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My QE is your Currency War (is someone else's revolution)

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Paul Mason | 17:56 UK time, Sunday, 20 February 2011

Transcript (roughly) of a talk I just gave at the Warwick Economics Summit

Movements in the exchange rate between one currency and another have become the great unmentionable in macro-economic policy. Half the world has an exchange rate policy - the other half claims not to have one.

Yet as the financial crisis has morphed into first a fiscal crisis and now in many countries a social crisis, the global currency markets have become a new stage on which the basic drama is to be played out: who pays for the crisis?

It was the Brazilian finance minister, Guido Mantegna, who declared that the world was in the midst of a currency war in September 2010.

In fact we are in the midst of several currency conflicts and I will list them:

China versus the USA: in which the US wants China to allow the RMB to rise against the dollar, weakening China's competitiveness by raising the price of Chinese exports.

There is the USA versus the Emerging Markets: in which the USA's quantitative easing policy is seen to be exporting inflation, again forcing the currencies of Brazil, South Korea and other export giants to rise against the dollar.

With the Brazilian real up 40% against the dollar in two years Brazil responded to QE2 with
a. A tax on foreign purchases of bonds, designed to suppress the flow of capital in Brazil
b. $40bn of intervention into the spot market for its own currency
c. This month, a ban on short selling of the dollar against the real in Brazil

There is the Euro versus the dollar. Analysts at Goldman Sachs estimated that the entire negative impact of European austerity programmes in 2010 could be offset by a fall in the Euro's exchange rate to parity with the dollar: to the extent that this does not happen, Europe bears the cost of its own crisis.

Then there is north Europe verus south Europe. The Eurozone is locked into one exchange rate but peripheral Europe has, over a nine year period lost competitiveness against the core industrialised and export-led countries above all Germany. Southern Europe cannot devalue, so it is being forced to impose an internal devaluation by the Eurozone authorities - which means massive austerity, wage cuts and the erosion of welfare state provision.

Then there is Japan versus America. When America did QE, so did Japan - in part justifying the move on the grounds that QE was an act of exchange rate competition.

Finally there is Britain versus the rest of the world. Sterling underwent a 25% devaluation during the Lehman crisis, stabilising at a net 20% fall against the currencies of its main trading partners. In this way Britain has offset the cost of the crisis, avoiding double-digit unemployment but amplifying the impact of the commodity price inflation that has now taken off.

The most amazing thing about these currency wars is that few ruling politicians will admit to taking part in them. But they exist - and I now want to situate them within the unfolding crisis that began in 2008.

The best metaphor I have for understanding this crisis, is the 1982 movie Alien.

In the movie, the alien is sitting on John Hurt's face, breathing on his behalf. The ship's doctor decides to cut it off. But as he makes the incision - blood spurts out and the alien's blood is acid. It burns through the floor of the ship, and the cast run down to the next floor and sure enough it's burned through the ceiling, dripped to the floor and is now burning through that as well. They run to the next level and the tension's rising - because if the acid burns thru to the ship's hull - bang! - end of the movie. But it stops. The floor holds it, or the acidic qualities burn themselves out.

In this metaphor the banks are the alien. The blood is toxic debt. The first floor burned through is the global credit market - that disintegrates. But then it burns through the real economy. Output, global trade, stock market values plummet in the final quarter of 2008 and early 09.

Then the state rescues the free market. The state, which was told to butt out of the market, that it could never play a useful function, that it could never regulate better than the two parties in a deal could. Suddenly the state steps in. Bailouts whose value in both the UK and the USA came close to totalling a year's GDP. Fiscal stimuli totalling around 12% of GDP in the USA, China. Quantitative easing in the USA, UK and Japan again totalling a similar amount. And that stabilises the crisis.

Now here's the problem. Some parts of the state formation were not strong enough to hold the toxic matter in check for ever. So it has now begun to burn through and destroy aspects of political arrangements in the world. I will list them:

  • The Eurozone - where the social model in the peripheral countries has to be destroyed so the Euro can live;

  • Bipartisan politics in the USA - which cannot survive the entry of the state into economic life without provoking a severe existential crisis among the population;

  • British social democracy - insofar as its economic programme was based on being a conveyor belt of tax revenues from the financial and service sectors down to poor communities whose lives never got any better;

  • Finally, and now spectacularly, the whole economic model in Arab north Africa based on state capitalism and patronage suddenly could not deliver rising employment to its new educated middle class and - with the return of commodity price inflation in 2010, began to be shaken by revolts and unrest.

You have to see this third phase of the crisis as the interplay between efforts to foist the cost of the crisis onto a country's own population - and efforts to offload it onto another country's population in the form of currency appreciation and inflation.

Korea, the Phillipines, Indonesia, Colombia and South Korea are all engaged in some very public thinking about the same kind of capital controls as Brazil imposed. And currency manipulation spills very easily over into trade sanctions.

The US Congress passed the Currency Reform for Free Trade Act authorising the government to take punitive trade sanctions against any country whose currency was deemed to be undervalued by more than 5%.

Here's a graph of undervalued currencies: most of them in Asia, as proposed by HSBC's forex team. (ref Cline and Williamson, Petersen Institute/HSBC).

a graph

American policymakers make continued and resolute statements that they have no intention of weakening the dollar through loose monetary policy. Mervyn King has, in private been more frank: a senior and reliable source inside the bank told me Mervyn "was very proud of himself for talking down sterling" during the 2007/8 crisis.

When I studied the political economy of the Great Depression, in the early 1980s, we tended to focus on the Keynesian and Marxist explanations - falling effective demand; disequilibrium; the rate of profit. Everyone agreed that the money supply had collapsed and that prices had fallen but Keynesians tended to see this as a consequence, not a cause.

One of the fruits of the rise of neoliberal economics in the 1980s is that everyone is much more enlightened as to the monetary and forex explanations for why the stock market crash turned into an output sliump. Indeed the greatest contributor on this subject is Ben Bernanke himself. He argues that US monetary contraction was a result of faulty institutions and bad policy and that the bad policy was a result of the USA's determination to stick to the Gold Standard, at a time when many of its competitors were leaving: that is, to maintain an unviably high price for the dollar against gold.

"To an overwhelming degree the evidence shows that countries that left the Gold Standard recovered from the Depression more quickly than countri that remained on gold."

Those that devalued first, like France or Belgium, recovered first. This, to me, despite all the public statements, is the logic behind the policies of all the major economies.

China struggles to maintain its undervalued currency. The USA struggles to devalue causing a secondary conflict with Emerging Asia and Latam; ditto the UK; the Eurozone is caught in the middle - but the Bernanke law forces peripheral Europe into an internal devaluation.

One school of thought sees this all leading to a resolution of the global imbalances - on capital flows, on trade, on current account. I don't. It is already leading to disorder - in North Africa rising food prices are just one factor in the unrest but they are a factor and they are in part the result of the wall of money flowing from the developed world into the Ems.

Premier Wen Jia-Bao has with disarming frankness explained what the impact would be of the desired change in the Yuan-Dollar rate:

"If the yuan isn't stable, it will bring disaster to China and the world. If we increase the yuan by 20-40 percent as some people are calling for, many of our factories will shut down and society will be in turmoil."

There is an other reason why the "orderly rebalancing thru currency war" story does not stack up - and it's been pointed out by HSBC's forex analysis team. (Currency Wars: What are they good for? November 2010, Bloom D et al)

Looking at the Plaza Accord of 1985 - designed to rebalance the current account situation between the USA, German and Japan, and to cure high US unemployment - HSBC concludes:

  • The scale of the changes needed to address current account imbalances is too large to do in the medium term;

  • Even if you achieve a big exchange rate adjustment, the trade imbalances are very sticky - they don't easily respond: you don't get in other words a bunch of toy factories opening up in Tennessee

  • And finally there are unintended consequences. The Plaza Accord laid the basis for the loose monetary policy in Japan that fuelled its property boom and bust - a bust which, lets remind ourselves, Japanese property prices have never recovered, even 20 years later.

So what to do?

China has proposed a new global reserve currency; America proposed and withdraw a voluntary cap on current account surpluses at the Seoul G20. [There's been some scant movement on this actually at the G20 meeting this week but nothing spectacular]

But the two proposals would have to be seen as elements of a much bigger global restructuring of capitalism that is beyond the scope of this discussion.

I will finish with a warning. I recently played the excellent mega wargame Hearts of Iron III, which stretches from 1936 to 1947. It models internal politics, espionage, resource allocation and of course trade. But by 1936 - if you are a country like France, Britain or the USA you do not have much to worry about: nearly all your trade is with your own currency bloc. Its an affront to the modern mind to propose - as France - a perfectly economically equal trade between Chile and yourself only to be rebuffed with the reminder: "Chile is a puppet of the United States".

By the mid-1930s the Gold Standard had been replaced by near hermetic trade and currency blocs. Soon another one would be formed, around the Reichsmark.

That is what happens when, to go back to the Alien analogy, the acid burns through to the hull of the spaceship.


  • Comment number 1.

    Competitive devaluation, as in the 1930's, is a reaction to the crisis.

    Still we don't have any real discussions about why capitalism has crises.

    All the time we just stay at the surface level & accept crises as if they just happen like the weather, then we never really get anywhere.

    As an economic journalist I want to see you getting the politicans, central bankers, city & academic economists explaining why there are crises.

  • Comment number 2.


    The Common cold research unit closed (in part) because they just could not give the volunteers a cold TO ORDER. It became apparent that WE DO NOT KNOW ALL THE FACTORS IN PLAY.

    Money isn't working.

    Nuff sed.

  • Comment number 3.

    Dear Paul,

    Thank you for this insightful and comprehensive global analysis. I shall need read it a couple more times at least to "grok it to fullness¹"

    Initially though, two separate strands of thought occur to me. The first is that currency manipulation is not always by governments and sometimes not even conscious. We regularly have hedge funds and financial traders trying to force currency movements for the sake of making a specualtive profit. Also, in the lead-up to the world financial crisis we had currencies like the pound and the Icelandic Kronur rising to way beyond the level appropriate to their economies. This was because of a build-up of foreign-financed debt in these countries, either to faciltate speculative "investment", or manipulation of markets like the UK housing market.

    The second strand of thought is this. If politicians and business leaders in countries like the US are starting to talk about "fair" competition, this begs the question: on what grounds can competition be deemed to be "unfair"? From the point of view of a British or European worker, surely it is unfair to have "free" competition with countries where ther are no health benefits, retirement pensions, education entitlements etc. In other words, unfettered global free trade is revealed to be a sham: the deliberate creation of an unlevel playing field to induce a race to the bottom in living standards.

    BTW I am not against competition. I sing in a male voice choir which regularly takes part in competitions. We do it partly for the chance of glory, but mainly to raise our game and thus please our audiences. Of course as a small choir of forty or so, we can't perform the same repertoire as a very large choir, but we have a successful niche. Some choirs are disappearing; we are not.


  • Comment number 4.

    ..If we increase the yuan by 20-40 percent as some people are calling for, many of our factories will shut down..

    that's ok close ours instead. dump surplus on africa. the eu did.

    or china could invent something useful instead of stealing everyone else's ideas?

    if china had to pay royalties most of its production would be uneconomic?

  • Comment number 5.

    @4 Jaunty, don't forget that much Chinese production is on behalf of Western companies like Apple - no patent infringement there. It's that race to the bottom. We had it when Dyson moved production to Malaysia.

  • Comment number 6.

    if you had no rules or bad rules in [the complex] air traffic control system would not planes would be colliding and dropping out the sky so why do people think the [complex] financial world is best with no rules or bad rules?

    a handful of people who launched a tsunami of debt still walk free and there is nothing to stop them doing it again. in fact they are. through things like carbon trading, through one way bets on the taxpayer having to bail out the financial system and through the oligarch commodity tax on poor people?

    all the exit strategies are 'bosnian pyramids' which means they may or may not be real but we won't know the truth until much later.

    [bosnian pyramids]

    cameron recognises that uk politics institutionalises incompetence and deals with it through the big society mantra which is just a way to spread the incompetence further out. The 'blind spot' for cameron is if you give power to the people why should they let the elites hold their position of privilege? so the big society invites riots, public takeovers of decrepit institutions that no longer serve a real purpose?

    the mathematical problem we face is in a zero sum game does anyone have to the right to be rich and claim more than their fair share and so make others have less?

  • Comment number 7.


    the fines china imposes upon copyright ripoffs is a fraction of the profits. chinese courts turn a blind eye to unlicensed copies.

    .. As long as they are going to steal it, we want them to steal ours. They'll get sort of addicted, and then we'll somehow figure out how to collect sometime in the next decade.
    —Bill Gates

  • Comment number 8.


    if the toxic acid of unrest burnt through the uk social society would the uk state act like egypt or like Libya and machine gun protesters on the street? are our monarchists in the gaddafi mould?

    if you create a sea of people with nothing left to lose then what are the likely social outcomes? positive or negative. how do failed elites maintain power except through violent repression?

  • Comment number 9.

    i wonder if JP in his empire series will deal with the basic apartheid of imperialism ie for someone to be imperial they must make someone else imperialised?

    so our national awards are ones that promote an apartheid? [knights of the british empire etc]

    mind you one can self justify and say you have been ordained by god to rule over others? which shows you need a false belief rather than reason to be an imperialist and think it and its language good?

  • Comment number 10.

    @8 "....if you create a sea of people with nothing left to lose then what are the likely social outcomes?...." Nothing to lose but their chains?

    Jaunty - are you turning into a revolutionary? YOU used to accuse people of sounding Marxist! ;-D

    Actually, I agree, and it does worry me, because in that kind of situation too many innocent people get hurt and often the wrong people rise to the top.

    Worcesterjim has a dream of "wiping the smile" off "Diamond Geezer"'s face. I do sympathise, and my gut anger would sometime incline me to want to reduce his height from 5'6" to 4'8".

    But I'd settle for sentencing him to 10 years in a homeless B&B with an electronic tag, or maybe sending him to China to work in an electronics factory.

  • Comment number 11.

    Mr Mason you transcripted (but could also have explained a little more explicitly for a general audience) :

    'By the mid-1930s the Gold Standard had been replaced by near hermetic trade and currency blocs. Soon another one would be formed, around the Reichsmark'.[End]

    And the analogy with today is....? Trade wars and ...? New Mark ? WWIII ? Can't you spell out your views for us instead of using hints and innuendos more suitable for students. We are not all lively economics undergraduates - unlike the Warwick Conference !

    Perhaps your weekend took your energy away from additional endeavour : at least we have your approximate transcript - and doffing cap - I am making a request rather than hawking a complaint.

    Supply-side adjustments are not so easy any more it appears. (They were not even in the '30s.) And to the extent that they are rather 'sticky', rebalancing will take time and lead to some disappointed aspirations.

    I wonder why you and Ms Flanders don't seem very willing to discuss, with rigour, calm ways for the Nation to come to terms : if the distinct possibility is that absolute living standards will continue to fall for large sections of the developed world, what good is mere hinting ? Of little benefit I fear to a thicko such as the current reader .

  • Comment number 12.


    Your talk seems to draw upon many of your posts and past analogies.

    Yet somehow, this time,despite having lots of good ingredients I don't think you have baked a good cake here.

    I don't quite buy the 1930's analogy / warning.

    Technology has changed that dynamic as can be seen, in part, by the way the protests seem to be playing out at the moment.

    There again, maybe I just hope you are wrong.

  • Comment number 13.

    Just running with the Alien metaphor a little further, does that place Hank Paulson in the role of Ash (you know, Ian Holm)? Scare the pants off us by spilling some Lehman Blood - just enough to illustrate the dangers of removing the face-hugger/vampire-squid - and then leave well alone?

    Of course we later find out that Ash did not have our best interests at heart, but had been placed on the ship by the corporation for a special mission. The crew are all expendable. It is arguable that Ash knew exactly what he was doing and that there was never any real danger that the acid would breach the hull.

    Are we now seeing the scene where Ash gets his head knocked off by a fire extinguisher played out in North Africa? I just hope that nobody engages the ship's self destruct mechanism...

  • Comment number 14.

    The most interesting economics blogger on the BBC website.

    Don't forget that a number of Asian economies are pegged to the USD. For how much longer?

  • Comment number 15.

    So the elite in China are protecting their employment at the expense of social mobility. How long can they keep the stopper on that bottle?

    The elite in the US are pumping up the supply of dollars in the hope of restarting their economy at the expense of other countries which have enjoyed a long and relatively stable relationship with the US.

    The European elite are behaving like water fowl: serene on the surface but paddling like mad underneath. But we have to accept that Europe’s problems are small beer compared to what is going on in the Mahgreb right now. I never thought I would need to pray for any Libyan.....

    The elite in the UK continue to think they are running an island, forgetting that in the world economic order they have helped so much to create we are not isolated. I do get a sinking feeling that the rich are buying places in the lifeboats in the hope the rest of us won’t notice. Forget `Alien’, remember `Titanic’.

    I wholly agree that toxic debt is the real problem but it continues to be treated like the elephant in the room.

    Elites around the world bought into a bogus concept of political and economic stability prior to 2008. They had decided on the advice of the emperor’s new tailors that the irrationality had been rationalised out of the capitalist model and so there were presents for everybody with the biggest and best for themselves. Then capitalism entered its destructive phase as it always tends to do when people forget that there are such moments in history.

    Ah! I sense the scorched and bloody reek of history: my first and perhaps my only real love!

    Now what was stable is in flux; a flux made all the worse by the elites who are refusing, like all Bourbons and Stuart monarchs bar one, that the world has changed and so must they. The theory was a lie and so is the elite which had sustained itself by this lie: each has become as redundant as the other. Time for change!

    In the UK the social-democratic model is broken. It has been under dire stress for decades as the economic structure that sustained it was gradually strangled by those twin assassins called incompetence and greed. It is pointless now complaining about cuts in fiscal spending, increases in taxation, growing unemployment and falling demand as for years the real economic fortunes of this country have been buried beneath layer and layer of accruing debt.

    Tomorrow does come and history happens! Learn my friends, and learn well. Debt is the enemy of the working man so look out for those who have put you into debt, even though you have yourself saved for a rainy day, as they are truly the enemy of all good and decent folk.

    The window glass of refracted truth has broken and we are exposed to the chill wind of reality. Yet we must embrace that wind whose austere harshness will provide us with the keen incentive to bring rationality back to our affairs.

    The debt needs to be identified and managed out of existence. If this means the casino banks need to be broken then they must be broken. Resources need to be focussed in creating more real jobs. If this means the payola of senior public employment comes to an end to be replaced by public duty and conscience then it must be done.

    To my simple puritan mind austerity demands equality so that the available resources can be spread further so that more are sustained with whatever remains. Nobody spoke better words than half-colonel and siege-master Tom Rainborowe (Rainsborough)at the Putney Debates in 1647: `... that the poorest he that is in England hath a life to live as the greatest he...’

    I also commend to all the opening sentences of Gerard Winstanely’s Digger manifesto of 1649 in which he declares that where does the good book argue `that one branch of mankind should rule over another’.

    These are native sentiments, that other portion of the Anglo-Saxon model that is rarely alluded to, but which rings true to every generation that finds them. And I haven’t even reached John Ball yet: I will keep the memory of that well-intentioned yet sadly foolish man for another time.

  • Comment number 16.

    Another fascinating blog, but Paul dont hang back give us the answer!
    A currency war may not lead to a solution although it seems to be a fait accompli. The Chinese may be waving redundancy notices and internal instability but the race to the bottom cannot be allowed to continue which will lead to the West's own Tahrir response (keep your eye on March 26th).
    The potential of a currency war is in the willingness to abandon international free trade in favour of rules and trade agreements. The UK however should not sit idly by and allow its employment to be destroyed. It must make it difficult for firms to just up root and cash in on the desperate sweat shops in the third and second world.

  • Comment number 17.

    It's debt deflation anyway, Jim, but not as we know it!

    The Bernanke policy is just trying to stave off the day of reckoning, when the US dollar (and potentially all fiat currencies) gets a swift reality check:

    "What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur.

    On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities or anything else that might be deemed an indicator of inherent value. Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the US dollar, but of all fiat currencies."

    Debts that can't be paid, won't be paid.

    The US dollar itself is playing the "too big to fail" card (and they have the UK, Japan and China most locked in to this!). The conclusion won't be pretty:

  • Comment number 18.

    Unfortunately the world is a messy and incoherent place despite our pretence of order and understanding (which we must do and we probably get better at...though there is a danger that current monetary policy/experiment proves a great leap backwards despite appearing to have somewhat worked so far). Our problems will be solved by our reaction to the stress and strain of our current imbalances...the winners in the race are those that can cope best with the stress (UK is showing an interesting lead). That is probably the current great powers with their robust institutions, companies and markets (yes, the market is robust once it puts childishness aside as it will...always a chameleon). And then the emerging markets that are used to surviving on a slim access to capital will be okay. But it is the plump and capital indulgent that one needs to look out for...perhaps some of the oil economies...but really China is the most grotesquely 'capital obese'....just another slice, go on, and another...POP!

    Lovely blog...sweeping...but I suspect a decent stab at a grand summary of what's going on. Although we are more established and stable in Europe and US I think the 'revolution' is coming here (we always have them just less dramatically than a place like Libya...see Margaret Thatcher for example, or the formation of single currency, German reunification and its consequences, etc). The US is where something big is brewing though and it should turn out interesting, radical and likely good once they get round to it

  • Comment number 19.


    funny if reason is now 'revolutionary'? :) what a strange philosophical planet that must be?

    not sure that is the same as marxist which takes class as the highest idea of the mind [which given uk society is dominated by the apartheid of monarchism is probably accurate as to what the monarchists think is the highest idea of the mind]. so marx solution is to combat the apartheid of monarchism with another apartheid of workerism.

    the logic of the zero sum game is to lead to war or self imposed rationing for the greater good.

    on twitter today we learn of the telephone number wages the bbc pays 'the talent'. yet if the wage bill is divided by the number of staff the average bbc wage is 40k ish. so the 'tin opener' people use to pay others less so they can have more is the 'talent and what they could earn in the private sector' narrative which we know is bogus.

    maybe we should have a zero sum game average wage for all balloon debate where people have to justify why they should get more meaning others get less even though without the whole team nothing would get done. Why should we depart from the average wage for everyone? what strategies or jedi mind tricks do people have to employ to make others poorer so they can enrich themselves? this also works on a nation state level. if china is to have 8% growth a year who must shrink?

    curious news international is on twitter? when their news is blocked on the search engines?

  • Comment number 20.

    15. At 10:52am on 21 Feb 2011, stanilic wrote...very well !

    Superlative writing, stanilic.

    The Mahgreb does not of course contain the Emirates, but that little issue aside, there is an enclave around Marble Arch which could be justifiably titled its suzerainty.

    Although one cannot but admire your prose , not everything you say finds agreement at my end. But it would be churlish to debate anything of substance after having been so royally entertained.

  • Comment number 21.

    there has been some disquiet in recent days about BBC foreign correspondents on junkets out in the middle east....what tosh. Any BBC hack who goes there at the moment with bullets flying round deserves our praise not cynicism...brave guys....I wouldn't do it...

  • Comment number 22.

    @19 Jaunty - I apologise for teasing you. Actually, sad or not, reason has always been revolutionary - think of Thomas Paine. The problem with revolutionary reason is when enthusiasm transports its application from the real world to a fantasy world of the heart's desire.

    Unfortunately unreason can be revolutionary too. This is very much the case with the Teabaggers in the US. To say they believe in a square circle is far too simplistic: they believe in a hyperdimensional cubic sphere linking warped Christianity, fairytale Capitalism, guns, conspiracies and a total disregard for any facts about their own or anyone else's history which might challenge their world-myth.

    "..maybe we should have a zero sum game average wage for all balloon debate where people have to justify why they should get more meaning others get less even though without the whole team nothing would get done.."

    I agree. I've never understood why people who have a job which they enjoy should be paid more than people who have a job which is fundamentally unenjoyable.

    Obviously people like my plumber (may all Deities preserve him) will gave a greater or lesser income depending upon how much he chooses to work. However I know that for him prices vary according to customer attitude. Actually, like many others in society who are above the breadline, his chief motivations seem to be job well done and his standing in the community.

  • Comment number 23.


    if the world of belief is different from the world of knowledge then one can say Blair 'believed' he was doing the right thing but had no knowledge as to if that was true.

    the whole iraq thing demonstrated this difference between these two worlds of belief and knowledge ie those who believed and the actual knowledge.

    knowledge requires some kind of threshold to be knowledge but beliefs are arbitrary and random and do not even need to exist in the visible realm e.g pink flying elephants, santa, etc .

    so is the free market a belief or knowledge? what kind of threshold must we have to say the free market exists? for me it is a belief. look at the energy market which has been privatised. If one believes private eye Ofgem acts like a ministry commissioning works that the energy companies then tax us for through our bills. There is no moral hazard in the energy or financial markets so it is not a 'free market'.

    cameron says he wants to end the government monopolies. but given the government does not plan for there to be moral hazard what kind of system is cameron setting up? a government backed 'private company monopoly' that privatises the profit and socialises the loss? That is the age old oligarchs model that hides behind the mask of the free market narrative.

    so it is not illegal for anyone to point out the belief system of monarchy role gaming is an apartheid model but it is TREASON if anyone even suggests this should not be the default model for the highest office of state. Which illustrates that 'the law' protects the world of false beliefs from the world of knowledge and reason.

    which is why will have more belief model injustice ie more iraqs, more ofgem style 'ministries' taxing us for works over which there is no political control and more poverty of the many created by 'the talent' and their narratives. The law will protect them from the treason of reason and say, House of Commonsequely, they 'do nothng wrong'. Must be an episode of star trek in there somewhere.

  • Comment number 24.


    That last link of yours is a very good 'from the horses mouth' raw assessment of the underpinning dynamic, which I have agreed with for some time.

    To see it put that way though is actually pretty scary.

    What is the BBC's excuse though?

  • Comment number 25.

    My country's QE is YOUR Currency War.
    Great title and great article because most economists abd financial experts have no clue about IMPACT of American QE and/or the QE of other nations.
    As it stands, The American Federal Reserve Bank is seriously affecting, as you say, "burning down the Middle East".
    Chairman of the Federal Reserve, Ben Bernanke began a 2cd round of Quantitative Easing (QE2) in October; this followed (most suspiciously) a year of growth in the American economy at a rahter significant rate of over 3%.
    I thought QE2 was unnessary and as an economic stimulus not sufficient
    - to create enough inflation
    - to reduce unemployment.
    I thought QE2 was nonsence, especially because of the effect it would have on the poorer countries where food inflation was/is running at 15%. I thought the American QE2 was arrogant, selfish and terrubly unwise from an economic point of view.
    QE2 injected @ $600B into the financial system.
    By the Federal Reserve repurchasing an equivalent amount of US Government bonds. The former bondholder then deposits the money received into banks. Banks take these new deposit dollars and over-leverage them, often up to 10%, creating trillions in credit.
    The GDP of the US economy is @ $14 trillion/year; so, it should have been impossible for the Federal Reserve to pirchase @ 40% of the entire GDP, but no onbe said booh.
    The truth is this: QE2, like QE 1 will be invested in the stock market (which is why the stock market goes up and up); it will also be invested in commodity markets, including futures.
    Why do this?
    This is the question, and here is the answer:
    When the stock market rises, the public feels that the economy is recovering; investors think the country is gaining wealth.
    The problem:
    QE2 DROVE UP COMMODITY food prices world-wide.
    Americans = spend about 10% of personal income on food for three meals a day.
    Over 1/2 of the rest of the world spends @ 50% of personal income on food for two meals a day.
    Result: QE2 induced commodity food price increase thereby reducing the amount of food poor people can purchase by almost 1/3.
    The riots in Egypt, Tunisia, Yemen...are about economics that these poor people do not even understand, except through the growling in their bellies.
    Before Chairman of the Federal Reserve, Ben Bernanke began a 2cd round of Quantitative Easing (QE2) in October, American unemployment was modestly declining and inflation was flat.
    QE2 has not significantly reduced unemployment.
    QE2's one success was to raise the US stock market.
    Who benefits from that?
    When the Credit Crisis hit in 2008, the Middle East country of Dubai was first to suffer an over-leveraged debt crusis. Greece, Iceland, Ireland, Spain have followed suit.
    So you see Chairman of the Federal Reserve, Ben Bernanke began a 2cd round of Quantitative Easing (QE2) in October has over-leveraged worldwide commodity food prices and indirectly caused havoc in poorer countries.

  • Comment number 26.

    QE has simply made the super-rich banking and political 'elite' richer whilst plunging hundreds of millions around the world into different types of poverty - fuel poverty predominantly here in the UK, although food poverty is fast catching up in the UK, and food poverty around the World.

    I think the next flash-points in the World will come from those countries that are massive grain producers - look to South America and China. Their people will increasingly find that they cannot afford their own home-grown grain because it can fetch a higher price on the global markets.

    (I know Egypt was the grain basket of the Ancient World and the Roman Empire but I have no idea how much grain is produced in Egypt today. The climate has change has it not.).

    I was reading only this morning that a grain ETF, (Exchange Traded Fund which is a bunch of stocks in a given sector), that I was advised to invest in last June has risen 115% since then.

    I did not invest as I do not have the inclination to make profit from others going hungry - but it appears that a great many are happy to do so.

  • Comment number 27.

    The stock markets - DOW and NASDAQ - have boomed under both QE1 and QE2 but when you look at the volumes of shares being traded it is frigthening how low those volumes are.

    Have a look around and it appears that much of these shares are allegedly being traded by the big banks on Wall Street and associated firms. Most of the trading is done by computers, moving vast numbers of shares in seconds.

    Dig a bit deeper and you learn that even these low volume shares are being traded on margin - which is the same kind of thing that lost Groucho Marx and millions of others their shirts in the 1929 crash.

    Buying on margin is basically where you stump up a dollar and buy five dollars... or you stump up a million and buy a hundred million.

    Margin allows you the benefit of great upside without having to find the hard cash to invest... but the potential is for vast losses if and when the markets fall.

    I am no expert but I read a lot.

    I keeping reading articles by people with more knowledge of these things than I. They claim that a massive ponzi stock bubble has been created in the DOW and NASDAQ trying to lure in the so-called retail investors - that's the likes of you, I and Joe Public with our 401Ks, our pensions and our ISAs.

    I read that the markets are being rigged for a crash once the retail investors, seeing the massive rise in shares in the past year, decide to dive back in. I read that the banks will benefit hugely from this in the sums of many billions. At a stroke they will be liquid again.

    Revolutions are dangerous things. You do not know where they will stop. You can end up with gulags and secret Police.

    I increasingly find myself watching the news in Africa and the Middle East willing on the people. I do so because I hope that, in some small way, they will empower us to stop the corruption that is now eating both the UK and the US from within.

  • Comment number 28.

    When will we get our Tahrir Square moment?

  • Comment number 29.

    20 Amused2Death

    Thank you for your courtesy.

    I don't really mind if people disagree with me so long as we can all be polite to one another. It is not about winning it is about dialogue and ideas. We need a new dispensation which can only become evident by dialogue. There is no monopoly on truth.

  • Comment number 30.

    28. At 6:07pm on 21 Feb 2011, watriler wrote:

    When will we get our Tahrir Square moment?

    when the middle classes start to go hungry

    The BOE is has been powerless against the USA, and all it can do now is turn round and bend over to the mega money men and ladies, it is doing all it can to attract hot money into the country and set up its legislation so that the likes of the oligarchs who benefited from the russian robbery could move their money out of reach.

    The USA has been busy exporting its devaluation of the dollar through mega printing and this has forced anyone looking for a safe haven for their saving into commodities. China i have read are taking payment in commodities or promises of commodities as they know the dollar is effectively worthless having lost 90% of its value in the last century.

    Anyone who is presented with the facts can see the only way the US can accomodate its debt and its annual deficit is by printing more money and making whats left worth even less.

    Because the world buys with dollars commodities have gone up along with those buying silver and gold in an attempt to keep what wealth they have left.

    Steve Keen has done massive research and models on the world problem and the only answer is to forgive the debt.

    The UK cant put interest rates up even with the inflation rampant due to the house price situation just waiting to collapse.

    The BOE and the government should have just made safe 50k per person in their bank accounts taken in the what it could from the pension funds and then opened the trap door to the cesspit

  • Comment number 31.

    QE is the embodiment of "socialism for the bankers, capitalism for the rest of us".

    It does nothing for a country's accounts, nor for the effective money supply (as bonds are only marginally less liquid than cash), but what it does do is create a wodge of investment cash (our pensions) that has to be invested somewhere. Some of this underpins "normal" asset prices like shares and property. This has some value at the beginning of a crisis, when asset values are under pressure and liquidity is short. But it has little value now. However, some of it leaks out into other "assets" - so we end up with new bubbles and speculation on commodities. Either way, it is the finance sector that pockets the profits.

    QE originally had little purpose. Now it has none. If the government wants to spend money, then better to finance infrastructure, etc., to get the money into the real economy and reduce unemployment.

  • Comment number 32.

    The world economy is not a zero sum game. The size of the cake is not fixed - it can - and has expanded in living memory.

    The question is where has all the money come from to finance the rise in global GDP?

    Some suggest 97% of the money in circulation is created as debt. Debt which should be paid back with interest.

    There is clearly spare capacity for more work and more consumption in both the emerging and developed world. The limiting factor may be the source of raw materials.

  • Comment number 33.

    A potential solution to the currency war would be a new global currency. Each country could keep its own local currency for the domestic economy; the new currency could be used for international trade.

    Eventually, the new currency would become more trusted and convenient than the old currencies.

    This idea should get the global elite conspiracy theorists a liitle hot under the collar.

  • Comment number 34.

    @32 clockwork

    The question is where has all the money come from to finance the rise in global GDP?

    Your question is back to front. The money in the system reflects the rise in global GDP. It's been "printed". So what?

  • Comment number 35.

    latest news.

    ''UN human rights chief warns Libya that systematic attacks on civilians could be a crime against humanity''

    If the UN cheif understood the real source of instability and misery in the world he would be replacing 'libya' with 'Global financial institutions'.

    The quantum of unecesarry suffering caused by the global financial model and those who control it far outweighs, and is often the driving cause of the violent conflicts which are the only thing which seems to get the headlines or the attension of organisations like the UN after the fact.

    When will they realise that violent acts in the modern technological world are as much, if not more, about the decisions people make on the trading floors, hedge funds and central banks of the world as it is about pulling the trigger of an AK47 and act accordingly when such acts of wantom violence are commited.

  • Comment number 36.

    great blog again Paul

    "Suddenly the state steps in. Bailouts whose value in both the UK and the USA came close to totalling a year's GDP. Fiscal stimuli totalling around 12% of GDP in the USA, China. Quantitative easing in the USA, UK and Japan again totalling a similar amount. And that stabilises the crisis."
    No one seems to remember, when tarrying over the odd fraction of a percent plus or minus in GDP growth, just how big a 'kitchen sink' has been thrown at the economies of the world in the last 2-3 years. The results we are now seeing in the form of commodity inflation, recovered stock markets, and the odd motorway widening/construction project. Joe Public has not seen an awful lot of the stimulus, because central banks channeled most of it to shore up bank balance sheets. This hasn't been a crisis of government debt/deficit whatever Dave says. This has been a rescue of the major banks that became too big to fail. In a perfect world, stimulus would have been managed/channelled to restructure the developed economies rather than maintain the over dependence on financial services, bubble related industries, property etc. The problem is that in the brief window available the restructuring hasn't happened and we are stuck with asset/commodity bubbles and a speculative financial sector. We are seeing the side effects of stimulus work through, without truly reaping the potential benefits. The imbalance in currencies has not been worked through yet. To do so will necessitate further massive shifts in wealth, where in a zero sum game, some will win and some will lose.

  • Comment number 37.

    @34 gastrogeorge

    I believe the credit is created before the transaction causes a rise in GDP. For examole, a credit card is checked by the issuing bank before it authorises a transaction at the point of sale.

    A large loan for the purchase of a car or house is created and transferred to the seller before the transaction is completed.

    The point is - when the private banks are reducing the size ot their loan books (i.e. net lending is negative) it makes sense for the central banks to step in with QE to counter private debt deflation.

    As an aside, I don't see low deflation or stagnation, as seen in Japan for 20 years, as a bad thing. A target of stable 2% growth is an oxymoron.

  • Comment number 38.

    @37 clockwork

    I agree that the authorities have to intervene while the banks are reducing their loan books - to restore aggregate demand.

    But QE is pointless. You're just exchanging one promissory note (a pound note) for another (a government bond). The only differences are that one is interest-bearing and they are in (slightly) different asset classes.

    QE only effectively releases money into the investment economy - so propping up other asset prices - and increases liquidity in the financial sector - which was required at the time of the crisis to lubricate the wheels when the banks wouldn't lend to each other.

    If you want to counter private debt deflation, the only effective measure is government spending - that gets economic activity into the real economy.

  • Comment number 39.

    This is SO ON THE MONEY! Well done Paul.

    You've missed another layer to the Alien parallels...

    Bishop - The android who is tasked to betray the human characters to preserve the alien - he smiles sweetly, he seems to be on their side but all the time his only objective is to keep the alien alive at all costs.

    Step up Mr Osborne - is your blood white hydraulic fluid too? You even try and save other peoples' aliens as well - e.g. the Irish banks...


  • Comment number 40.

    Point of information?

    "Those that devalued first, like France or Belgium, recovered first. This, to me, despite all the public statements, is the logic behind the policies of all the major economies."

    I thought that France and Belgium were late in leaving the gold standard? And their economies suffered as a result?
    "The first three countries in the table were members of the Gold Bloc, who remained on the gold standard until relatively late in the Depression (France and Poland left gold in 1936, Belgium in 1935). The remaining three countries in the table abandoned gold earlier: the United Kingdom and Sweden in 1931, the United States in 1933."


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