Imagine 10 kids in a room and each one has been given a pile of sweets and $10.00. They will do what is embedded in their DNA - trade. And trade will flourish until the sweets are gone (note the money is still there) unless parents replenish supplies. Prices of the remaining sweets will rise exponentially when supplies are low and everything should obey the laws of economics as we know them. Introduce credit and allow one child, Bankster, to be the representative for Mrs Dragspan. Bankster is the only child allowed into the kitchen where he can get sweets and/or money and on-lend to other children on credit. The kids like this new system.
Fast forward two hours: some kids have gone berserk and bought so many sweets on credit that they are on a massive sugar high and have no way to repay Bankster who now is also under pressure as he has no security for all the credit sweets he has given out. The party is falling apart. No worries, Mrs Dragspan settles the kids with a game of musical bailouts where, when the music stops, everybody has to give their sweets to Mrs Dragspan who redistributes them equally, well not really, most of the sweets goes to Bankster to shore up his balance sheet, but that’s the story anyway.
Now Mrs Dragspan is complaining that the party is muted as a result of her actions. 8.2% of the kids are sitting on the side-lines with no sweets sulking. “Kids today!”
So Mrs Dragspan invents another game; give each child some sweets and unlimited paper on which they can write their own denominations of money. Ask them to be reasonable and not to abuse the system.
Sincere children will print amounts akin to the real world and trade with integrity. Some quick-witted souls will realise that they can write higher and higher denominations in exchange for sweets. Even more quick-witted will realise there is a bigger game in town, they can exchange their “insincere” currencies with those written by children of integrity. Thus the quick witted children engage in buying other’s sweets with their money (money printing or QE) and buying sincere currencies with their insincere currency (currency wars).
(Both imply an implosion of the foundation to money and credit , a lack of faith in the home currency and both lead to eventual devaluation of the said currency and inflation).
What if all children do it?
It will be a race to the bottom with children, limited only by the amount of zeroes they can think of, writing higher and higher denominations. Eventually the children will revert to barter, accepting only sweets in exchange for sweets. Children will start to distrust other children’s sincerity and even ask for their store of sweets held in safekeeping to be returned (Bundebank gold?). The ultimate realisation is that the money is worthless unless underwritten by children of integrity.
And so the party ends once more, Mrs Dragspan can no longer kick the can down the road, the children snivelling post sugar crashes are corralled back into SUV’s by the book-club riot police wielding Gucci handbags only to be hypnotised on arrival back home with 3 Disney DVDs.
(If money is so dependent on integrity for its existence why are Central Bankers milking this important facet and risking its demise? That is a conundrum…it seems unnaturally careless…It’s like letting baby Superman play in the Kryptonite park or letting teenage slugs play with the salt cellar! Or maybe it is more like putting Hannibal Lector in charge of the blind school)
It is only a matter of time before some previously responsible Central Bank does a dawn raid on its own currency buying massive amounts of other currencies with its own, the same currency which it has brought into existence with a stroke of a digital pen.
Can the government then use the proceeds? Probably. It might even become a popular financing mechanism. Instead of “realigning wealth” from their own citizens through inflation and QE stealth tactics, this steals from all other countries as well as they have overestimated the exchange rate (and the integrity of the central bank in question)
Currency volatility anyone?