In a completely expected move, politicians from around the world gathered and made the decision to spend a lot of money that they didn’t have and which doesn’t exist (yet).
I am referring to the recent G20 meeting, where the global crisis was the main topic. As you may know from my past writings, I hold it as a near dead-certainty that national politicians can be counted upon to spend instead of cut and to print instead of tax. It’s just natural to want to take the path of least resistance.
If local politicians had a printing press, they’d print, too. But they don’t, and so they hike fees and taxes on things like roads, gasoline, fishing licenses, and building permits when things get tight.
Printing money out of thin air is inflationary and unfair. It steals from savers and preferentially enriches those at the head of the handout line. It diminishes all the money accumulated from past production and inappropriately reinforces the belief that something can be had for nothing.
So I was more than a little intrigued when I read about the $1.1 trillion pledged by world leaders to the IMF. Where did it come from? Who was donating what? As always, the devil is in the details.
Interestingly, I had to read through more than 18 accounts before I found any details at all, which were meager. I finally located these in a NY Times article:
China is expected to contribute $40 billion. Japan and the European Union each pledged $100 billion. The United States has said it will contribute $100 billion, too, though that requires Congressional approval.
In addition to $500 billion in loans, the Group of 20 approved a one-time issuance of $250 billion in Special Drawing Rights, the synthetic currency of the fund, which will be parceled out to all its 185 members.
As I read it, there are about $250 billion in outright grants, $500 billion in loans, and $250 billion in Special Drawing Rights (SDRs). Given that none of the governments in question, except China, have that kind of money lying around, the $250 billion in grants and $500 billion in loans will have to be printed out of thin air.
More worryingly was the authorization to create $250 billion SDRs out of thin air. Usually described as a “synthetic currency,” they are nothing more than a type money created out of thin air, but one without any particular association to any given country.
Think about that for a minute. SDRs are being printed out of thin air by an institution that does not have any particular taxing power over the productive output of any particular nation.
What does this sort of money mean? What exactly is it?
It operates like central banking super-money and can be used as the primary fuel for massive pyramiding by the recipient bank. Think of it as the primary deposit into a banking system with a minuscule reserve ratio. It can be leveraged hundreds of times by central banks and then thousands of times further once those funds are disbursed into the next tier of the banking system.
For a world that should be mulling over lessons learned about the peril of thin-air money and excessive leverage, the reintroduction of SDRs are like a gigantic, blinking neon sign that reads, “We didn’t learn anything!!”
If we are collecting the fuel for a massive international inflationary bonfire, SDRs are a very dry bundle of sticks.
The chance that this all ends in a year or two with a round of severe and destructive inflation is now quite high, perhaps better than 50%. With any luck, the central banks will continue to try and hide their tracks by selling their gold, meaning you can pick it up at fire-sale prices. Pun intended.