The dismal science

It seems to me that economists have a great deal to answer for. Despite all the theories, very few economists predicted the rapid onset of the credit crunch during 2008. Most people in the real world know that if something is too good to be true, it is probably untrue, but this simple piece of common sense appears to have eluded two categories: the credulous victims of conmen (of which more later) and economists. Alongside their failure to predict the economic woes of 2009, though, goes another heinous crime: the spawning of a deeply unpleasant lexicon, two recent examples of which are "deleveraging" and "quantitative easing". The first simply means the reduction of borrowing; the second, I think, means printing more bank notes in order to increase the money supply.

Gerard Baker, writing in the Times newspaper, described the potential adoption of "quantitative easing" as a revolutionary shift in policy and a new dawn in macro-economic management (though this brilliant journalist and commentator did leave the reader in some doubt as to whether or not this will represent a real or a false dawn). Even after allowing for journalist hyperbole, however, to call it "revolutionary" is over-stating the case - the Zimbabwean central bank, after all, seems to have been doing little else for the past few years - with the appalling consequences of hyper-inflation, just as occurred in the Weimar Republic in the 1920s and, before that, in the aftermath of the French Revolution. No doubt the Federal Reserve and the Bank of England's more modest injections of cash into the economy will not have quite such disastrous results, but if history teaches us anything, it suggests that quantitative easing is a dangerous policy to follow.

History would also suggest that in times of quantitative easing, real property and tangible assets are the best places to invest. There is an amusing (and probably apocryphal) anecdote which tells the story of a certain Emil Schultz who received his weekly salary during the worst period of the Weimar Republic in so many bundles of small-denomination notes that he was unable to carry them all home. He therefore borrowed a wheelbarrow from a friend and, on his way home, stopped at a small shop to buy some food. On leaving the shop, he found the money neatly stacked up on the ground, but the wheelbarrow stolen....

This anecdote brings me on to the subject of fraudsters and their credulous victims. Last week, in Kampala, I received an interesting approach from a certain Engineer K, who claimed to work for the National Water and Sewerage Corporation (NWSC) of Uganda. K explained to me at some length that the NWSC were sourcing spare parts for an urgent repair from Sweden, at great expense, while these same parts were available from a Kampala-based contact of his at a fraction of their imported cost. If I could be so kind as to go to his contact and buy the said spare parts, Engineer K would then arrange for the NWSC to purchase them from me at the import parity price, and I would make a tidy profit (to be divided between the two of us). Call me a cynic, but I think this is one of the oldest hustles ever invented. Once I have allowed greed to get the better of my common sense, I go to the contact and buy the spare parts. Engineer K and the contact then disappear, leaving me to discover that the parts I have bought are in fact worthless….. Of course, I am speculating here – maybe this time Engineer K is really telling the truth.

Recently, of course, this simple scam has been played out on a much larger and more damaging scale, the best example of which is the Madoff scandal, where so-called expert investors appear to have been seduced into believing that the delivery of steady year-on-year returns of 10% was somehow achievable through the alchemy of a secret investment management formula…… However, it also lies at the heart of the sub-prime debt crisis and the subsequent credit crunch, recession, mass unemployment and general financial misery, for which many economists and central bankers now suggest that quantitative easing is the best remedy.

Forgive me for my skepticism, but remember: if it looks too good to be true, it probably is.