I printed you a miracle

I don't know which made me cry with laughter more, re-watching Jim Kerr's neck appendage take on a life of its own or reading in Thursdays's Evening Standard that the Bank of England is claiming QE ('printing money') has made each of us £10,000 better off.

Chuckle muscle worn flaccid? Here's why printing money as highlighted in OUCH! doesn't make you richer :

Imagine that you are a counterfeiter producing £5 notes. You are so good at your chosen profession that no-one can tell the difference between the fake £5 and the real £5. You print lots of £5 notes and start spending them. This has 2 effects:

1.      The total money supply of the country increases thus driving up prices because the purchasing power of the existing currency unit is decreased. This decrease is directly proportional to the amount of fake cash you put into circulation.

2.      You get richer whilst everyone else gets poorer. It changes the wealth distribution because whilst there is a general lowering of purchasing power per currency unit there is a disproportionate amount of money in your hands as the counterfeiter. If you are first in the chain you get the benefit.

The same reasoning is valid if the ‘counterfeiters’happen to be the government. By diluting the total by printing money it also acts as a wealth transfer mechanism to the state at the expense of the general populous.

Its really quite simple, if money printing made us richer then why not just print £10 million for every person in the country, dish it out and then we could all retire? Afterall what could possibly go wrong? Zimbabwe managed to get to 100 trillion dollar notes (worth about US$ 5.00) before their currency finally collapsed. Zimbabwe's annual rate of inflation in November 2008 was 516 Quintillion % that’s 516 followed by 18 noughts (516, 000, 000, 000, 000, 000, 000) - although they narrowly missed the world record inflation rate set by Hungary where prices doubled every 15.6 hours.

Why are various western central banks/governments resorting to money printing? 'Velocity' and a collapse in the money supply may be the raison d’être stated but peel back the layers of manipulation and the alternative is default - but why do it overtly when you can do it covertly? That way, you don't get the direct blame. However this game is not without consequence. As Tim Price points out in his latest newsletter, Bill Gross may have called it too early (exact timing is always tricky) but stated UK governnment debt was resting on a bed of nitroglycerine.

You may be being 'promised a miracle' but the reality you will be experiencing in the near future may not feel that miraculous when it arrives.