Thursday, January 22, 2015

Beware The Euro In Your Wheelbarrow, or an idiot’s guide to big words

Quantitative easing? Isn’t that where a central bank tries to create just a little inflation to get the economy moving again while pretending it isn’t creating just a little inflation? Or is it where a central bank tries to create just a little inflation to get the economy moving again while pretending it isn’t creating just a little inflation, but creates a whole lot of inflation and fucks things up even worse? Nice term though, reassuring, as though they know what they are doing. Many of you will have come across the definition of an economist as someone who is able to explain convincingly to today why what he convincingly predicted yesterday didn’t happen. And if you haven’t come across it before you have now. The term ‘quantitative easing’ is related to that: sounds great, sophisticated, intelligent, reassuringly complex and if and when things go tits up, no one really knows why and it can all be explained away in a jiffy.

Economists are rather like ad agencies - those who resort to their services don’t really have any idea whether or not they are worth the money spent hiring them, but dare not do without them in case they do know what they are talking about. I am fascinated by economics, but at one remove.

Years ago I was one of many who was baffled by all the talk of us selling chairs to America and America paying us in bread, but got lost soon afterwards. Similarly with the ways of the City and the stock markets - I was suitably impressed by all the waffle until - in my case rather late in the day - I realised that all the jargon used was not primarily a means of fellow practitioners being able to talk to each other in their own shorthand, but was primarily intended to make sure the rest of us didn’t have a clue as to what was going on.

A good example is when talk turns to a highly leveraged company: well, you think, highly leveraged! Well! Must be a success! Then you find out that what it actually means is that the company has either
borrowed a lot of money or, at the very least, the money it owes is considerably larger than the financial value of its assets (many of which will be illiquid i.e. it would take a while to turn them into ready cash to meet your debts if you had to and, anyway, by turning them into cash you could well put yourself out of business - in Dick and Dora terms if a company’s main asset is the factory in which it produces goods, selling that factory for ready cash in order to see off creditors would pretty much mean the end of that company as it would be unable to produce any more goods (unless it leased back the factory).

It’s my contention that essentially economics is just another way of observing and describing human behaviour. But even on that simple, some would claim simplistic, basis, it will pretty soon fail as a discipline in that it assumes that in any given situation we will all more or less behave in the same way. The trouble is we don’t. Some might well settle for selling what they produce at the market price, but others, who are greedier, might well settle for trying to manipulate the market in order to push up the price they can charge.

That goes on in the diamond market where producers make damn sure supply is kept to certain limits in order to keep prices high. It is also going on in the oil industry where several oil producers have boosted supply to bring down prices - the price of a barrel has halved over these past months - to make shale gas a less attractive alternative and, they hope, in time to put shale gas producers out of business. Once they are, supply will again be limited, prices will once again go up and, the oil producers hope, life will get back to being grand again.

Economists are well able to describe what is going on - falling back on jargon, no doubt - but I can’t remember any economist predicting such a massive boost in oil supply and the resulting collapse in prices when shale gas as an alternative energy supply first came onto the scene. Then, if I remember, there was grand talk of the ‘decline of the oil industry’. Some bloody decline, as it turns out.

At this point, no doubt, some reading this will sneer that what I am writing is indeed Dick and Dora stuff, that it is all a lot more complex. To which I say: of course it’s a lot more complex - if you want it to be. But it needn’t be so complex. Years ago I did a lot of photography and dealt with shutter speeds, film speeds, f stops, depth of field and all the rest, and I contend it is perfectly possibly to explain to a six-year-old what goes on when a camera takes a picture without resorting to a single piece of jargon.

Children understand ideas such as ‘the bigger the hole, the more can fall into it. The smaller the hole, the less can get through’. That’s exactly what happens with the amount of light going through the camera aperture and hitting the ‘film’, only I would call the aperture a ‘hole’ not an aperture when describing it all to a seven-year-old.

A few years ago, I was explaining to my then nine-year-old son how the stock market functioned in similarly easy-to-understand terms. I even got onto futures, why they were created and how they are now abused. I think he understood. Which brings me to ‘quantitative easing’, a great, complicated name for a simple economic ploy.

Ironically despite all the denials that it most certainly does not risk stoking inflation, that is exactly what it is intended to do - just not too much. Put better, it is not intended exactly to stoke inflation, merely to create a little inflation. Folk fear, of course, that although it might work in the short term - actually, we know it does work - the danger is that in the long term we will be saddled with rampant inflation of the kind which brought the Weimar Republic to its knees and allowed the conditions to be created in which Adolf Hitler was able to seize power.

The European Central Bank has decided to introduce a programme of ‘quantitative easing’ in the euro zone and will be ‘creating’ €1 trillion with which - well, to create a little inflation. The idea is that if there is more money in the eurozone, banks will feel more inclined to lend it and the eurozone economy will take off again. Hm. And once again, hm. It seems - so far - to have worked in the US and here in Britain, so will it work in the eurozone? That remains to be seen.

One large caveat is that the US and British economies are single entities, whereas the eurozone economy, although ostensibly one economy, is seen from a different angle, made up of 25 economies which might resemble each other in some ways, but do not resemble each other in other ways. But isn’t that also true of the US, you might ask? And don’t individual US states have a say over how their own state economy should be run?

Well, up to a point: states, as far as I know (always a useful admission to make) can to a certain extent set their own taxes, but I don’t think they have any say over the Federal Bank interest rates. And despite the US economy now being ‘on the move’ - as, of course, it is obliged to be with a presidential election getting ever closer - individual states might be prospering or not as the case may be. Certainly a state such as Rhode Island or Maine will usually always be doing far better than Mississippi or Louisiana, yet nominally as equal constituents of the US they are all economically ‘on the move’. The eurozone, however, still doesn’t enjoy the kind of indentification with the whole of its individual members as the US does.

Of course, the governments of each eurozone state wants their country to pull through and get out of the economic shit, but just what to ‘the people’ feel? And what with the general election in Greece due in three days, the ECB’s grand plan to save the eurozone with a programme of quantitative easing might be defeated before it has even got underway if a new Left-wing government does what it says it will do - and, crucially, what those expected to vote for it will insist they do, which is to tell the country’s creditors to go stick their credit notes where the sun don’t shine.

Oh, to live in interesting times.

Don’t worry, pet, it'll all soon be over — the ECB has decided to
introduce a programme of quantitative easing

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