Heading towards global Zimbabwe?

On 9 August 2010, BBC Newsnight reported that $1 trillion stimulus package was not sufficient v, "the recovery is losing momentum" and that quantitative easing (QE) is now expected to follow, to stimulate the economy.

In her report, a BBC Newsnight journalist, Ms Naga Munchetty, gave an explanation what QE was. Her account was absolutely consistent with the foundation premise of this blog, and the analysis based on it. The current crisis was caused by the financial institutions that constructed a giant pyramid scheme (by lending with loan to deposit ratio greater than 100%, thereby generating in a run away manner a massive and uncontrollable money multiplier).

Ms Munchetty said: "Quantitative easing is likened by some economists to pouring liquid down the black hole in the dark." This black hole is nothing mysterious. In fact it is the amount of money needed to reduce the current massive level of money multiplier to an acceptable level. Smaller money multiplier means higher financial liquidity as one dollar of real cash has a smaller number of dollars of liabilities to serve. Historically, when economy functioned properly, it used to be in 5 - 8 region. In simpler terms, this is printing money to support the financial pyramid so it does not run out of cash. Had Albanian gangesters been allowed to do the same in 1997, their pyramids would not have collapsed either. However they did not have a clout of the modern days' financiers to convince Albanian government that this was the "right" way forward.

Ms Munchetty continued: "It's hard to tell how deep the hole is, or when you are close to filling it up." This precisely refers to the fact that we do not know the current level of money multiplier. (As it has been proved on this blog this is a direct result of a lending with loan to deposit ratio greater 100%: it is its characteristics. It is a loss of control of money multiplier resulting from lending with loan to deposit ratio greater than 100%.)

The filling in"holes of confidence", i.e. restoring confidence between banks, companies in the commercial world, mentioned by Ms Munchetty is simply a reduction of money multiplier to an acceptable level. It is also clear why banks are not lending: they hold off to QE money as it reduces the money multiplier, which any lending whatsoever would have increased (even with a minimal loan to deposit ratio).

However, contrary to what Ms Munchetty's suggested, "what happens next" once the black hole of liquidity is filled up is completely predictable. Once money multiplier reaches acceptable level, the banks will start lending again. It is their business and in fact they are urged to do so by politicians and business people. At that point the QE money, trillions of dollars will find its way to the market and will get multiplied. Even if the banks lend with a very low loan to deposit ratio of 50%, this money will be doubled. If they use a conservative 80%, a much more realistic scenario, the money will be multiplied by 5. I.e. every trillion of dollars in circulation will very quickly create a demand for 5 trillion worth of products and services in the current low inflation economy. To economists who "do not know": this means, surprise, surprise raise in inflation at an instant. Now you have been warned.

Any suggestion - supposedly by some economists - that printing money will result in economic growth, as Ms Munchetty also mentioned, defies belief and rational thinking. If that was possible any country would grow its economy by printing money. We all would be rich without doing much work (apart from running the printing presses). Presently Zimbabwe would have led the world as the most successful economy. It is simply amazing what some bewildered or dishonest economic pundits come up with trying to avoid the central issue of this crisis: the financial system has been a massive pyramid scheme with all its fraudulent characteristics.