Money for Nothing and Your Birds for Free
About 10 years ago there was a Great Financial Crisis.
Eminent experts weren’t happy at how central bankers, such as the US Federal Reserve, solved it by creating money out of thin air.
They called it quantitative easing (QE). Most people assumed it had something to do with a big ship called the Queen Elizabeth, an easy mistake to make as experts accused central bankers of being all at sea.
In fact, the Chairman of the US Federal Reserve at the time, Ben Bernanke, was called out by a group of these expert economists, academics, and “leaders in business” for embarking on such “a voyage,” all of whom confidently predicting that it would lead to rampant inflation and higher interest rates; which together would lead to increased unemployment.
But time tells all truths, and 10 years later those eminent experts, economists, and business leaders were revealed to be completely wrong. And not even one has ever admitted their error, of course, but that isn’t unusual.
It’s called Collective Blindness or Cognitive Dissonance – big words about simple biases.
Ok, let’s assume you are a bird watcher, but you’re out of work just now and have no savings.
You do, however, own a motorbike and have a helpful bank manager (the latter being clearly fictitious), and you’ve heard there’s a really unusual bird - a Red Spotted Kite - that’s been seen in a highland village and you want to photograph it.
So, you strike a deal with said friendly bank manager (rarer than Kites, some say) to lend you £100 against your motorbike to pay for an overnight stay in the highlands, should the rare bird still be in the vicinity of the village.
But you also agree that if the bird makes no appearance, you will repay the loan that day without any interest charged.
A signature and a handshake later you’re off to a small hotel in the highlands with £100 in cash, the owner of which says you can have a room for the night for that £100, but agrees that if the bird fails to appear you can have all the money back.
Now, this agreement sets off a chain reaction of sorts.
You see, the hotel owner - convinced the bird is still around - takes the opportunity to use your cash money to pay off an outstanding bill of £100 with the butcher. The butcher then nips round to the local garage to pay the proprietor £100 for repairs on his car. The garage owner, in turn, finds Betty (the local wedding planning) to pay the £100 balance for the cake for his upcoming wedding. And Betty pays the hotelier the £100 deposit for the wedding reception room that she has rented on behalf of the garage owner.
When you come back, having found no sign of the elusive Red Spotted Kite, you ask for and receive your £100 back from the hotel owner (thank you Betty) as previously agreed, and later that day you return the loan to the bank manager with no interest charged.
So, with that circle of debt in the village now paid off with notional money, how come QE was so bad for our economy?
Why not ask one of those experts in business, economists, and hot air to explain?
Now that would be a rarity.
If you found this note interesting and you want to chat about it, do get in touch.