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Last month I explored some of the effects that so called “quantitative easing” has had.  You hear these weasel words bandied around a lot at the moment.  If you are unsure what exactly this phrase means “quantitative easing” is the current fashionable course of action being taken by Central Banks, because interest rates are either at near zero or negative.  What Central Banks do is create new money so that the banks under their control can buy government bonds.  This shores up the banks’ accounts, without causing inflation because the newly created money is basically an accounting transaction that is contained within the financial sector.  No new money is actually  printed, this simply has the effect of providing the clearing banks with a form of debt relief.  We have all been sold the idea that after quantitative easing the now financially secure banks will feel confident enough to lend to the real economy, growth will then take place and we will all be better off.  Well, does this work in Europe?  The short answer, as the data in the chart above shows, is no.  In the Euro area average wages are falling and the majority of people are getting poorer, so they have even less money to spend.  Promoting bank loans was never going to help the real economy as the bulk of bank lending is against property, as I wrote about last month, all quantitative easing does for the real economy is create a property bubble.  Note that rather than just one method of measuring wage deflation in the Euro area, the chart above shows a range of indicators for measuring wage inflation and deflation, nevertheless they all show a strong trend towards deflation.  I first wrote about the dangers of deflation using Europe as an example 16 months ago, and then followed that up with an article about consumer price deflation 11 months later.  I once worked with Professor Richard Werner, who originated the phrase “quantitative easing,” in 1995 when he was employed as an economist in Japan.  He told me that the Japanese had already tried to stop their economy deflating and the pressure was on to be seen to be doing something different.  The solution they chose was to rename something that all central banks do most of the time – creating new money, only this time it would be called something different.  His suggestion of “quantitative easing” sounded good, and at that time using this money to buy government bonds appeared to be different to anything that had preceded it.  So initially the Japanese population and the financial markets were very happy because something new was being done to stop the deflation that was then rampant.   With the benefit of hindsight, many economic analysts look back at this period in Japan as “the lost decade,” and even to this day Japan is still fighting deflation and the population is impoverished.  Regrettably, nearly all developed economies are moving into deflation now because of low aggregate demand, so quantitative easing is a phrase we will keep hearing until somebody comes up with something snappier.  We are very slowly coming to terms with the fact that we are all still living in a financialised world which has an enormous debt hangover - and it will only get better when much of the debt is written off.  This was something the ancient world understood well which is why many civilisations had “debt jubilees” when unfortunate debtors were relieved of their debts by Royal Decree.  To date, governments have only extended debt relief, via quantitative easing, to the banks.  And those banks are pleading that they are still in such a fragile state that they cannot afford to write off the many bad loans they made in the run-up to the 2008 financial crash.  But, bad loans notwithstanding, they have all been able to spare the money to pay their staff large bonuses.  These Central Banks have a lot to learn from ancient Mesopotamia where silver (corporate) debt had no relief while grain (consumer) debt was granted total debt relief.  It’s ironic that Central Banks with their quantitative easing are now doing the exact opposite of this ancient wisdom yet expect to revitalise economies.  Hence the exponential, and growing, increase in the gap between rich and poor. Back to Japan: between 2001 and 2006 it created huge amounts of money and increased its reserves five- fold to support its banks, yet we can now see that this illusory action totally failed to stimulate any genuine economic growth.  If the world’s central banks had studied economic history they would have learned from Japan’s experience that their current form of quantitative easing can’t possibly stimulate growth in a modern economy.  Only the rich get richer, as only they can afford to buy assets like houses, and they make ever more money as those assets increase in value, buoyed up on bank credit.  Without productive investment in the real economy, the poor can only get poorer via wage deflation, while prices increase, and the economy fails to grow.  It really is as simple as that.  Inevitably vested interests block the political agenda so governments can’t make productive investments – the fat cats are making too much money.  In Britain nearly half the population own their own homes and a substantial number of these have bought extra homes that they rent to the rest of the population who can’t earn enough to pay a deposit in order to begin buying a home of their own.  This means that while 50% of the population have a vested interest in higher house prices, the other 50% are finding house prices are rising faster they can save.  The Conservative Government currently in power is only interested in pleasing their supporters, mostly home owners, so the status quo is unlikely to change any time soon.  The rent controls in other European countries (like Holland, Sweden, Switzerland and Germany for example), restrain speculation on housing unlike “free market” Britain.  The British banking sector has ensured that property is now regarded far more as a financial asset than a home, mainly because the physical nature of property, coupled with the insatiable demand for homes, makes it excellent security. Looking at the chart above you can see that the wild credit creation binge, primed by Central Banks low interest rates and easy credit conditions across the world, lifted wages in the Euro zone from negative territory in 2005 until the financial bubble peaked in 2008.  Wage inflation then crashed into negative territory in 2011.  Ill advisably the European Central Bank (ECB) is not concerned with the well-being or prosperity of the population but solely price stability.   This means, according to virtually all economists, an economy that has 2% inflation, an idea that originated when New Zealand’s politicians, keen to get home for Xmas, voted to set this as a target some 27 years ago.  You may be amazed to learn that now all Central Banks, not just the ECB still define 2% inflation as the target for price stability.  But there’s no evidence to back this up.  The figure of 2% was plucked out of the air, based on the speculations of a finance minister considering what inflation figure New Zealand’s 3.4 million population as well as his fellow politicians would consider a reasonable target.  Extraordinarily, economists today fail to consider that inflation expectations that seemed to work for a primarily agricultural population in what was a period of historically high inflation, is a valid target for today.  Economists obstinately continue to believe this to be a suitable target for a European industrial economy living in deflationary times.  That 2% target for price stability is the same for the Federal Reserve in America (FED) and the Bank of England as well as the Bank of Japan.  So it shouldn’t be a surprise that no Central Bank has ever managed to meet an inflation target of 2% for several years, nor is it likely to come close to this target in the foreseeable future. Looking at the chart you can see that across the Euro area wages have been steadily falling for more than a decade apart from the boom and bust generated by the credit expansion and low interest rates that led up to the financial crash of 2008.  Even after cutting interest rates to below zero, bond buying and talk of “whatever it takes” from the ECB, wage deflation across the Eurozone was only delayed for a couple of years.  Come 2015 the ECB had to resort to full blown quantitative easing (creating new money to buy government bonds), something that it will continue to do until 2017.  As the chart shows, so far the only effect has been to drive wages down further.  You might wonder why the ECB would follow a similar disastrous course to Japan, a course that that has made everyone but the richest citizens poorer.   Remember that Japan’s deflation was caused when the Bank of Japan wanted to produce “structural changes” so their economy would be less dependent on exports.  The free market philosophy they followed was responsible for creating one of the world’s greatest property bubbles.  At the peak of the bubble the Emperor’s private garden in the heart of Tokyo was worth more than the whole state of California.  In Japan’s case deflation was intentionally caused by the Bank of Japan (you only have to read Princes of the Yen to understand this).  However, the European Central Bank (ECB) is being forced by circumstances to provide debt relief for Europe’s national banks via quantitative easing. Central banks wield enormous power as they control economies with little accountability or democratic governance.  Just witness what the European Central Bank is doing to force “structural changes” on the southern European economies.  When a Central Bank talks about structural changes it is a euphemism for extreme capitalism, those neo-liberal ideas that will let American banks buy assets cheaply and increase their fee income dramatically.  There has even been talk by the Bank of England of the need for structural change in the British economy which is already one of the most liberal economies in the world.  Anybody is free to set up in almost any business in Britain without any professional qualifications.  Britain is also a rare country which has been foolish enough to sell off much of its banking, power generation, water supply, mobile phone networks, automotive manufacturing, and steel making industries to foreign ownership.  The result is that many “British” company profits quickly disappear offshore while only token amounts of tax are paid locally, eroding the local tax base.  This means, of course, that national services like healthcare spending have to be reduced.  This clearly isn’t a recipe for a healthy society and long term prosperity, yet that is exactly how this is presented to the people.  We are told that foreigners will invest more in a company than British domiciled investors, even though domiciled investors living in the country naturally have a greater stake in the functioning of the local economy and the society around it.  The Greek people have seen what’s going on in Britain, and they are violently resisting the ECB as it tries to impose “structural changes” on the Greek economy.  You can expect the ECB to talk about the need for “structural changes” in France, Italy, Spain and the rest of the Eurozone, everywhere that is, except for Germany.  Sadly, the current generation of economists at the world’s central banks were not taught the wisdom of the ancients via classical economics at their universities - it was out of fashion.  Instead, their teaching was based on free market theory and the need for structural changes when markets fail.  Ideas that originated in Chicago and were cynically promoted to their advantage by American Banks.  And it’s still happening: To this end the European Central Bank has an overt agenda to promote structural change, i.e. freer markets, throughout Europe to the advantage, yet again, of American Banks.  It also has a covert agenda to make the Euro currency cheaper, thereby promoting inflation as imports become more expensive, and simultaneously Germany’s exports become cheaper.  The ECB is also deliberately making the Eurozone more globally competitive by lowering labour costs.  At this, as the chart shows, they are being very successful – and the majority of Europe’s population is becoming ever poorer – just like Japan which still hasn’t recovered from its lost decade. April 2016
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Quantitative unease…

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Last month I explored some of the effects that so called “quantitative easing” has had.  You hear these weasel words bandied around a lot at the moment.  If you are unsure what exactly this phrase means “quantitative easing” is the current fashionable course of action being taken by Central Banks, because interest rates are either at near zero or negative.  What Central Banks do is create new money so that the banks under their control can buy government bonds.  This shores up the banks’ accounts, without causing inflation because the newly created money is basically an accounting transaction that is contained within the financial sector.  No new money is actually printed, this simply has the effect of providing the clearing banks with a form of debt relief.  We have all been sold the idea that after quantitative easing the now financially secure banks will feel confident enough to lend to the real economy, growth will then take place and we will all be better off.  Well, does this work in Europe?  The short answer, as the data in the chart above shows, is no.  In the Euro area average wages are falling and the majority of people are getting poorer, so they have even less money to spend.  Promoting bank loans was never going to help the real economy as the bulk of bank lending is against property, as I wrote about last month, all quantitative easing does for the real economy is create a property bubble.  Note that rather than just one method of measuring wage deflation in the Euro area, the chart above shows a range of indicators for measuring wage inflation and deflation, nevertheless they all show a strong trend towards deflation.  I first wrote about the dangers of deflation using Europe as an example 16 months ago, and then followed that up with an article about consumer price deflation 11 months later.  I once worked with Professor Richard Werner, who originated the phrase “quantitative easing,” in 1995 when he was employed as an economist in Japan.  He told me that the Japanese had already tried to stop their economy deflating and the pressure was on to be seen to be doing something different.  The solution they chose was to rename something that all central banks do most of the time – creating new money, only this time it would be called something different.  His suggestion of “quantitative easing” sounded good, and at that time using this money to buy government bonds appeared to be different to anything that had preceded it.  So initially the Japanese population and the financial markets were very happy because something new was being done to stop the deflation that was then rampant.   With the benefit of hindsight, many economic analysts look back at this period in Japan as “the lost decade,” and even to this day Japan is still fighting deflation and the population is impoverished.  Regrettably, nearly all developed economies are moving into deflation now because of low aggregate demand, so quantitative easing is a phrase we will keep hearing until somebody comes up with something snappier.  We are very slowly coming to terms with the fact that we are all still living in a financialised world which has an enormous debt hangover - and it will only get better when much of the debt is written off.  This was something the ancient world understood well which is why many civilisations had “debt jubilees” when unfortunate debtors were relieved of their debts by Royal Decree.  To date, governments have only extended debt relief, via quantitative easing, to the banks.  And those banks are pleading that they are still in such a fragile state that they cannot afford to write off the many bad loans they made in the run-up to the 2008 financial crash.  But, bad loans notwithstanding, they have all been able to spare the money to pay their staff large bonuses.  These Central Banks have a lot to learn from ancient Mesopotamia where silver (corporate) debt had no relief while grain (consumer) debt was granted total debt relief.  It’s ironic that Central Banks with their quantitative easing are now doing the exact opposite of this ancient wisdom yet expect to revitalise economies.  Hence the exponential, and growing, increase in the gap between rich and poor. Back to Japan: between 2001 and 2006 it created huge amounts of money and increased its reserves five- fold to support its banks, yet we can now see that this illusory action totally failed to stimulate any genuine economic growth.  If the world’s central banks had studied economic history they would have learned from Japan’s experience that their current form of quantitative easing can’t possibly stimulate growth in a modern economy.  Only the rich get richer, as only they can afford to buy assets like houses, and they make ever more money as those assets increase in value, buoyed up on bank credit.  Without productive investment in the real economy, the poor can only get poorer via wage deflation, while prices increase, and the economy fails to grow.  It really is as simple as that.  Inevitably vested interests block the political agenda so governments can’t make productive investments – the fat cats are making too much money.  In Britain nearly half the population own their own homes and a substantial number of these have bought extra homes that they rent to the rest of the population who can’t earn enough to pay a deposit in order to begin buying a home of their own.  This means that while 50% of the population have a vested interest in higher house prices, the other 50% are finding house prices are rising faster they can save.  The Conservative Government currently in power is only interested in pleasing their supporters, mostly home owners, so the status quo is unlikely to change any time soon.  The rent controls in other European countries (like Holland, Sweden, Switzerland and Germany for example), restrain speculation on housing unlike “free market” Britain.  The British banking sector has ensured that property is now regarded far more as a financial asset than a home, mainly because the physical nature of property, coupled with the insatiable demand for homes, makes it excellent security. Looking at the chart above you can see that the wild credit creation binge, primed by Central Banks low interest rates and easy credit conditions across the world, lifted wages in the Euro zone from negative territory in 2005 until the financial bubble peaked in 2008.  Wage inflation then crashed into negative territory in 2011.  Ill advisably the European Central Bank (ECB) is not concerned with the well-being or prosperity of the population but solely price stability.   This means, according to virtually all economists, an economy that has 2% inflation, an idea that originated when New Zealand’s politicians, keen to get home for Xmas, voted to set this as a target some 27 years ago.  You may be amazed to learn that now all Central Banks, not just the ECB still define 2% inflation as the target for price stability.  But there’s no evidence to back this up.  The figure of 2% was plucked out of the air, based on the speculations of a finance minister considering what inflation figure New Zealand’s 3.4 million population as well as his fellow politicians would consider a reasonable target.  Extraordinarily, economists today fail to consider that inflation expectations that seemed to work for a primarily agricultural population in what was a period of historically high inflation, is a valid target for today.  Economists obstinately continue to believe this to be a suitable target for a European industrial economy living in deflationary times.  That 2% target for price stability is the same for the Federal Reserve in America (FED) and the Bank of England as well as the Bank of Japan.  So it shouldn’t be a surprise that no Central Bank has ever managed to meet an inflation target of 2% for several years, nor is it likely to come close to this target in the foreseeable future. Looking at the chart you can see that across the Euro area wages have been steadily falling for more than a decade apart from the boom and bust generated by the credit expansion and low interest rates that led up to the financial crash of 2008.  Even after cutting interest rates to below zero, bond buying and talk of “whatever it takes” from the ECB, wage deflation across the Eurozone was only delayed for a couple of years.  Come 2015 the ECB had to resort to full blown quantitative easing (creating new money to buy government bonds), something that it will continue to do until 2017.  As the chart shows, so far the only effect has been to drive wages down further.  You might wonder why the ECB would follow a similar disastrous course to Japan, a course that that has made everyone but the richest citizens poorer.   Remember that Japan’s deflation was caused when the Bank of Japan wanted to produce “structural changes” so their economy would be less dependent on exports.  The free market philosophy they followed was responsible for creating one of the world’s greatest property bubbles.  At the peak of the bubble the Emperor’s private garden in the heart of Tokyo was worth more than the whole state of California.  In Japan’s case deflation was intentionally caused by the Bank of Japan (you only have to read Princes of the Yen to understand this).  However, the European Central Bank (ECB) is being forced by circumstances to provide debt relief for Europe’s national banks via quantitative easing. Central banks wield enormous power as they control economies with little accountability or democratic governance.  Just witness what the European Central Bank is doing to force “structural changes” on the southern European economies.  When a Central Bank talks about structural changes it is a euphemism for extreme capitalism, those neo-liberal ideas that will let American banks buy assets cheaply and increase their fee income dramatically.  There has even been talk by the Bank of England of the need for structural change in the British economy which is already one of the most liberal economies in the world.  Anybody is free to set up in almost any business in Britain without any professional qualifications.  Britain is also a rare country which has been foolish enough to sell off much of its banking, power generation, water supply, mobile phone networks, automotive manufacturing, and steel making industries to foreign ownership.  The result is that many “British” company profits quickly disappear offshore while only token amounts of tax are paid locally, eroding the local tax base.  This means, of course, that national services like healthcare spending have to be reduced.  This clearly isn’t a recipe for a healthy society and long term prosperity, yet that is exactly how this is presented to the people.  We are told that foreigners will invest more in a company than British domiciled investors, even though domiciled investors living in the country naturally have a greater stake in the functioning of the local economy and the society around it.  The Greek people have seen what’s going on in Britain, and they are violently resisting the ECB as it tries to impose “structural changes” on the Greek economy.  You can expect the ECB to talk about the need for “structural changes” in France, Italy, Spain and the rest of the Eurozone, everywhere that is, except for Germany.  Sadly, the current generation of economists at the world’s central banks were not taught the wisdom of the ancients via classical economics at their universities - it was out of fashion.  Instead, their teaching was based on free market theory and the need for structural changes when markets fail.  Ideas that originated in Chicago and were cynically promoted to their advantage by American Banks.  And it’s still happening: To this end the European Central Bank has an overt agenda to promote structural change, i.e. freer markets, throughout Europe to the advantage, yet again, of American Banks.  It also has a covert agenda to make the Euro currency cheaper, thereby promoting inflation as imports become more expensive, and simultaneously Germany’s exports become cheaper.  The ECB is also deliberately making the Eurozone more globally competitive by lowering labour costs.  At this, as the chart shows, they are being very successful – and the majority of Europe’s population is becoming ever poorer – just like Japan which still hasn’t recovered from its lost decade. April 2016
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Quantitative unease…