A reader made an important statement on a question on the previous post.
The claim was made that Guernsey and Jersey have printed their way to prosperity.
It is a fallacy that you can create wealth from nothing.
There are significant differences in what these two semi-autonomous British dependencies did compared to the actions of the current Federal Reserve in the US.
In reviewing the history of Guernsey, when a major capital project was needed, rather than go to the bond market, the government increased the supply of non-convertible Guernsey Pounds. This currency circulates along with Bank of England Pounds and is part of the monetary system of the United Kingdom.
The critical concept to understand in this example is that the people of Guernsey essentially loaned the money to the state of Guernsey at zero interest for the capital project.
A complete explanation of how this works is available for your review at the following site (this is a response to the original question in Italian, the answer is in English and published in 1946):
State of Guernsey
The state of Guernsey printed only the amount of currency required which flowed into the local economy, but not more than was required for the project. The government of Guernsey, unlike the Federal Reserve, canceled old notes to prevent the build up of excess funds in circulation. One could argue that this is at least a partly specie backed currency, as it contributed to construction of hard assets.
This is a much different concept than that being deployed by the Federal Reserve. The Fed is attempting to boost the real economy by printing money with no specific purpose other than to fund entitlements and deficit spending. Treasury is not directing this money to update and reinforce the electrical power grid, or build dams, or roads or anything else useful that constitutes a hard asset.
The admitted goal of the Fed is to re-inflate the economy and stock markets by stoking the fires of inflation, in an attempt to lure/force money into the real economy.
Will it work?
If we turn to the example of Japan and consider that 20 years after the collapse of the Nikkei and collapse of real estate in Japan we still see a deflationary environment prevailing.
A determined Fed, could, eventually, print enough currency to completely replace the shrinking supply of credit in our economy.
Here it is important to understand that the money supply is more a function of the sum of money in circulation and credit. Credit is important as it is many times larger than the supply of paper notes and bank deposits. If bank lending and consumer loans outstanding was reduced to very low levels, the Fed would achieve the reflation goal. The cost would be horrific, but it is possible if Weimar Germany and Zimbabwe are considered.
So go ahead and print Mr. Bernanke, but as you repeatedly push on the quantitative easing string, remember Newton's Third Law of Motion:
For every action, there is an equal and opposite reaction.
And the Bond Market will determine how long this action will be tolerated.
The claim was made that Guernsey and Jersey have printed their way to prosperity.
It is a fallacy that you can create wealth from nothing.
There are significant differences in what these two semi-autonomous British dependencies did compared to the actions of the current Federal Reserve in the US.
In reviewing the history of Guernsey, when a major capital project was needed, rather than go to the bond market, the government increased the supply of non-convertible Guernsey Pounds. This currency circulates along with Bank of England Pounds and is part of the monetary system of the United Kingdom.
The critical concept to understand in this example is that the people of Guernsey essentially loaned the money to the state of Guernsey at zero interest for the capital project.
A complete explanation of how this works is available for your review at the following site (this is a response to the original question in Italian, the answer is in English and published in 1946):
State of Guernsey
The state of Guernsey printed only the amount of currency required which flowed into the local economy, but not more than was required for the project. The government of Guernsey, unlike the Federal Reserve, canceled old notes to prevent the build up of excess funds in circulation. One could argue that this is at least a partly specie backed currency, as it contributed to construction of hard assets.
This is a much different concept than that being deployed by the Federal Reserve. The Fed is attempting to boost the real economy by printing money with no specific purpose other than to fund entitlements and deficit spending. Treasury is not directing this money to update and reinforce the electrical power grid, or build dams, or roads or anything else useful that constitutes a hard asset.
The admitted goal of the Fed is to re-inflate the economy and stock markets by stoking the fires of inflation, in an attempt to lure/force money into the real economy.
Will it work?
If we turn to the example of Japan and consider that 20 years after the collapse of the Nikkei and collapse of real estate in Japan we still see a deflationary environment prevailing.
A determined Fed, could, eventually, print enough currency to completely replace the shrinking supply of credit in our economy.
Here it is important to understand that the money supply is more a function of the sum of money in circulation and credit. Credit is important as it is many times larger than the supply of paper notes and bank deposits. If bank lending and consumer loans outstanding was reduced to very low levels, the Fed would achieve the reflation goal. The cost would be horrific, but it is possible if Weimar Germany and Zimbabwe are considered.
So go ahead and print Mr. Bernanke, but as you repeatedly push on the quantitative easing string, remember Newton's Third Law of Motion:
For every action, there is an equal and opposite reaction.
And the Bond Market will determine how long this action will be tolerated.
Comments
Post a Comment