation against other asset classes. Think 70's but worse and on a Global scale.

BoE

So, inflation, fewer Mars bars or pints per pound ( Mars was my initial 1970s measure but by the late 70s I started measuring it in pints (albeit both are flawed, Mars change the bar size and with beer government distorts the inflation impact by changing the duty))

Bubblesofearth wrote:Sure but the point I was addressing was the rate at which currency collapse can happen. What is needed, in most cases, is some form of extreme economic shock.

It needs rather more than that. It needs a complete misunderstanding of what is going on in the real economy and to respond to the impact in the wrong way. For example failing to raise taxes when you have crippled the production system by giving land to people that can't farm - or raising taxes when the economy is on its back after a virus pandemic...

Once you realise that reserve creation is just the accounting counterparty of increased private sector saving/reduced private sector debt (ie their red ink is our black ink) then you realise that nothing untoward is actually happening. People are just saving in the currency of issue, and that will reverse when they start spending that currency again.

As Japan has demonstrated for over 30 years and the rest of the developed world for 20.

All of this is very clear once you draw up a simple national balance sheet and observe how the flow transactions change the numbers.

Lots of people have lost a lot of money betting against Japan. Nothing happened. Similarly those betting for inflation have been sorely disappointed. Yet few of them have asked the obvious question: "Is what I believe correct?".

NeilW wrote:
Once you realise that reserve creation is just the accounting counterparty of increased private sector saving/reduced private sector debt (ie their red ink is our black ink) then you realise that nothing untoward is actually happening. People are just saving in the currency of issue, and that will reverse when they start spending that currency again.

As Japan has demonstrated for over 30 years and the rest of the developed world for 20.

All of this is very clear once you draw up a simple national balance sheet and observe how the flow transactions change the numbers.

Lots of people have lost a lot of money betting against Japan. Nothing happened. Similarly those betting for inflation have been sorely disappointed. Yet few of them have asked the obvious question: "Is what I believe correct?".

This simple model does not explain why stuff costs over 20x as much as when I was born. A period during which it has become ever easier (efficiency, Globalisation etc) to produce stuff, i.e. it should have fallen in price!

The distribution and velocity of money need to be considered as well as flow. Debt is also a huge factor. I do not believe governments will simply pay down national debt as tax returns increase. I believe there will be huge pressure for continued central and local spending and this is what will happen. There will be no political will for a return to austerity.

A couple of years down the line, as velocity of money returns to normal, there will be inflation IMO. If anything there will be an increase in spending compared to pre-covid as huge pent up demand is released. When people are denied something they tend to overcompensate when released. For a time the new normal will become an on-speed version of the old normal. I realise this is not what most people are predicting but we'll see.

BoE

Bubblesofearth wrote:This simple model does not explain why stuff costs over 20x as much as when I was born. A period during which it has become ever easier (efficiency, Globalisation etc) to produce stuff, i.e. it should have fallen in price!

What about your income? Has that stayed the same as when you were born?

It's the relative amounts that matter.

The distribution and velocity of money need to be considered as well as flow. Debt is also a huge factor. I do not believe governments will simply pay down national debt as tax returns increase. I believe there will be huge pressure for continued central and local spending and this is what will happen. There will be no political will for a return to austerity.

Of course there will be no return to austerity. Because it doesn't work. Governments will spend what the people want them to spend on items they want them to spend on. And they will be able to do that for as long as there are items available for them to buy at a price worth paying. When they run out, the spending stops - as we saw with PPE.

Spending *causes* taxation, not the other way around.

There is no "debt". They are all Gilt savings assets owned by pension funds here and abroad and banks as offsetting assets for deposits. It's nothing to worry about. Why on earth should people saving be an issue?

A couple of years down the line, as velocity of money returns to normal, there will be inflation IMO.

Japan says there won't be. The auto-stabilisation of the taxation system says there won't be. The idea that there is going to be a spending tsunami misses the point that people have been largely paying back their debts. I doubt they will be hitting the credit cards until the job situation markedly improves.

Austerity did not involve paying off debt, it involved reducing the deficit with a view towards being in a position to pay off debt. This was done by keeping public spending about constant in real terms.

NeilW wrote:

Of course there will be no return to austerity. Because it doesn't work. Governments will spend what the people want them to spend on items they want them to spend on. And they will be able to do that for as long as there are items available for them to buy at a price worth paying. When they run out, the spending stops - as we saw with PPE.

No it won't because most of the spending will be on construction projects or more money for the NHS, social support etc.

There is no "debt". They are all Gilt savings assets owned by pension funds here and abroad and banks as offsetting assets for deposits. It's nothing to worry about. Why on earth should people saving be an issue?

Because there normally comes a point when the debtor is no longer able to service the debt. That won't happen with HMG as they can always go to the BoE for more. Which is what they will do until confidence vanishes.

Japan says there won't be. The auto-stabilisation of the taxation system says there won't be. The idea that there is going to be a spending tsunami misses the point that people have been largely paying back their debts. I doubt they will be hitting the credit cards until the job situation markedly improves.

Japan has never been a good guide to the West. Totally different culture and attitude to money.

I've not seen any stats showing significant payback of debt by individuals. No need to hit credit cards if HMG is handing out cash around as needed.

BoE

Bubblesofearth wrote:I've not seen any stats showing significant payback of debt by individuals. No need to hit credit cards if HMG is handing out cash around as needed.

BoE

One of the very few occasions when I agree with NeilW. I read somewhere that during lockdown individuals were paying down debt and/or increasing savings. Will not last though.

Dod