When the current and on-going bank debt crisis began in 2007 we were told that the answer was to print up money (call it QE or ‘borrowing’ if it makes you happy) and give it to the banks. This would, we were assured, relieve the purely short-term cash and collateral shortage the banks appeared to be suffering, and once it did that the banks would be able to return to lending to the the real economy and we would all be saved. They printed. They gave it to the banks and…nothing happened.Except that it all got worse.

The banks got the money. But they did not lend to the real economy. Much of the cash they received, they parked straight back in the central banks where they were paid interest on it – by us.  Some was used as cash flow to pay bills. The rest, a growing amount, was used for speculation. Either by lending it to speculators or by the banks making it available to their own internal Prop. trading desk where they could speculate with it themselves.

Which was lovely if you were a banker but it did also mean that when the bankers needed more money and more had to be printed, there was a problem with justifying it. At first the bankers and our rulers tried to brazen it out and claimed we just hadn’t printed enough the first time, or the second, and a bit of belt tightening and a dose of ‘we’re all in it together’ cap touching and forelock tugging, as we handed our betters some more cash, would do the trick this time. Only it didn’t.

Then something new entered the story. Instead of being forced into talking about the failure of what they had done, our leaders began to point to other countries who had been printing and claimed that while we were printing in order to help our banks lend and help the rest of us, ‘they’, those johnny-foreigners, were printing in order to devalue their currency against ours. And although no one actually said so, there was the handy, albeit unspoken implication that perhaps the reason our printing hadn’t worked was because some countries, mentioning no names – oh all right then, China and Japan! –  were undermining all our otherwise brilliant efforts with their dastardly and selfish currency manipulation!

We were printing to help our banks help us. They were currency manipulators.

We seemed to slide from a world of central banks taking ‘coordinated and heroic emergency actions’ to a world where the same printing, when done by foreigners, was now reported as a ‘race to the  bottom’ of ‘beggar they neighbor’ devaluations.

Tempers have frayed. G20 meeting have become even more farcical and resemble ever more uncannily the gatherings of powdered, wig-wearing elites, so far removed from the people they rule over that they simply can not imagine why the commoners don’t just work harder, earn less and consume more like the plan says. Let them eat cake has become let them borrow. Why won’t the ungrateful wretches understand that there are no free hand-outs – at least not for them. Money can only be handed to those who know how to use it profitably, not waste it on pointless things like health services and pensions. The common people must realize they have brought this upon themselves and must now accept their medicine and work longer for less so they can get back to shopping, consuming and above all borrowing.

But I digress.

It seems to me this familiar story is missing something. Nations are printing and despite the fears of hyper-inflation none has so far appeared. Why not? I am sure there are many factors but I would like to offer one I have been thinking about.  Inflation occurs when the supply of money grows out of proportion to the economic activity it serves. When there is too much money around for too few goods and services, then prices inflate.

Fine. But how do we calculate the volume of goods and services the money is servicing, in order to know when re-flating will become inflating. The standard way is to compare the money supply with GDP. But money, in our debt backed world is tied up in credit and the larger and thoroughly international, border-less world of credit backed ‘money’. That money does not stop at borders or fit within the statistics compiled within those borders. Most of the  ‘broad money’ is simply not captured by national GDP figures but still exists, in the shadown, off-shore world.

We print and from that printing comes a torrent of new credit and debt which takes our currency and ties it to economic activity beyond our borders and beyond our economy. I have begun to think our nations are printing with another goal in mind. The more nations print the more their currency oozes out into the global economy, The more deals denominated in your currency the more good and services it is tied to. Those things may not be in ‘your’ economy, but they are still things your currency services and as such they form the demand for your currency which in turn, is what gives it its ‘value’.

Nations that print do run the risk of inflation IF the volume of that currency becomes too great for the economic activity it services or to put it in another way, the amount of economic activity the currency has access to.

I wonder if nations, who by this point have painted themselves in to an exit-less corner of having to print to endlessly prop up their banks and achieve short term devaluations of  their currency, have realized that if you can’t spur growth in your home economy then a workable alternative (and a far faster one) is to insinuate your currency in to other people’s economic growth.

If so then the situation evolves again. Nations that have been printing can see that if they can expand the use of their currency –  by making it cheaper to borrow, selling more debt so more people hold IOUs in your currency, getting your currency in to other people’s hands so more people use it to fund their economic activity, –  then your printing and your currency is tied to ever more economic activity, much more than you have at home, and is, by this means, safeguarded from inflation. I wonder if we could consider the Yen Carry -Trade, part of the reason Japan could print all through the  lost decades without inflation? The Japanese economy didn’t have to grow as long as trade utlitizing the Yen did.

Are we entering a world where printing begins to create its own imperative to print more.  The more you print, the more your currency invades other people’s economic activities, the safer your printing is and the more license you have to print yet more.

This, it seems to me, ushers in another side to currency wars. This side is not simply about currency manipulation and devaluation but about Currency Imperialism. Print up cash the way you used to train up soldiers and send those paper and electronic warriors off to conquer foreign lands. The only problem is the one common to all forms of Imperial empire building. Not everyone can expand indefinitely. At some point empires rub against each other and compete for space and influence. If I am even partly correct then wars will be fought over whose currency is used for what, by whom and where. I would suggest two wars, at least, have already been fought, at least in part, over this when the Euro and dollar clashed over what currency oil should be sold in. And I think this might prove to be a useful way of deciphering why new wars will be fought.

I have written about Currency Wars before offering specific analyses looking at China, Iran, India and Japan among others.

https://www.golemxiv.co.uk/2012/01/a-new-reserve-currency-to-challenge-the-dollar-whats-really-going-on-in-the-straits-of-hormuz/

https://www.golemxiv.co.uk/2011/04/making-the-new-sub-prime-part-1-backdoor-to-china/

https://www.golemxiv.co.uk/2011/04/making-the-new-sub-prime-part-2-whats-in-store/