Things That Make You Go Hmmm...

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In March 2001, the Bank of Japan embarked upon a program that was called ‘ryōteki kin’yū kanwa’ or, to put it another way, ‘量的金融緩和’. To the vast majority of us it translated into something we are now intimately familiar with: Quantitative Easing.

Wikipedia describes QE thus:

(Wikipedia): Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to keep market interest rates at a specified target value. A central bank implements quantitative easing by purchasing financial assets from banks and other private sector businesses with new electronically created money. This action increases the excess reserves of the banks, and also raises the prices of the financial assets bought, which lowers their yield.

All sounds rather clever, doesn’t it? It’s not.

QE has been around in one form or another for a long, long time—a fact I was reminded of recently when I reread the wonderful ‘Lords of Finance’, Liaquat Ahamed’s tour-de-force, Pulitzer Prize-winning book about the collapse of the world economy in the late-1920s (if you haven’t read it yet you truly should). I was only 75 pages in when a passage I’d read before—but at a different time—leapt from the pages and punched me square in the face:

"...among the first casualties of war is not only truth but also sound finance. None of the big wars of the previous century — for example, the Napoleonic Wars or the American Civil War — had been held back by a mere lack of gold. These had been fights to the death in which the belligerents had been willing to resort to everything and anything — taxes, borrowing, the printing of ever larger quantities of money — to raise the cash to pay for the war.

By the end of 1915, eighteen million men were mobilized across Europe. On the Western Front, two gigantic armies — three million men from the Allied nations and two and a half million Germans — sat stalemated, bogged down in trenches along a five hundred-mile front stretching from the Channel through Belgium and France to the Swiss border. Like a giant sleeping reptile stretched across the face of Western Europe, the front remained immobile. By a perverse sort of logic, as hundreds of thousands of men were led to the slaughter, their terrible sacrifice was called upon to justify pressing on, and the carnage generated its own momentum.

Still, the complacency of those first few months took a long time to evaporate. Even into 1916 the dogma that this would be a short war lingered as general after general predicted victory in another six months. By then the five major powers — Britain, France, Russia, Germany, Austria-Hungary — were spending a massive $3billion each month, nearly 50 percent of their collective GDP. No other war in history had absorbed so much of the wealth of so many nations at one time.

Countries varied in how they raised the funds. Nevertheless, there were certain common themes. To pay for such a gigantic effort by taxation alone would have entitled tax rates at confiscatory levels and was therefore impossible. Daunted by the task, none of the governments even tried, and taxes accounted for but a tiny fraction of the new money raised. Instead, the belligerents resorted principally to borrowing. Once they had exhausted every potential source of loans, they relied on a technique almost as old as war itself: inflation. Unlike medieval kings, however, who accomplished this either by shaving pieces of gold and silver off the outer edge of their coins—a practice known as clipping—or of issuing coinage made of cheaper alloys—currency debasement—governments in the Great War turned to their central banks, often relying on complex accounting ruses to disguise the process. Central banks in turn, abandoning their long-standing principle of only issuing currency backed by gold, simply printed the money.”

Things That Make You Go Hmmm...

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