Quantitative Easing, Inflation and Civil Unrest

I have written before about the convergence of crises that threatens not just our prosperity as a nation, but global prosperity - peak oil, global jihad, overpopulation, and resource wars. However, more imminent is the prospect of great economic instability, with the Irish banks an obvious reminder that we are unlikely to see an economic recovery any time soon.

The coalition's ruthless cuts will needlessly impoverish many of the poorest people in society, which will undoubtedly create resentment and possibly even social unrest. However, this would pale in comparison to the prospect of high inflation coupled with stagnant household income which would thrust many millions into real poverty. You may think this is an unlikely scenario, but the reality is this may well be the result of 'quantitative easing'. The following extracts are from an article published in The Daily Telegraph back in July:

Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).

The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.

People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".

Interestingly, The Bank of England has introduced £200 billion into our economy this year in a process now known as quantitative easing. Over in the United States the monetary base has risen from $871bn to $2,024bn!

The article continues with a description of the horrors that hyper-inflation created in the Weimar Republic:

Near civil war between town and country was a pervasive feature of this break-down in social order. Large mobs of half-starved and vindictive townsmen descended on villages to seize food from farmers accused of hoarding. The diary of one young woman described the scene at her cousin’s farm.

"In the cart I saw three slaughtered pigs. The cowshed was drenched in blood. One cow had been slaughtered where it stood and the meat torn from its bones. The monsters had slit the udder of the finest milch cow, so that she had to be put out of her misery immediately. In the granary, a rag soaked with petrol was still smouldering to show what these beasts had intended," she wrote.

Grand pianos became a currency or sorts as pauperized members of the civil service elites traded the symbols of their old status for a sack of potatoes and a side of bacon. There is a harrowing moment when each middle-class families first starts to undertand that its gilt-edged securities and War Loan will never recover. Irreversible ruin lies ahead. Elderly couples gassed themselves in their apartments.

Foreigners with dollars, pounds, Swiss francs, or Czech crowns lived in opulence. They were hated. "Times made us cynical. Everybody saw an enemy in everybody else," said Erna von Pustau, daughter of a Hamburg fish merchant.

The Death of Paper Money; The Daily Telegraph; by Ambrose Evans-Pritchard; 25 Jul 2010

We are living in interesting times.