OUT TO LUNCH
When I was at school in England in the 1960’s we had to choose three subjects to study at A level and some of the really bright kids even chose four. This assumed that you would pass enough O levels at age 15 to qualify for what they used to call the ‘Lower Sixth Form’. If you didn’t manage that you went into what was euphemistically called ‘Remove’ and your parents were in for another year of school fees as you made another valiant attempt at the O level hurdles.
Those of you who remember the Billy Bunter stories (now banned because of ‘fat shaming’) will remember that the porcine schoolboy forever waiting for the pater to send a postal order was known as ‘the fat owl of the Remove’. Yaroo. Suffice to say that the Remove was reserved for the school thickies and would also be banned in today’s Woke world lest it instill a low sense of self worth in young lads with high hopes of becoming politicians in adult life.
Obviously I sailed through my O levels and opted for English, Politics and Economics as my A level subjects. I figured that these would make me a far more likely catch at sixth form dances with the nearby girl’s boarding school than opting for Chemistry, Maths and Biology.
My economics master was a very erudite chap with side whiskers who made witty comments which went way over our heads. We only realized how witty they were several years after we had left the school. His nickname was ‘Mott’ and his style of teaching was very dry indeed. So much so that double economics before cricket nets on a Thursday summer’s afternoon found my mind wandering onto far lewder topics than marginal propensity to save.
So, despite Mott’s brave attempts to drum economic theory into my unreceptive brain I only managed to scrape an E pass at A level. Fortunately an A in English plus an S level pass and a C in Politics was enough to persuade a university to accept me in those days. But I always felt that I had let Mott down.
Until about five years after I had left school and had started work in the City of London. By a million to one chance I was emerging from 78 Cornhill and about to cross the street en route to the Jamaica Wine House (fondly known to regulars as ‘The Jampot’) for my usual lunchtime refreshment of a couple of glasses of hock and a round of smoked salmon sandwiches when Mott walked right in front of me, showing a small group of pupils around the city institutions.
“Hello Sir” I chirped, remembering my public school manners.
“Bullard” he almost stammered, recalling that I wasn’t one of his star pupils, “what are you doing here?”
I told him that I had chosen a career in money markets and that I now worked within the throbbing hub of the economy. The look of disbelief on his face was priceless and if only cell phone cameras had been around in 1974.
One thing that Mott did manage to get through my thick noggin during the two year run up to A levels was the theory of demand and supply. That is, if a product is in short supply and demand exists then the price of the product will rise to meet that demand (think of illicit cigarettes). Conversely, if there is no demand for a product then the price of the product will fall until it meets some demand.
As obvious as this may seem it doesn’t seem to apply to money. The price of money is measured in the interest rate charged to borrow it and, in the normal course of events, if there is a large demand for money then interest rates rise and if there is little demand for money (also known as credit) then interest rates fall. You can add into the price of borrowing the likelihood of the borrower not repaying the loan. So loan sharks (who seem one of the few enterprises actually observing the laws of economics) load the interest payments for those known to be poor repayers of debt. Similarly, a country rated rather poorly by a ratings agency cannot expect to borrow money on the world’s capital markets at the same price as a triple A rated country. Or so we have been led to believe.
All of the above made perfect sense until something called quantitative easing was discovered back in 2008 to paper over the cracks of the junk bond induced banking crisis. In a country like Zimbabwe or South Africa this would be dismissed as irresponsible and be referred to as printing money. However, if it’s done by a large global economy or two it’s perfectly all right apparently. Except that surely the chickens have to come home to roost some day?
Take the example of the UK. This year the economy is predicted to shrink by 10% as a result of COVID and the national debt will pass the dreaded 100% of GDP mark which would normally set alarm bells ringing. And yet the stock exchange is strong, bond prices are firm and the property market shows no sign of strain. Not such good news for savers unfortunately who can’t expect to get any interest on any money saved for their retirement.
Back in 2009 quantitative easing in the UK was originally intended as a £50 billion rescue plan. The taste of cheap money was so sweet that the amount grew to £450 billion over ten years and since COVID it has grown to a whopping £745 billion. The UK government is effectively borrowing money it can never hope to repay. But that’s all right apparently because it’s not traditional borrowing, it’s quantitative easing which is pure smoke and mirrors. The government issues bonds which the central bank then buys thus allowing it to release money into the banking system.
The beauty is that this also keeps interest rates artificially low thereby boosting consumer spending and, more particularly , shoring up the property market (which guarantee so many bank loans). Best of all though it keeps government borrowing costs artificially low because in the normal course of events, the government would have had to pay up for money.
It’s really no different to a fish and chip shop owner selling 60 portions of hake and chips every night but buying them all himself and declaring that he is running a profitable business.
As Liam Halligan wrote in last week’s Spectator magazine,
“QE hasn’t led to inflation, its acolytes say — and it won’t in the future. But it has. Much of the central bank’s ‘funny money’ has so far stayed within the financial system, generating stock and bond market bubbles, as well as bloating property prices. If bank lending now expands across the broader economy, as the government hopes, inflation will follow QE as night follows day.”
“By holding back bond vigilantes for now, QE is facilitating vast government debts that will come back to haunt us. Monetary policy is now so deranged that around a fifth of all global debt has a negative yield, retarding global growth and storing up huge systemic dangers. Amid already massive monetary expansion, the Westminster City consensus is that we need even more, as the Bank of England prepares to yank UK interest rates deep into negative territory.”
Why should this remotely concern us? Quite simply because the ANC are thinking of doing precisely the same thing. They may not always get the terminology right (“quantity easing” according to Ace Magashule last June) and they may deride the ways of the colonialist oppressor but when it comes to new methods to steal money they are there like a bear.
There’s already a few ideas circulating about how to reboost the post COVID economy and most of those involve a rather unsophisticated Robin Hood strategy of emptying the savings and retirement funds of those not deemed worthy of having them and redirecting the money to worthier causes. The most attractive though is the magic money tree approach which seems to be working in the US, the UK and Europe. If it’s good enough for the colonialists the cadres will argue, then it must be even better for us.
Hold your breath while plans are put on the table for a nationalized Reserve Bank and several gallons of printing ink are ordered for the money printing machines.
Last week, the Financial Times ran a story saying that analysts from Bank of America described the pound sterling as an “emerging market currency in all but name” pointing out that failing to reach a post Brexit deal will make it even more vulnerable. So if the UK currency is already waist deep in the hot and smelly stuff where do you think we will be in a year’s time? Buy your snorkels now.