by Ann Pettifor 10 March, 2009
Over dinner at a prominent newspaper the other evening, journalists mused over the threat of inflation. They were not the first to do so. Many people, some of them influential, are warning of the threat of inflation.
Prominent amongs these are commentators and journalists, even economists, that do not understand the nature of bank money. They invariably confuse it with the tangible stuff that appears as notes (printed) and coins (minted). As a result, they believe that what the Bank of England is doing is printing billions of these notes. Naturally such a misconception leads them to assume that we are threatened now by the sight of Mervyn King pushing a wheelbarrow stashed with billions of pound notes around the City of London – followed by the spectre of inflation.
If ever you meet up with such a scaremonger, here’s a counter point to put to them.
Money and debt is being destroyed. Some call it de-leveraging. Others call it debt write-offs. Or debt cancellation. Bankruptcies invariably involve debt destruction – because bankrupts do not pay back their debts, so they get written off. The point is that money/debt is being destroyed in vast uncountable quantities.
Sudden Debt has helpfully provided some examples of truly remarkable debt destruction. The Ford Motor Company is planning to ‘eliminate’ about $10.4 billion of debt. In other words, they are trying to remove the debt from their books. “Ford will pay 30 cents to 55 cents on each dollar of debt, depending on the type of note. Ford’s debt is trading publicly at about 20 cents on the dollar” according to the New York Times of the 4th March, 2009.
In other words, 45 – 70 cents of every single dollar of debt owed by Ford is to be destroyed, or ‘eliminated’. $10.4 billion of the stuff. Indeed Ford is being generous. Creditors would lose 80 cents of every dollar if they dealt directly with the market in Ford debt.
Similarly in Spain, the bank Santander is selling its shares in Compania Espanola de Petroleos SA – a large oil company, for less than half the closing price of CEPSA shares. The reason for this? Santander desperately needs the cash, and so the bank is destroying half the value of the shares it owns in CEPSA. (Bloomberg, 25 Feb. 2009)
The destruction of money/debt is best described as deflation. Deflation of the vast credit bubble that was blown up over the last three decades.
What the Bank of England and other central banks are concerned to do, is to replace the debt being destroyed, with new money. The trouble is, that the amount of debt being destroyed is so vast, that to replace it would require even vaster injections of new money. Right now, the central banks and Finance Treasuries are just not keeping up with the amount of debt being destroyed. Indeed they do not even know how to count it, or assess the amounts outstanding.
As long as they don’t, for so long will we not have even the remotest threat of inflation. Instead we will be faced by a far worse fate: a sustained and destructive debt-deflationary spiral.