Saturday, 16 October 2010

Quantitative Easing misses the point

Compared to the drivel that the Keynesian party among the economics tribe perpetrates, the doctrines of the mercantilists must sound like the epitome of logic and rationalism. Who really thinks that helicopter money is the solution to the economic woes the commentators diagnose for the United States? During the quite intense recession of the mid-1970s there was no question of QE, the politicians (and the media) did not panic. Today anything less than growth a l'outrance seems to be simply unacceptable. But is a decline of 5 per cent in someone's annual income (from a level higher than ever seen in human existence) really a disaster calling for extreme (and ultimately futile) measures? What magnifies the real or perceived economic problem faced by the US is rampant militarism and extreme inequality exacerbated by a dysfunctional political system that is hopelessly dominated by special interests and checkbook politics. As more and more parts of the population slide towards the fate of becoming an underclass the urgency of trying anything (apart from sensible economic and political reform) to stem this tide is at least understandable - even if it will ultimately fail.

Wednesday, 6 October 2010

Are Governments more risky than some banks?

Until the full force of the credit crunch hit the investment landscape during 2007-2009 this question would have been brushed aside with a quick No! At least this was the situation in the 'developed world'. But during the past year the cost of insuring against the default by the state in many a 'developed' country has regularly surpassed the cost of insuring against the default by a large commercial bank.
After the mini-panic of May 2010 when a default by an EU member state suddenly looked more than likely the markets have calmed down. The pricing of government debt allows investors to make a rational analysis of the likelihood of future default and this has calmed the markets - for the time being.
We think that the burden of excessive and unproductive debt carried by many governments will eventually be whittled down by inflation. The resulting loss in purchasing power will be the involuntary contribution made by savers and investors to finance the politician's pet spending projects.