The downside of quantitative easing

We try not to make too many forecasts at Moneyweek (it’s just too hard). But one thing we have been pretty clear on is that, given that it is pretty much the only policy option left to governments, we expected to see more quantitative easing (QE) everywhere. That seems to be working out about right.

Today saw the promise of another £75bn-worth from the Bank of England. QE didn’t work last time and it is hard to see how it will work to do much but push up asset prices this time either.

But its re-introduction does at least give me the opportunity to quote for you some bits of a fabulous speech made by Adam Fergusson (author of When Money Dies, and an expert on the hyperinflation in Weimar Germany in the early 1920s) at M&G yesterday.

Given our present turmoil, he said, and the fact that it looks unlikely that the West will be able to escape its debts with growth, all policymakers would be wise to remember the consequences of extreme money printing.

We think hyperinflation (as defined by prices rising by over 50% a month) is rare. But it isn’t particularly rare at all. There were in fact 29 incidences of hyperinflation across the world in the 20th century. Relatively unusual, yes. Rare? No.

Here’s Fergusson on the subject:

“Wilful inflation, printing money, QE, permitting or encouraging the currency to depreciate, is not just the unfair, covert tax Keynes said it was: it is the repudiation of debt. It crushes the powerless (creditors, bond holders, pensioners, professionals, non-unionised workers).

“For an advanced economy, it may be the consequence of uncontrollable world shortages or commodity costs like oil – which people usually understand. But when it stems from public sector wage demands which a government has been unable or too cowardly to resist, or when it is embraced for other similar short-term political or economic purposes – to stimulate a stagnant private sector, to make exports more competitive – it is no less than robbery.

“And that applies as much to any central bank’s inflation target (say of 2%) as to the headline inflation which so often brings negative real income to investors. 

“It is the knowing dispossession of holders of capital, of those with income not linked to an index, and of a government’s creditors at home or abroad. 

“It is the forcible expropriation of all guileless creditors who trusted its word, and the rewarding of all debtors whose obligations have been lightened.”

Right now investors will no doubt just be relieved to see a nice rally in the markets. But along the way, it is worth remembering the downside to money printing.