Monetarists - not kings or queens, or presidents or prime ministers -
rule the world, for the worse rather than for the better.
It is not known who has given
Mario Draghi, the president of the European Central Bank, a license to
undertake "outright monetary transactions", the European version of
perpetual money printing.
Draghi will be committed to an
"unlimited" bond buying programme to save the euro and prop up the
sovereign debts. This unlimited bond buying programme will be accompanied by
clear steps to create the "Federation of Nation States", or the
"United States of Europe".
Draghi is a pure monetarist, one
who believes that money printing can save a drowning economy.
Across the Atlantic, the US
Federal Reserve has also announced a third round of money printing, known
officially as quantitative easing (QE3). Ben Bernanke, the Fed chairman, says
the Fed will be targeting the weak labour market by purchasing mortgage-backed
securities to the tune of US$40 billion a month to stimulate the economy. Another
$45 billion will be spent per month to purchase long-term US Treasuries, to
hold down the long-term interest rates, which are already at an abnormally low
level.
The US Fed has a strange dual
mandate - managing price stability and ensuring full employment. It is a
bizarre theory to hold that monetary policy, or money printing in plain terms,
can bring about full employment. However, the Fed is now ignoring price stability,
in spite of rising food and fuel prices, and is focusing on adding fresh
liquidity and holding the rates down further to stimulate the labour market.
Bernanke also belongs to the
monetarist camp, which equates money printing with economic growth and
employment. Most people now call QE3 "QE infinity", since the Fed
plans to intervene in the financial system indefinitely until the labour market
improves. Since the previous two rounds of QE, which can only buy time, have
failed to improve economic conditions, how can QE infinity turn the economy
around?
Dr Paul Krugman, a Nobel prize
winner in economics, has infamously called for massive stimulus - both fiscal
and monetary - to reflate the Western economies, even though they are saddled
with a mountain of debt that will never be paid off.
In Asia, the Bank of Japan has
long been manufacturing money out of thin air. It has just announced an eighth
round of money printing to prop up the ailing Japanese economy. The Bank of
Japan is to purchase 10 trillion yen of bonds to add further liquidity into the
financial system. Now it has 80 trillion yen of bonds in its portfolio,
equivalent to 20 per cent of Japan's gross domestic product.
Bank of Japan Governor Masaaki
Shirakawa said on Wednesday - against this wish - that Japan is now maintaining
the easiest monetary conditions in the developed world. "I do not think
that you could argue that the Bank of Japan is less bold than the Fed," he
said.
The Japanese economic bubble went
bust in 1990 and the economy has not recovered since, in spite of heavy-handed
government intervention through both fiscal and monetary means. Fiscal
intervention, including the cost of maintaining the country's welfare system,
now brings the Japanese debt up to $14 trillion or 230 per cent of GDP.
Aggressive bond buying by the Bank of Japan has driven interest rates down to
the 0 per cent mark - the first central bank in the rich world to do so. The
monetarists also rule over Japan.
The problem with the Keynesians
and monetarists is that they don't allow the economy to go through the normal,
albeit painful, process of restructuring and debt reduction. The bubbles built
up before the busts in Japan, Europe and the United States. Instead of
undertaking a restructuring, the US Fed, the European Central Bank and the Bank
of Japan have chosen a convenient path of money printing.
We all know that money printing
sows the seeds of hyperinflation. It will destroy the global economy. It seems
that since the European Union, the US and Japan have all gone bankrupt, they
want the rest of us to go down the drain with them.
It is time for a new regional
financial architecture to be created, to move away from the global dominance of
the Fed, the ECB and the Bank of Japan, which exist to prop up the banks'
balance sheets rather than helping the real economy to recover.
US$1 = 78.2 yen
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