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  1. Wealth
June 15, 2009


By Spear's

Well, we all know Gordon can’t make anything work within the normal rules and always needs more money

While Tim Geithner and Gordon Brown play with their broken banking sets and begin to realise that the manufacturers have left some of the key bits out, like liquidity, confidence, inter-bank loans and steady deposits or savings, Helicopter Ben and his co-pilot Mervyn are having all the fun as they play their new game of QE to their heart’s content.

Readers of this column have already learnt that Quantitative Easing does not refer to Barbra Streisand straining on her bidet, but refers to fistfuls of dollars being thrown around like confetti, with the idea of getting us all going again. Unfortunately, this resort to the printing press hasn’t helped Tim and Gordon at all in their attempts to rebuild bank lending.

So what has it done? Well, we all know Gordon can’t make anything work within the normal rules and always needs more money, so he has stepped in and grabbed most of Mervyn’s QE chips for himself, as he makes Mervyn buy up gilts, or Government debt, as opposed to buying bank assets and providing liquidity where it is needed by the real economy.

Ben has been buying up prime bank assets but still the US banks have too many toxic assets to resume lending, while the Chinese do not look like they are going to go on buying US T-Bills until the Year of the Dog comes round for the umpteenth time. Yes, the public sector deficits really are now beginning to crowd out the private sector.

Surely, if all this newly-printed fiat money isn’t showing up in bank lending, it must be showing up somewhere? Of course it is, on an M4 gauge near you. It should be no surprise that adjusted broad money in the UK on a 3-month annualised growth rate is rising strongly, up from 2% at the depth of the downturn last November to 8% at the end of May 2009.

That’s a 400% increase in the rate of increase in 6 months, and would cause the monetarists of the 1980s Milton Friedman and Sir Alan Walters to turn in their graves. This is the first evidence of the inflation to come, and with the economy still in bed, is the first sign that inflation and higher interest rates will be upon us before the economy has even gotten out of bed.

All of which leads us to ‘Hill’s Law’: ‘the more QE administered to the patient, the smaller the margin of error in timing the reversion to an anti-inflationary stance; and the corollary is, that the more QE the patient receives the weaker the recovery’.

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Will it be a V? No! Will it be a W? No! It’s a VL, with the _ bit of the L going on for a Long Time. There’s something nasty in the air all right, and it smells of Super-Stagflation, which will be upon us in late 2010/2011. Forget swine flu, this is the real plague which will infect us all.

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