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QE2: History Lessons From Germany

Stabilization came only when the abyss was plumbed. At the end of 1923, Germany no longer faced the false choice between unemployment and bankruptcy, for she had both. When the new Rentenmark, equal to one old gold mark, was introduced and trusted, food flowed into the towns and cities again. Many could not afford it.

This terrible tale of the ravages of inflation rings warning bells for less virulent forms of deficit financing.

It emphasizes, first, governmental predilection for the quick fix of printing money. With the banknotes of the Mississippi Bubble, the assignats of the French Revolution or the paper promises of Weimar, the addiction grew, each extra dose of the drug irresistible because circumstances seem exceptional. Will QE2 be the last of the series?

It shows how readily confidence in money evaporates; and the public's distress when virtues like thrift and honesty become folly. Is it plausible for a bank to concern itself with employment (surely a government's worry) as well as financial stability?

It explains how inflation casts its shadow before it. Havenstein continually proclaimed his intentions, with inevitable results. The mere prediction of QE2 by the Fed, and talk of an inflation target, sent the dollar tumbling across the world, with knock-on effects on every commodity and currency.

It warns how fighting an internal crisis with the two-edged sword of cheap money may be interpreted as malevolence by foreign trading partners.

Worried by growing inflation, the Bank of England is this week having second thoughts about its QE2. Although main-street banks have released little of the GBP200 billion QE1 into Britain's wider economy, there are signs of its recovery. It is an interesting contrast to a Federal Reserve worried about deflation.

Both countries have low interest rates and few choices for economic stimulation. Nevertheless, lack of alternative seems poor justification for a neo-Keynesean measure whose effectiveness is evidentially so opaque and when the risks of unintended consequences across the world are so disturbing. While economic opinion is divided, confused taxpayers must understandably fear that more fuel may be being poured into a tank already full, threatening a costly, futile and dangerous global spillage.

Adam Fergusson has been a member of the European Parliament, a special adviser at the Foreign Office, a consultant on European affairs for international industry and commerce, and a political adviser during Margaret Thatcher's government.


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