With the Euro and US economies continuing to sputter, whispers of Quantitative Easing (QE) have once again consumed the financial media. It is hardly encouraging that, in their recent pronouncements, the Governor of the New York Federal Reserve, various senior IMF officials among other respectable figures have given further credence to these discomfiting mutterings. Even more worrying is what appears a prevailing indifference to glaring moral and practical problems associated with the instrument.
QE is simply the purchase of outstanding national debt by a country’s Central Bank, an instrument that is becoming a worryingly common feature of the contemporary post-financial crisis global economic landscape. It is hardly a secret that it is a poorly disguised method of printing money, an action that ironically, in the not-too-distant past, could have provoked an avalanche of sanctimonious lectures if those from the developing world had taken such actions. We can be thankful, however, that the South African Reserve Bank is constitutionally precluded from participating in this regrettable procession and so we can consider ourselves safe for now.
The lessons of the recent financial crisis, consisting in the heavy price that families across the world have paid in mass retrenchments, as a result of certain “innovations” in mortgage structuring, are seemingly yet to be fully grasped. The desire for economic and social advancement is a divinely endowed human instinct. When this instinct, however, is unhinged from common sense and the truth, problems are usually not too far away. Though they may be delayed, we can be assured of their certainty. The fall of man and his perennial pursuit of the knowledge of good and evil, a pursuit for knowledge from places either than its true source, has meant that since the fall of man, problems have become the norm rather the exception across the spectrum of history.
It might be of benefit therefore to occasionally return to elementary principles that should otherwise be common sense. This could be no truer than in the case of money, where it seems those who are called to be stewards thereof, for the benefit of society, have taken a veritable flight to irrationality. We must remember that modern fiat money, that has become an accepted medium of exchange and store of value, carries negligible inherent value apart from the worth imputed to it by those who use it to exchange goods and services. In other words a hundred Rand note has no greater value than what you and I have ascribed to it.
We communicate this value through the quality or quantity of goods or services we exchange it for. The real value resides not with the money but with the underlying goods and services underpinning it. This is in contrast to a bygone era when units of money had inherent value. Such as when coins were alloys of actual silver, gold and other precious metals. The entire supply of Rands in South Africa can therefore only be a representation of the goods and services it produces, in condensed form.
The modern state, among its many tricks, has conferred upon itself the sole legal right of creating fiat money. That is why using other currencies such as the US dollar is forbidden in South Africa. Of course, there are practical reasons for this, such as the need to effectively control and manage a country's financial system. Though it may be so, we should not forget that it is a sacred trust. The enormity of this trust is often underestimated. It consists in the fact that the state has the legal right to decimate, if it so wishes, years of our earthly labours, represented by the wealth stored in its currency, if it chooses to employ injudicious monetary practices such as QE. Thankfully, while we may have much room for disgruntlement with other organs of state, as far as the so-called “financial cluster”, the same is hardly applicable. This discussion is mainly relevant to our US, British and European counterparts and we would be wise to lead in this regard rather than to follow, as has been the historical pattern.
The financial crisis has upended our understanding of the world and who knows what else is to follow? We could even be in the cusp of a generational shift in the entire structure of the global political economy. Nevertheless, I will leave that discussion for another time. For now, what we see are anaemic European and American economies, the erstwhile engine rooms of global growth. China appears to have effectively decoupled from its over dependence on Western demand. It continues to face, however, the challenge of facilitating an internal cultural change from extreme thrift towards greater consumption orientation, which is no mean task considering the famous frugality of its people. Along with its ascent, it is pulling economies of the resource rich world, many of which are located in the developing world, to similarly unprecedented economic heights.
Commensurately, the developed world faces economic challenges of sphinx proportions. The long rumoured “double-dip” recession has finally arrived in many of these countries and seems to have found a semi-permanent home. Rising or stubborn unemployment, along with the inevitable social consternation continues to confound the great minds of the West. The consequent low demand for goods and services from its cash strapped citizens has led to an epoch of unprecedented low inflation. Eager to assuage the increasingly restless masses, not to mention the unquenchable urge to hold on to office, in desperation, anything that appears vaguely likely to ameliorate this dilemma is heartily embraced by hapless politicians. The rising prominence of QE occurs amid such conditions. Its proponents continue to contend that it is a harmless instrument in the quiver of Central Bankers (and of course, who are we to argue with lofty Central Bankers?). After all, in such a deflationary environment, what danger can it amount to?
While this consistently pronounced line of reasoning has a spurious ring of truth to it, it misses a fundamental point: the morality (or the lack thereof) of QE. To talk of the purchase of government debt by Central Banks is a misnomer, particularly when the money is created from nothing. There is no cost to the purchaser in this case, beyond that of paper and the printing press. This renders the word “purchase” deceptive because “purchase” normally implies a cost to the purchaser, which in this case is negligible. Power is therefore assumed by concerned Central Banks of creating value out of nothing. This, of course, cannot be possible because value cannot be instantaneously manufactured out of nothing, unless it is misappropriated from elsewhere. In this case, the value is the compressed ingenuity, effort and time stored in the underlying assets represented by the currency. The real losers here are those have been prudent enough to save their hard-earned income. This places in context German antipathy to talks of QE by the EU, with good reason!
A relevant question that might be asked is why we are yet to see rampant inflation associated with excessive money supply, as a result of QE. The answer lies in the weak demand conditions on the ground, due to consumer over indebtedness, that have led to commensurately poor growth prospects for main street businesses. The banks have therefore been unwilling to lend in such conditions, choosing to rather hoard their stacks of dollars, pounds and Euros. So it may be premature concluding that the current environment of benign inflation will persist indefinitely.
There is much that is being said about the possible effects of QE, such as whether or not it is the panacea to well documented Western economic travails, among other fallacies. In this regard history offers some noteworthy lessons, not least the Japanese experience that we have not explored. Nevertheless, while this is an important discussion that warrants continued assessment, not enough is being said about the morality of this instrument. I find this particularly troublesome, considering how fundamental this issue is. In any other situation we would instinctively frown at anyone who takes what is not his or hers, without permission and without paying for it. I’m not sure why it should be any different with QE.
