The masters of the universe and the great Inflation God


The Euro falls against the Dollar. To historic lows. Why ? Well it seems that the ECB has been sending out some fairly strong signals that it is going to launch a significant stimulus in the face of the looming threat of deflation. That means it will print money because they are afraid that things folk buy may get cheaper rather than dearer.


There are a number of rational responses to this news. Sometimes a good cry can make a fellow fell better. The more contained can have a good hard cynical laugh. Those like me can shake their heads in disbelief and observe that we are truly through the looking glass.


I once observed that a government stimulus in an economy like Irelands was much like pissing in a colander. You don’t save the piss and you ruin the colander. Well the fact is this is true pretty well every where, and this fact is well known everywhere. It didn’t work in depression era USA. It didn’t work most recently and spectacularly in Japan and it wont work here. It will drive asset prices and create a big bull market but when the heroin of cheap cash is eventually withdrawn those bubbles will deflate with all the concomitant damage.

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But why are we so frightened of deflation anyway? If there is bad deflation and we have it then that is a signal that the economy simply has not yet been allowed to clear the malinvestment  which accrued during the periods of growth. But surely in the modern economy we are surrouded by the joyous miraculous deflationary power of the free market and technology.


Every single thing in your house that comes with a plug is cheaper now in absolute terms, not real terms, than it was ten or twenty years ago. Food is cheaper. Travel is cheaper. Books are cheaper. Cars (adjusted for quality) are cheaper. We know all too well the noxious power of inflation yet now our policy makers desire it, a little  just a little inflation to make us feel better. We live in states where saving is now regarded as a dangerous and contemptible activity. It must be punished while those who borrow and get deep into debt are treated with the utmost solicitude and it of them and only them that our dear leaders think when setting the price of money.


Recently our friends at the Cato Institute published what was in effect an obit on Keynesian economics. Their brief return to popularity was over; the tide was going out on JMK once more. Would that it were so. The error that Cato makes is to assume that simply because something patently doesn’t work means politicians who have tried everything else won’t try it.


It is the nature of Parliaments to be full of people who are there in order to do things. These are active and energetic people. This is our own fault for sending people like that to govern instead of decent lazy sceptics who would do as close to nothing as possible. When bad things happen they run and rush and do. And when all the running and rushing and doing still don’t not have the desired effect they know in their hearts only one thing. Something Must Be Done. Like patients with terminal illness they will abandon the scientific and the rational and return to magic. When very very often what an economy most desperately needs is that they do nothing. And lots of it.


Until we return to a time where we elect men and women to Parliament who see their principle duty as being stopping the state from poking around in the lives and affairs of people we will be ruled by a class which will fall back on magic and alchemy rather than admit its own uselessness.

And that is simply why Keynes will never die. Whether or not his theories correspond to reality or have any predictive or curative powers is irrelevant (they don’t). What Keynes provides is a system which needs, indeed demands, experts administrators and politicians and makes them the masters of the economic universe. Such a system will never lose its attraction to the people who rule over us; experts administrators and politicians.

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