Friday, 20 March 2009

An Excess of Money Cannot be Cured by More Money

Two things have come together this week to concentrate my thoughts on Brown's abject failures in economic and fiscal management.
One, on Wednesday I attended an investment conference and two, I have been writing our investment policy statement.
At the conference one of the best speakers was the bloke doing the fixed interest bit. The simple message was that the rates of return available to investors on fixed interest securities, both Sovereign and corporate, did not provide adequate compensation on instruments with durations greater than 12 months. Short dated bonds of AA quality or better were the only things to buy as investments. This is essentially an anti inflation argument. Inflation being the excess of money supply.
We have decided that the Risk Free Rate of Return will use is RPI. RPI is the nearest proxy I can get for inflation, as in the excess of money supply. Really I would prefer a more comprehensive measure that took into account the increase in broad money supply, but the RPI seems to us to be a reasonable proxy.
These actions and consequential thoughts got me thinking about money supply. Clearly, and now undeniably, the cause the the current economic woes is an excess of money supply. Here, in the US and elsewhere in the world. Money supply has boomed. And suddenly it all stopped. Why did it stop? The 'market' stopped it. Not Brown, not Obama, the 'market'. That is blokes like me and you said, 'That's it. No more. I don't believe what I am being told. It's all gone Pete Tong and I'm off'. 'I'm not going to put any more of my wealth into money or investments until all the existing excess of money has been washed out of the system'. 'And what's more any more money that I do get will be used to rebuild my balance sheet by reducing debt - and in consequence increasing the amount/value of my equity'. 'So stuff it'.
'I am not going to invest until I can be sure that this excess of money has been washed out of the system.'
(Of course one of the most bound and certain ways of destroying this excess money was to let the likes of RBS and LloydsHBOS go bust.)
Given the above, how is Brown's policy of tipping Billions of new (poor quality) Pounds into the economy going to help us get rid of this excess of money and encourage investors and others to spend their, devalued, money?
Afterthought.
Clearly this is market success. The markets are passing an accurate judgement on the failures of proto-socialistic policies of global lefty or mercantilist governments. They daren't admit this of course. It's be curtains for them all.

7 comments:

Kraxpelax said...

This issue is complex. I have a recent post on my blog Window Mirror that should be of interest. Link further down.

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My Poetry:

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My Philosophy:

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My photographies from Stockholm:

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- Peter Ingestad, Sweden

Oldrightie said...

First weed and nuture your garden. When in full production you can find time to help a neighbour. Or, like Labour, you could go on a binge and neglect every garden in the land.

Mark Wadsworth said...

Agreed, especially the last bit.

WV: unthinc

Lola said...

MW "Unthinc"! Doubleplusungood is what this 'policy' is.

TheFatBigot said...

I'm sure the need to flush the excess "money" out of the system has by-passed Downing Street entirely. I say "money" because so much of it was just pretend money with no tangible wealth behind it.

Someone earning £300 a week who needs to spend £50 a week repaying debt has a real income of £250 a week. So simple, yet Brown and Darling look on him as having an income of £300 and are casting their policies accordingly. It really is very worrying. They need to have the courage to face reality and say "sorry chaps, as a country we are poorer than we think we are". Obviously there's no chance of that so they are following a course of pure deception and illusion, the long-term cost of which is only beginning to be exposed.

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