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Why not print money?

I AM a fan of UK financial magazine MoneyWeek's Nick O'Connor.

He raises all kinds of fascinating questions and he involves his readers, sometimes, he says, getting as many as 500 email comments on a single essay.

Sometimes I agree with him on the things that he publishes, and which are often written by others; sometimes not. Fair enough - you cannot publish a torrent of new essays like he does and get everything right. And at times maybe I am the one that gets it wrong. But Nick gets feedback from his readers and he can learn a lot from that. Feedback is great!

On October 8 he published an essay by Bill Bonner in which he cited a graph from Andy Haldane at the Bank of England.

It supposedly shows that today's interest rates in the developed economies have set an all-time record low. And he talked about an ancient belief that when men try to take over the duties of the gods, they get punished by them. The gods get jealous. Remember, interest rates are a price - not something to mess around with. Will the central banks get punished?

Here is the graph:

5 000 years of interest rates

Bill Bonner concludes: Woe to the price-fixer who fixes the price of money too low for too long, and then attempts to raise it.

That is the jamb in which Janet Yellen finds herself. She is damned if she [raises rates] – for she will wipe out trillions worth of asset prices; and she is damned if she doesn’t, for she will only make the situation worse by driving more money into more unsustainable assets.

This is fine by us; she deserves to be damned. She has willingly and wittingly attempted to do what only the Gods can do – determine the correct price of lent money. She should have known better.

The correct role of central banks is to determine the level of demand or the rate of increase in demand - demand inflation. The tail of the dog, the price of credit, the rate of interest, will follow and adjust. It is a basic principle of all economic text books: prices adjust.

Unprinting money

There was another essay sent to me by Nick on the same day - one of about four or five, all fascinating.

This one was saying that central banks cannot un-print money by selling off the bonds that they have bought with the money that they have printed.

Wrong. If the central banks hang on to it, the effect will be to permanently remove that money as if it had been destroyed; and if the central banks remove it electronically from their balance sheets, it will be destroyed in the same way it was created.
 
But he is correct in saying that bond values will be undermined if they are sold off too rapidly. He should also have said that bond values will crash if interest rates rise. Fixed interest bonds are a huge hazard. They should be replaced with wealth bonds.

Wealth bonds are my invention. They index-link the capital owed to National Average Earnings, NAE, so that the value rises as fast as the long-term level of demand from spending - like other major assets do.

READ: Wealth bonds: a solution?

Why we need printed money

As credit gets repaid, all that money disappears. More money, more credit, has to be created for otherwise Peter cannot pay Paul without waiting for the money to get paid. Someone has to borrow. We get a double slowdown

a)    Debts being repaid instead of buying things, and
b)    Less money around.

a)    Is a part of a natural credit cycle – sometimes people borrow more, sometimes less.

Central banks have not just lowered interest rates, so as to maintain the stock of money in circulation. They have lowered interest rates further than that to avoid the credit cycle. Now some people must borrow more money because asset prices like houses are rising in value.

No gentle and temporary slowdown will occur until people have absolutely had enough of borrowing and revolt. If some money had been printed to replace the lost money, then interest rates would not have had to be reduced. Interest would fall a little or undulate a bit. They would balance supply with demand. The gods would have been happy.

* Edward Ingram is a leading thinker on the world stage of  macro-economic design and has written a series of essays for Fin24.

Do you have a comment? Write to Edward Ingram and you could be published.

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