Quantitative Easing....

I have a hunch it will be in the exam, directly or indirectly (Unit 4). Bradley has prompted some deeper thinking on QE, so I have been collating key points for you, which we will cover in revision sessions today or next week. This will be in the form of a Q&A session to test your knowledge, but (by pure chance) the following sharp analysis appeared in my inbox, courtesy or emergingmarkets.org; it is so good I will give you a printed copy as well - if nothing else, take the core concept of supply and demand and be ready to use it in the exam - evaluation &/or conclusion:

FINAL WORD: Can cows fly – or have central bankers forgotten their Economics 101?

13/05/2015 |

By Krzysztof Rybinski

People, irrespective of their nationality, education or religion will agree on some issues, but at the same time fight over others. For example we all agree that a cow cannot fly. But people disagree whether executives in large banks should receive multi-million dollar bonuses. Some argue that such bonus schemes align interests of bank clients and other stakeholders with those of senior management, which is essential as banks play systemically important roles in many countries and globally. Others would say that those I will call “banksters” spend their time inventing products that force bank clients to take large risks and suffer large losses.


But this article will not be about cows, nor will it tackle the bonus schemes at financial institutions. It will be about the basic economic principles that we all agree with and that are taught on the Economics 101 course. Banksters have successfully convinced people that these laws have stopped working, that now we have new economic laws.


Let us take a look at the basic law of economics that has been questioned by banksters, and also by central bankers and politicians who support them. When we have many goods and services, and suddenly the volume of one good or service rises significantly relative to others, then the price of this good or service will decline relative to other prices. Central banks in many developed economies have transferred huge amounts of money (dollars, euros, pounds, yen) to accounts that banksters keep at the central bank. Banksters borrow money from the central bank at a zero interest rate, buy government bonds using this credit and resell them to the central bank at a handsome profit. Not only do banksters have access to huge amounts of free credit, they also make guaranteed risk-free profits.


But what happens with these trillions of dollars, euros, pounds and yen that were printed as a result of this process? If the quantity of one good suddenly goes up, the price of this good should go down. So when more money is printed, its value should go down. Decline of the value of money can be seen on the goods and services market or on the financial markets. In the case of goods and services markets, a decline of the value of money means higher inflation. But we do not observe this. On the contrary, inflation is close to zero and in some countries we even have deflation, i.e. falling prices. But it is a result of the banksters’ behaviour. They do not want to share money they got from the central banks with the wider public, so no new credit is extended to businesses or Main Street. Banksters keep these trillions for themselves to speculate on financial markets. So the value of money in relation to other financial assets does go down, as predicted by Economics 101. Prices of equities, government and corporate bonds, real estate and other financial assets go up. Economics 101 works well.


So where is the problem of the flying cow? The value of money goes down relative to the value of other financial assets, as the amount of money relative to other assets gets bigger. But we do not see inflation in the goods and services markets. So banksters say that we can print even more money, and there will be no inflation. Cows can fly, against the basic law of physics.


There are two possibilities. First, central bankers will refresh their Economic 101 course and will stop printing money, gradually raising interest rates to reduce the amount of money flowing round. But we know what will happen to financial markets: the value of financial assets relative to the value of money will go down, and banksters will lose money.


The second possibility is that central banks will continue to print money. But then inflation will rise much faster and on a much bigger scale than can be anticipated today. We all remember what high inflation does to the middle classes, and what is the effect of destruction of the middle class. When it happened in Germany, a few years later Hitler rose to power and Nazi Germany killed 6 million Jews and 14 million of other nationalities. Denying the basics of Economics 101 course can have dramatic consequences.


There is no easy exit from this situation. Either markets will crash first, or we will have high inflation first and markets will crash later. When huge amounts of money are printed, we should be prepared to face the consequences.


It will not happen tomorrow. In the meantime banksters will continue their propaganda and will release new promotional materials showing more flying cows, while economists paid by banksters will develop new theories about flying cows. But smart people will know that basic laws of physics and basic laws of economics cannot be abolished.


Krzysztof Rybinski is rector of New Economic University at Almaty, Kazakhstan, and former deputy governor of the National Bank of Poland