Tuesday, February 09, 2016

Cameron Behind The Curtain

Imagine being prime minister of a near-bankrupt nation. What drastic measures would you take? Suppose all forms of debt – governmental, personal, commercial and financial – were at record levels and could no longer even be serviced, let alone settled. Taxes were already prohibitively high; squeezing the rich would induce massive capital flight to safe-haven dominions; while even the merest hint of substantial public spending cuts would dump you out of office in an eye-blink. What would you do?

If it were a sovereign nation, in control of its own (fiat) currency supply, you might opt to print paper money out of thin air. However, if this had already been tried, and failed, as a desperate attempt to bail out insolvent banks, you might be reluctant to repeat the exercise. Indeed, the main effects of the policy were inflated house prices and an overvalued stock market.

What if, though, a second blast of ‘funny money’ could be injected directly into the economy, as opposed to using it to blow up asset bubbles? This so-called ‘helicopter drop’, of perhaps a year’s average salary, could be credited to the account of every taxpayer. Personal debt could then be reduced significantly, and those with none would be encouraged to splash out on more consumer goods. If only it were that simple. Producing vast quantities of (unearned) paper money would be inflationary, perhaps hyperinflationary, and ultimately ruinous. Thus, your choice would be: printing, leading to hyperinflation Zimbabwe-style; or not printing, allowing a deflationary spiral to fuel mass unemployment. Severe civil unrest might result from either.

So, what else could you do? You might choose to cut interest rates – all the way to zero – in order to make debt-servicing possible. What if, however, they already were close to zero, having been so since the previous financial crisis only seven years ago, when public debt was only half its current level? What then, particularly if this cheap money tactic had facilitated not a reduction of debt but a reckless expansion of it? Well, how about introducing a negative interest rate policy (NIRP), where banks would charge interest on deposits? This might, at first view, sound fanciful; and a rational public would immediately withdraw their funds, stuff their mattresses with cash and create runs on all high street banks.

Given that potential outcome, perhaps panic withdrawals could be outlawed. The outright abolition of cash, leaving only digital bank account credits, would preclude any such crisis. After all, card purchases now account for the majority of current account transactions. Individuals would at least have a choice: leave their money in banks and allow it to be taxed (stolen); or spend it the moment it is credited to their accounts. Additional consequences of cash abolition would be that all monetary transactions could then be recorded by the State, and any financial usage unapproved by the State could result in funds being sequestered. Increased social control would make policy acceptance more likely.

There is another possible strategy which could operate in tandem with the aforesaid NIRP. Economic activity, measurable by gross domestic product (GDP), could be increased simply by population growth. More people means more total spending – and ever more borrowing. Such growth would, though, need to be significant and ongoing. A 0.5% annual population increase would create a mirage of steady economic growth, so long as it could be maintained. For example, a nation with a population of 60 million would require a net rate of immigration of 300,000 per year, every year, to increase the GDP statistic continually.

Such policies might, if good luck prevails, maintain a notion of prosperity in the medium term. This illusion of economic health and normality could fool the majority of a nation’s population, especially if they were sufficiently financially illiterate, enslaved by debt and had no independent medium of exchange.

In the long term, alas, just like the Wizard of Oz, you would eventually be seen for the illusionist that you were (Figure 91.1). By that time, the catastrophe would be someone else’s responsibility; and only then would the enslaved, indebted masses realize that their collective fate had been sealed many years before.

Figure 91.1: Frank Zappa (1940-93)

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Copyright © 2016 Paul Spradbery

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