Thursday, May 09, 2013

The world is awash with money

A very, very short post tonight just to record an impression that I want to write about later. I have been following global policy developments reasonably closely, including quantitative easing and the currency wars.

The thing that is making me increasingly uneasy is the feeling that the pre-conditions are being set for an economic crash. What makes perfect sense for one country, becomes a mess when multiple countries do it. What I'm trying to work out in my mind is a scenario that would allow multiple quantitative easing to be unwound without tipping the wheelbarrow  over and us all onto the ground.

I can see how one country might do it, but not economies making up, what, more than 50% of the global economy if they all start doing it around the same time. That's my problem.                       


Rummuser said...

I agree. I am uneasy too. There is a big housing bubble about to burst here.

Winton Bates said...

Well, there is M and V, M is high and V is v low, so MV = PT is fairly low. If you want to worry about something, worry about the size of government I.e. the growth of government spending!

Evan said...

Steve Keen is trying to unpick all this. His blog is DebtWatch or somesuch.

Australia might avoid the crash (it's already happening in Europe) if China (or someone else) keeps paying for our resources.

Anonymous said...

The following doesn't attempt to solve anything, or to address your particular question, Jim, but I found it at least worth a read for background:


Jim Belshaw said...

Actually, Winton, I'm not sure about the size of Gov spending expressed as % of GDP. So far as the quantity theory of money is concerned, consider the V your equation. If lots of money is pumped out and people don't want to use it, V stays down or may fall. But what happens when V shifts because people start using the money?

Asset bubbles are often associated with higher M and greater V.

Jim Belshaw said...

Just a further comment Winton, my concern is how do you steralise all that extra cash?

Jim Belshaw said...

Thanks, Evan. I do read his blog. I want to deal with the Australian position in a later post after I have amplified the issues here.

Thanks, kvd. I hadn't seen the piece.

Winton Bates said...

Sorry for the slow response, Jim. As V picks up, central banks should begin to sell some of the assets they have acquired over the last few years.

I think it will be much easier to unwind monetary stimulus than fiscal stimulus.

Jim Belshaw said...

There are some things that confuse me Winton. As they begin to sell those assets, the price will fall, ie interest rates rise. The fall in asset valuations will affect balance sheets, including central bank balance sheets. The rise in interest rates will affect demand. With such a lot of money sloshing around, its going to require very careful management and potentially take a long time.

With fiscal stimulus, the stimulus ends. The government is left with higher debt if the stimulus is funded through borrowing, more money in circulation if financed through the printing press. I actually think that's easier to manage.