Cold Fusion: The Latest Insane Idea in Monetary Policy

Cold fusion used to be a zany term in the physics lab for generating endless cheap energy. Alas, no longer. Now it is the latest nutty idea from economists to create endless amounts of free money. Hold onto your wallets, this is an idea from the twilight zone.

World-wide, central banks have engineered 635 interest-rate cuts since the financial crisis of 2008 and purchased more than $23 trillion of assets, primarily sovereign bonds, according to Bank of America Corp. Nonetheless, the global economy is sliding into recession. Again this month, the IMF and other major international agencies have cut global growth estimates. So, when a policy of flooding the financial system with cheap money clearly doesn’t work, whether in Japan or Europe or America, what do you do? Why, more of the same of course! Are you kidding me?

According to Stephen Englander, global head of currency strategy at Citicorp., the answer is to focus policy more on boosting demand rather than just increasing liquidity in the hope that consumers and companies will find a need for it and borrow more. He advocates what he calls “cold fusion” in which politicians would cut taxes and boost spending with central banks covering the resulting rise in borrowing by purchasing even more bonds. “The next generation of policy tools is likely to be designed to act more directly on final demand, using persistently below target inflation as a lever to justify policies that would be anathema otherwise,” Englander said. I have news for Steve; they are anathema now.

In a similar vein, Hans Redeker, head of global foreign exchange strategy at Morgan Stanley, says it’s time for central banks to begin using Quantitative Easing to buy private assets having previously focused on government debt. “I would actually look into the next step of the monetary toolbox,” Redeker said in a Bloomberg Television interview. “We need to fight demand deficiency.” He wants to put more money directly into the hands of consumers.

Dear reader, please understand what this means. To boost the economy, they are prepared to destroy the currency. What is more, curing the problems of too much debt with more debt is why the economy is slowing down in the first place. Encouraging borrowing and consumption–fighting demand deficiency, as Redeker calls it—is working in precisely the wrong direction. Savings and investment drive growth, not consumption.

Cold fusion= more confusion. My answer is gold, something they can’t print. Keeping money in the bank is a bad idea as I will explain tomorrow.