Printing money is the last refuge of failed economic empires and banana republics
QUANTITATIVE EASING is a monetary policy tool sometimes employed by central banks to stimulate the economy when conventional monetary policy becomes ineffective.
To stimulate the economy, the central bank normally carries out expansionary monetary policy by lowering short-term interest rates through the purchase of short-term government securities. However, when the short-term interest rate gets close to zero it becomes impossible to lower the short-term interest rate further and so this policy tool can no longer be used to stimulate the economy (the liquidity trap).
When faced with the liquidity trap, the central bank can shift the focus of monetary policy away from interest rates and towards increasing the supply of money (quantitative easing). To increase the money supply, the central bank buys government bonds and other financial assets with newly printed (or more correctly, electronically generated) money which will increase excess reserves in the banking system. The central bank hopes that banks will use these excess reserves to increase lending which will help to stimulate the economy.
When a government increases the money supply, this will lead to higher prices because there will be more money chasing the same amount of goods and services. In other words, printing money (quantitative easing) causes inflation.
THERE MAY be a business school bubble for other people, but not for you.
Whether you are buying into a bubble depends on whether the cost of what you are buying significantly exceeds its intrinsic value. For most assets, you can find the intrinsic value by looking at the expected return – the more money the asset puts in your pocket, the more valuable it is. This works well for stocks and bonds but not quite as well for education, and rather poorly when that education is from a top business school which offers some very attractive non-monetary benefits:
Personal branding derived from the brand name of your MBA school will stand by you for life. “Oh, you’re a Harvard graduate, good man, let me open some doors for you!”
Social status derived from the prestige of your school may be a particular boon if you are a man. A first year psychology student once told me that women look for just two things in men (1) status and (2) resources. (Given the cost of attending a top business school you had better work that social status to your advantage.)
Networking with smart, well-connected, ambitious and successful business school students will help you discover new ideas and unforeseen opportunities.
Positive emotions are contagious and by associating with the happy and fortunate people whom you find at business school you may be able to achieve more than you ever thought possible.
TODAY MAY 1st 2011 (US time) the news of Osama bin Laden’s death circled the globe. According to the New York Times, Bin Laden was shot in the head when he resisted capture and his body was later buried at sea. And there was much rejoicing!
Bin Laden’s death is a popular outcome for the US and its allies because it is seen as justice for the 2,752 victims of the September 11 attacks and the end of a decade long manhunt for the world’s most notorious terrorist. At the same time, it is worth remembering that the total cost of Bush’s “war on terror” has now risen to more than US$1.2 trillion. Even after adjusting for inflation, that’s more than four times what America spent fighting World War I. The cost appears even higher when you factor in the more than 5,000 US casualties and countless other deaths that have resulted from the fighting. Meanwhile, the war on terror continues undeterred, with no clearly defined enemy and no hope of achieving decisive victory. The US federal government deficit for 2011 is expected to top $1.27 trillion.
So how does this relate to consulting?
As a consultant, you are not paid to win a popularity contest. Popular means saying what your client wants to hear, telling a story that makes the majority of directors happy, or providing a flashy power-point presentation. Instead, you are paid to provide insightful recommendations that can be actioned to achieve clearly defined outcomes which will generate value for the client. The outcomes are worthwhile only if the pay-off exceeds the cost spent in terms of time, money and effort.
Subtitle: The battle between John Maynard Keynes and F.A. Hayek
DURING THE global financial crisis, we were told by governments that the best way to fix the world economy was to increase spending. This sounds simple enough given that increased government spending and lower interest rates can be used to boost output, but it is only a partial truth.
John Maynard Keynes is the poster boy for governments everywhere because he prescribes a simple medicine for broken economies, more spending. The story runs like this: in uncertain economic times people save more money which makes sense for each person individually but leads to reduced spending overall and therefore lower firm revenues and lower economic growth. The only way out of this unhealthy spiral of saving is for the government to step up to the plate and increase the circular flow of money by spending on public works, digging ditches, war, fixing broken windows, or pretty much anything.
F.A. Hayek is the voice of reason who provides us with the other side of the story. Increased government spending (and quantitative easing) is not the solution to the problem and may actually make things worse because it continues to reward the malinvestments made during the boom years. The argument is that governments should play a limited role because propping up poor businesses and investments is not the best way to encourage strong and sustainable economic growth.
As you can guess, Hayek is not popular among the fat cats in public office because allowing businesses to fail during hard economic times will most likely lead to a sharp increase in unemployment (albeit temporary) and this will be very politically unpopular.
We should ask ourselves though, do we actually believe in the capitalist system? And if we do, what is the legitimate role of government in that system?