Category Archives: GIS Statements

GIS Statements

Economies need structural reform, not helicopter money

GIS statement by Prince Michael of Liechtenstein

Money facilitates trade and serves as remuneration for work. It also stores value. Money that is earned but not spent becomes savings, which can provide capital for investment. The effort expended in providing labor, services, or entrepreneurial activities, as well as the need for goods and investment, form the basis for the value we place in money.

Zhou Xiaochuan, governor of the People’s Bank of China, admitted at a press conference during the G20 summit in Shanghai that monetary measures have a limited scope for stimulating the economy. Structural reforms, though they hurt, are necessary. GIS experts have repeated this many times over the past few years, but at least the PBoC is willing to admit it officially, writes Prince Michael of Liechtenstein.

For years policymakers in governments, central banks and academia have preached easy money and inflation as a solution to the economic woes in Europe, the United States and Japan. But years of administering this medicine have had no effect on growth. Instead, it has led to an asset bubble, damaged savings (especially retirement funds) and motivated governments to delay painful but necessary reforms.

China tried the same tactics, and was also unsuccessful.

The reasoning behind implementing these measures was an oversimplification: Cheap, abundant money would incentivize businesses to invest and consumers to spend, further allowing banks to lend.

What was ignored, especially in Europe, was that the lack of reform to restrictive labor laws, oversized public sectors and bloated regulatory frameworks creates doubt about whether growth can be sustained. Businesses become reluctant to invest and consumers to spend. Japan and the U.S. are seeing similar effects.

The money therefore stays in the financial system and does not reach the rest of the economy. That some companies prefer to use the excess cash to buy back their own shares is significant: it shows they see a lack of viable options for investment. The blame for that lies not with business, but with bad government policies, which have stifled investment incentives.

In a well-run business, damaging the company, first by assessing the situation wrongly and then by not reacting when the mistake becomes clear, would be grounds for changing management (and their advisors). Not so with these policymakers.

EZB Draghi Helicopter Money
ECB Draghi

The European Central Bank continues with quantitative easing and negative interest rates, ignoring that such policies have not solved the problem. They will prove even less effective in the future, due to a decrease in marginal utility. Then there are all of the negatives already mentioned.

However, slowly, people are beginning to realize that the abundant, cheap money provided to the banks is not being injected into the economy. Instead of coming to the same conclusion as Mr. Zhou, some analysts are promoting the concept of “helicopter money”: central bank money, freshly printed, provided directly by the government to consumers as a gift – like throwing banknotes out of a helicopter.

That sounds wonderful and might stimulate consumption. But the populace could rightly see it as unsustainable, and might instead decide to save. In any case, such policies will only have a short-term effect and will further delay the necessary reforms. The underlying structural problems will remain.

“Helicopter money” policies may or may not be implemented, but that the discussion has come to this shows the difficulty of changing the mindset that economies can be stimulated purely through money supply. This mentality might lead to helicopter money but is certainly not a helicopter view. An efficient economy needs business, and not theoretical money supply equations.

It was refreshing to hear Mr. Zhou’s words. Such an obviously necessary change of paradigm would be welcome in the West.

Read the original statement “Economies need structural reform …”
here ->
GIS Statements

Reducing the role of cash will destroy the public’s trust in money

GIS statement by Prince Michael of Liechtenstein

Money facilitates trade and serves as remuneration for work. It also stores value. Money that is earned but not spent becomes savings, which can provide capital for investment. The effort expended in providing labor, services, or entrepreneurial activities, as well as the need for goods and investment, form the basis for the value we place in money, writes Prince Michael of Liechtenstein.

Today, that value is based on trust. People believe that the institutions which print or issue currency – such as central banks – will fulfill their obligation to protect its value. Most central banks have such an obligation written into their statutes. But they can only do so when they are independent: monetary policy must be kept separate from the government’s fiscal policy. When politicians gain control over monetary policy, the temptation to misuse the central bank’s ability to create money to fund all their wild spending desires might become too big to resist.

Unfortunately, when the fiscal crisis hit the U.S. and Europe, central banks started buying government debt. These were thinly disguised measures to give governments fiscal breathing room, and they were financed through the artificial creation of money. Money should represent value, but the new funds issued did not represent the creation of any new value. The amounts involved are so mind-boggling that people could begin to lose their respect for money altogether.

But there are a number of other signs that the value we put in money is becoming increasingly endangered. This goes especially for the euro, the U.S. dollar and the yen.

When central banks set interest rates at extremely low levels, and especially when interest rates are negative – as in the eurozone and in Japan – it erodes the incentive to save. Savers such as pension funds are punished. However, it helps governments reduce borrowing costs and thus rewards overspending.

The heads of the German Bundesbank and the Banque de France, both members of the board of the European Central Bank, have called for the introduction of a centralized European Ministry of Finance in order to save the euro. This is a sign of alignment of fiscal and monetary policy and a very strange call from central bankers. The only plausible reason for this appeal is the hope that an EU finance ministry would be more disciplined than national ones. Knowing politics, this is highly unlikely.

The entire global monetary system has become abstract and opaque. It is even difficult for economists to understand. This does nothing to increase confidence. Cash, in the form of physical notes and coins, however, are tangible, and can help maintain the public’s trust in money.

Calls to reduce the use of cash – and even to abolish it altogether – have become widespread. They can be heard from Harvard economists to bankers to European governments. Various pretexts are offered: fighting terrorism, simplifying transactions, improving hygiene. But abolishing cash won’t accomplish any of these things. Instead, the agenda appears to be twofold: first to facilitate the nationalization of private savings – a sort of legalized theft – and second, to give the state total control over citizens’ finances.

Getting rid of cash would eliminate the last physical point of contact between the broad public and money, and would finally destroy any remaining confidence in it. The result would be an expansion of the black market. In the end, this could prove beneficial, at least economically speaking, since it would create a “free” market. However, it would further erode the rule of law.

Moreover, as understanding of the monetary system and voter interest decrease, less accountability will be needed. This will allow governments to behave even more irresponsibly with public finances. The end of trust, combined with the loss of accountability, could destroy the world’s monetary system.

Read the original statement “Reducing the role of cash …” here -> GIS

Monetary Voodoo

GIS statement by Prince Michael of Liechtenstein

The governors of the European Central bank met on December 2 and decided to make a further small reduction in already negative lending rates, while extending their bond purchasing program by another six months to March 2017. In its unsuccessful way, the ECB is trying to resolve a trilemma. It wants to spur economic growth through low to negative interest rates, hit its targeted inflation rate of 2 per cent by increasing money supply, and relieve the fiscal pressures on member states by a huge bond purchasing program.

The idea is that by paying negative rates for deposits at the central bank, the ECB will prod commercial banks to increase lending to corporations and consumers, rather than maximize liquidity. In addition, commercial banks are expected to pass these negative rates along to depositors, discouraging savings and boosting consumption.

This plan is understandable and logical, in a shortsighted way. The difficulty is that it is detrimental to the economy in the long term and completely unsustainable. I have yet to hear a convincing explanation of why the magic figure of 2 per cent inflation is beneficial.

In order to alleviate the debt servicing problems of all-but-bankrupt European states, the ECB began quantitative easing in March 2015. The central bank purchases 60 billion euros of sovereign debt each month under this program. Counting the latest six-month extension, the total cash injection provided by QE comes to 1.46 trillion euros.

This policy of flooding the economy with liquidity has not spurred growth. While inexpensive credit can support expansion in a healthy economy, it cannot create growth. What cheap money does do effectively is to destroy savings, especially retirement savings.

Sustainable growth happens when businesses decide of their own free will to invest. To make such decisions, companies need to have confidence in the future. Today, this confidence has been undermined by erratic policies and overregulation.

The quickest way to restore trust would be to introduce the dreaded (by politicians) structural reforms that truly unleash private investment. Public spending on useful infrastructure could play a supporting role in this recovery plan.

Bond buying is not solving the euro area’s sovereign debt problem because member states continue to overspend. What it does do is buy time, which the national governments use to put off reforms.

Consumer price inflation has not returned to 2 per cent, but asset inflation is evident in stocks, bonds and real estate prices. This kind of sustained growth normally ends in a bubble.

In voodoo and tribal religions, priests intercede with the supernatural to ensure the welfare of the community. Looking at the long term causes and consequences, there appears as much logic in a witch doctor’s potions to dispel evil spirits as in the ECB’s efforts to heal the economy. Except the witch doctor probably causes less harm.

Read the original statement “Monetary Voodoo” here -> GIS

Terrorism and the money-trail mirage

GIS statement by Prince Michael of Liechtenstein

French investigators suspect that the perpetrators of the November 2015 terrorist attacks in Paris used prepaid debit cards to cover their expenses. New measures will be proposed by the European Commission next month to make it harder to finance such operations, writes Prince Michael of Liechtenstein.

This “action plan” will outline a series of steps, including legislation, for consideration by the next European Union finance ministers’ meeting in February, according to the Commission’s Vice President Valdis Dombrovskis.

France is proposing to cap the sums that can be loaded onto prepaid cards, and to curb the conversion of virtual or crypto-currencies such as Bitcoin into legal tender. The French also claim that Bitcoin allows anonymous transactions that cannot be monitored, which happens not to be true.

Two aspects of this issue are striking.

Since the 9/11 attacks, Western governments have insisted that finances are the Achilles heel of international terrorism, which would wither once the money flow is cut off. The financial services industry has been doing its utmost to shut down these flows for 15 years – to little effect. Perhaps the lesson is that there is nothing significant to shut down. Terrorism is not particularly expensive. Attacking the money trail sounds good, but distracts us from the real threat.

Another, cynical aspect should not be ignored. Cash and crypto-currencies have become a thorn in the side of certain central banks and governments. Cash makes it more difficult for governments to control people’s behavior or for central banks to misappropriate savings by applying negative interest rates. The same applies to crypto-currencies, which compete with legal currencies and thus force monetary policies to become more efficient. In this sense, fighting terrorism could just be another pretext for protectionism.

I am reminded of a popular Twitter meme showing a herd of sheep staring out of a pen. Mummy sheep asks: “Kids, do you know why we are permanently surrounded by those barbed-wire fences?” Baby sheep compliantly answers: “I do, Mummy – it’s to keep the terrorists out, so we can all enjoy our freedom.”

Read the original statement “Terrorism and the money-trail mirage” here -> GIS