Is Quantitative Easing A Magic Bullet, Or A Lie?

The entire world is heading for an enormous recession of the kind that it hasn’t seen for over a century. By all indications, it’s going to be a recession so massive that it will make 2008 look like a birthday party.

There hasn’t been much reporting on the issue right now because the world’s media and politicians are so focused on other matters (primarily the one that prompted the recession in the first place), but it’s definitely coming.

Incredible sums of money have been spent during the first six months of the year, and those sums of money didn’t appear in the projected budget of any nation before the year began. Eventually, someone’s going to have to pick up the tab and start paying.

Typically speaking, when a country or a national government is in vast amounts of debt, its first port of call is to pay it off through austerity measures. The problem with that is many nations, including the United Kingdom and the United States of America, have been trying to rein in public spending for much of the past decade.

There aren’t many corners left to cut that haven’t already been cut. There are few public assets to privatize that haven’t already been privatized. Selling off the family silver to pay debts only works for as long as you have family silver to sell. There isn’t much of it left, and countries already burdened by enormous debts have little time or opportunity to create any new ‘silver’ to sell in time to meet their scheduled repayments.

The public should be far more concerned about the fact that nobody appears to have any recovery plans in place whatsoever, but they’re all distracted right now. They won’t stay distracted forever. Someone’s going to have to come up with a plan in the very near future, but what might that plan look like?

The biggest indicator of the state of the world’s economy (or economies) is the stock market, and thus far, the stock market – despite a few significant wobbles – has remained remarkably bullish in the face of catastrophic drops in the productivity of every single developed nation on the planet. Like the public’s confidence and ignorance, that won’t last forever.

The easiest and quickest fix to the problem is probably the one that will be suggested first, and that’s quantitative easing. In fact, we’ve already seen it proposed as a solution by more than one notable publication. Has the well of quantitative easing already run dry, though? Is the genie already out of the lantern? Furthermore, even if it does work, can it continue to work forever?

For the uninitiated, quantitative easing is the basic process of printing more money to make up for shortfalls of cash. It’s the creation of money where no cash previously existed. It sounds like a simplistic solution, and it is. If it were a viable plan for sustaining an economy, every nation on Earth would do it all the time. The reason that they don’t is that it tends to devalue the currency of whichever country is printing more money. The more of a currency you create, the less valuable it becomes compared to the currencies of other countries.

As an example, if the United States of America undertook an enormous quantitative easing process, but China didn’t, the value of the US Dollar against the Yen would drop like a stone. That’s extremely bad for international trade and would likely inflict further harm on the American economy.

In addition to devaluing currency, quantitative easing also pushes down interest rates as a side effect. Most of you will remember the heady days of the early 21st century when interest rates on savings accounts were generous. Those days are long gone.

Right now, interest rates are at historic lows. In the United Kingdom, the Bank of England’s base rate is 0.1%. It can’t conceivably go any lower. If it did, the rate would either hit zero or slip into negative figures, which is unthinkable for any developed nation. The rates were cut as far as they could possibly go after 2008.

There’s no further room for maneuver. There isn’t any port left to call at. In theory, unless the world’s major nations are prepared to deliberately wreck their economies for the short term in the hope of long term gains, large-scale quantitative easing isn’t an option. Nobody truly knows what the shape of the world’s economy might look like if big countries even tried to do it.

Clearly, a nation’s financial reserves have to be adaptable. When a major crisis arrives, and the public’s safety or health is at risk, extraordinary measures have to be taken to protect it. That being said, the economy is not like an elaborate game of online slots where you sometimes win and sometimes lose.

If we’re to use that metaphor, there’s a popular online slots game with 10 free spins called ‘Action Bank’ where the player’s mission is to break into a bank vault and take what’s there, using the spin of the reels to access the vault. If the global economy really were like that online slots game, it’s already paid out the jackpot.

There’s nothing left to take in the vault. You cannot pay out over a trillion dollars of money outside of your planned spending, and then make up for it by printing a further trillion dollars without upsetting the apple cart significantly. If a civilian attempted to run their finances in such a manner, they would quite rightly be considered bankrupt – and that’s the problem.

The world has long moved past the point where the amount of money that exists is less than the amount of money that’s owed in debts. If every debt in the world was called in simultaneously, the funds required to pay those debts aren’t there. It’s never been printed. It’s never had a physical existence of any kind.

It’s all just numbers on a screen. To solve the current crisis by printing more money to answer those debts is to admit that the entire financial system we rely upon is bankrupt and has been bankrupt for decades.

The illusion would be shattered forever. That allows us to close with a question; are governments prepared to admit that the system is a myth, or would they prefer to let us all starve? We’ll find out soon enough.