Anti-intervention

Via Samizdata,

Bank steps up pace of quantitative easing:

The Bank of England stepped up its quantitative easing programme on Thursday, saying it would buy 5 billion pounds of gilts next week after investors eagerly offloaded 2 billion pounds worth on Wednesday.

Fake cash gang ‘run as business’:

Five men have been jailed and a sixth given a suspended sentence after admitted running a £5m counterfeit currency operation “like a successful business”.

As one commenter said,

The Government clearly does not like competition, especially from the private sector.

There is no good reason why the government should be allowed to print more money.

Inflation is supposedly neutral in the long run. If the nominal value of everyone’s money doubled overnight, and all prices doubled overnight, then it would make no difference.

However, in the short run, the people who get newly printed money benefit first. It takes a while for that money to filter through the economy. The people who get the newly printed money second benefit a little less. As the money filters through the economy, prices start to rise. The people who get the new money last are the ones who lose out. The price rises have already occurred before they get that money.

It doesn’t matter whether counterfeiters get the money first, or whether it is the government and its allies. Inflation hurts the little man.

So in the short run, inflation is immensely damaging. In the long run, too, inflation is immensely damaging. The amount of money the government creates is unpredictable, leading to unpredictable inflation. The subtle shifting of relative prices is drowned out by the general rise in all prices. People can not use price signals, and therefore cannot plan rationally. Prices are information. Inflation is like the government going around after an earthquake jamming the radios of the people who are trying to help.

The government is printing money at the rate of 16% per year

Source: http://ukhousebubble.blogspot.com/2009/01/uk-money-supply-growing-at-16-percent.html

See also: http://www.economicnews.ca/cepnews/wire/article/168316

In December, Guido Fawkes pointed out something odd in the new Banking Bill:

Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall cease to have effect.

If this passes, the government will be able to print money in secret, because the Bank of England will no longer have to publish accounts. It will be able to print as much money as it wants and nobody outside will know.

The Bank of England have cut their interest rate to 1.5%. The US Federal Reserve’s interest rate is now approximately 0%.

The government cannot sustain lending at below the market rate without printing money. Otherwise, where does the money it lends come from? This reduces the value of existing money. If the government rate is below the rate of inflation, then the “real interest rate” is negative. It becomes profitable to borrow money.

Consider if the inflation rate was 10% and the interest rate was 5%, and the price of gold was $1000 per ounce. Someone could borrow $1000 and buy an ounce of gold. After a year they could sell the gold for $1100, and pay off the loan with $1050, making a $50 profit. The end result is inflation: the people that engage in this practice end up with a greater share of the currency than those who don’t.

In a free market, this would not happen. No one would lend money at that rate; they would buy the gold themselves. The market interest rate would increase, and the opportunity for arbitrage would disappear.

But the government can finance its lending by printing more money. Without the free market’s negative feedback mechanism, there is no limit to the amount of money that can be made. Since the people that engage in this practice end up with a greater share of the currency than those who don’t, everyone will start doing it. Can everyone make a profit without doing any work? Of course not. To maintain this interest rate, the government will have to print more money to meet the increased demand for borrowing. This will increase inflation even more, increasing the arbitrage possible, so increasing demand for borrowing.

Unless the central bank raises its interest rate back above the inflation rate, this positive feedback mechanism will soon lead to hyperinflation.

“It would be irresponsible in the extreme for an individual to forestall a personal recession by taking out newer, bigger loans when the old loans can’t be repaid. However, this is precisely what we are planning on a national level.”

“Gordon Brown issued a stark warning to banks today, demanding that lenders must pass on yesterday’s full 1 per cent interest rate cut to their customers.”

“Gordon Brown faces a showdown with banks this week after they accused him of deliberately distorting the arguments over interest rates…

The head of the British Bankers’ Association (BBA) will tell the Government today that it is ignoring the plight of hard-pressed banks and giving borrowers false expectations of cheap loans. In a direct challenge to Mr Brown, Angela Knight, the BBA’s chief executive, said: ‘Many who call on banks to “pass it on” are unaware of these issues; others, for various reasons, choose to ignore them.’

The banks say that they cannot pass on the full cut because the cost of borrowing has not fallen on the wholesale money markets, where they borrow.

Writing in the Sunday Telegraph, Ms Knight said that comments, such as those by Mr Brown, were of no help to borrowers: ‘It does nothing for savers, either, many of whom are retired and rely on their savings.’”

Ludwig von Mises:

“The laws of the universe about which physics, biology, and praxeology [essentially economics] provide knowledge are independent of the human will, they are primary ontological facts rigidly restricting man’s power to act… only the insane venture to disregard physical and biological laws. But it is quite common to disdain economic laws. Rulers do not like to admit that their power is restricted by any laws other than those of physics and biology. They never ascribe their failures and frustrations to the violation of economic law.”

Nationwide have decided not to pass on future Bank of England interest rate cuts. Good.

The Nationwide Building Society has said it will not pass on any further cuts in UK interest rates to most of its tracker mortgage customers. 

A clause in the contracts of 250,000 customers says the Nationwide does not have to lower its rates when the Bank of England’s rate falls below 2.75%.

While it did not enforce this when the Bank Rate fell to 2% in December, it now says rates will fall no further.

It says it is doing this to protect savers from sharp interest rate cuts.

“Savings rates are at an historic low and this move means we will not be forced into a position where we could have to cut savings rates more aggressively than we would otherwise like to,” a Nationwide spokeswoman said.

Interest rates are prices, and they price in risk, amongst other things. A 1% interest rate, as expected to be announced by the Bank of England’s Monetary Policy Committee at their next meeting, would not adequately take into account the risk of some borrowers not paying back their mortgages. At a time when house prices are expected to fall further, this risk is greater than it would usually be.

The correct price of borrowing, taking into account risk, would be higher than the Bank of England’s rate (a number they have just plucked out of the air).