June 2014: Richard 'Jerry' Haworth - My wife, the central banker

Most people on this planet have a currency, their own personal currency; credit. Every time we write a cheque (admittedly, rare these days), we are printing our own currency. If there was no stale date i.e. 6 months after signing, it would be identical to a currency. We could hold Warren Buffet’s cash cheque forever knowing he is good for it.

Consider a family with a breadwinner and a resource allocator. The resource allocator normally controls the finances in a family much the same way as central banks do. In the old days, the breadwinner would stipulate an allowance which could be spent by the resource allocator on family matters i.e. a budget.  In the same way, governments are given an allowance (taxes) which is then spent against a budget. We modernised a bit and introduced (almost simultaneously) the credit card and the government bond. These two “improvements” allow the resource allocator access to credit WITHOUT implicit permission of the breadwinner.

Uh oh. History should have been fairly predictable at this point. Both the resource allocator and government overspent massively leaving the family/economy up to their ears in debt, and didn’t really tell the breadwinner the truth, the whole truth and nothing but the truth.

Along comes an extreme event e.g. retrenchment for the family, 2008 for the government. Normally credit evaporates leaving a vapour trail where “money” used to be. Cash or present money becomes very valuable and everybody starts selling assets to accumulate cash, all at the same time.

We tell ourselves ‘this time it was/is different’ which is a godsend to everybody up to their yingyang in debt! By blaming external events and not ourselves we give ourselves permission to reduce interest rates to zero thus minimising our repayments to near zero.  In a rare feat of mental gymnastics we argue MORE debt is the solution and thus we start maxing both the credit card (family) and the issuance of government debt (government).

This still isn’t enough… we are sliding down the slippery slope of the debt black hole. The resource allocator goes back to the drawing board and in a Eureka moment decides to write cheques not only to cover expenses but also to repay the credit card! Quantitative ease people! Monetise our credit/currency! That way the breadwinner doesn’t have to work, the resource allocator doesn’t have to save and the credit card gets repaid. Simple!

At this stage the breadwinner suspects things are too good to be true but having money for nothing feels good so it seems best not to ask too many questions, especially as everyone else is doing it. Cheques are going out of the chequebook like hummingbird wings…

Next comes the coup de grâce. The resource allocator, knowing the breadwinner smells a rat, lets him/her into the game and says “Honestly darling there is no need to worry, you don’t have to work, I will just write cheques for whatever we need.” Government in turn, starts reducing taxes, just like interest rates, to zero making up the deficit by monetisation.  Both under the pretence they need to get the economy/family going again. But it becomes normal and the couple/government realise over time they just have to monetise their expenses and debt repayments and they can live happily ever after.

Where are we going on holiday this year dear?