Money printing: recipe for disaster

Mad money printing is a recipe for world financial disaster. Two great financial commentators - Samuel Britten of the Financial Times and Irwin Stezler, the American business advisor and director of economic policy studies at the Hudson Institute who contributes to London's Sunday Times - have both pointed out that money printing on an inordinate scale is going on in the UK and US.

The sterling and the dollar are being exposed to the greatest of economic dangers: loss of credibility over the chief functions of money, which are store value and to act as a means of exchange.

It is now clear that economic forecasters, even the most pessimistic, failed to foresee the full consequences of the financial crisis. The only exception has been Pope Benedict XVI, who according to the FT, wrote a paper in 1985 predicting the present predicament. His utterance was nothing less than the unambiguous prediction "that an undisciplined economy would collapse by its own rules".

Most have acted like clowns. The once famous Prof. Arvid Persaud made a statement in November 2002 that: "Despite record corporate bankruptcies, weak economies and a market meltdown, banks are generally safe". This statement was shameful. How can banks be safe when they are menaced by record corporate bankruptcies?

The Bank of England printing works at Debden are working overtime supplying the funny money which underpins statements such as those of conservative opposition leader David Cameron in the FT. He wrote an article promising troubled British banks all the money that they needed. A cavalier promise indeed. I have learnt that the best way of ensuring success in one's career is to give demagogic advice to those who matter, unmindful of the fact that most governments end in disaster. For a politician, it is the electorate which matters most.

Economic history shows how inflation destroyed both the Roman and Spanish Empires. Cameron should realise what some wise men can see now: over the past 37 years, the US strategy with fiat money and floating exchange has failed catastrophically.

The experiment started in August 1971 when Nixon unhinged the dollar from its gold underpinning, ensuring the great inflation from which the UK was only saved by the elimination of its manufacturing base, and the wholehearted adoption of city finance as its new economic engine.

The Nixon development, of which Frank Zarb was one of the principal advisors, was (like many good things in life) destroyed by being overdone. Nixon and Zarb were right that economic expansion should not be at mercy of gold discoveries, which are becoming rarer. It was demolished by overuse of the printing press and by a series of self-confessed lies, not least by Zarb's tennis companion and collaborator Alan Greenspan.

World banking is threatened by collapse. During the last nine months it has been constantly repeated on Bloomberg that it was impossible to make out the position of a bank from its balance sheet. This has stopped interbank lending and led to the infamous credit crunch. Banks have been trading their deposits extravagantly, as was demonstrated in the last HSBC results meeting in an answer to a question of mine. This did not apply to HSBC, which had a leverage ratio of only 20. If HBOS had an unthinkable figure, Barclays and Deutsche Bank were in September dealing with a leverage ratio of between 50 and 60.

When the American government bailed out Citigroup for $300 billion, there was an immediate rise of 30 per cent in the share price of Kazakhyms, the gold and copper miner. Fresmillo rose by 18 per cent. It is the biggest silver mining company in Mexico. The way is now clear: only mining shares offer a reasonably profitable investment. China's economic growth is expected to power on as before and that country is expected to increase gold stock from 400 to 8,000 tonnes. The consequences for the prices of gold and silver shares are obvious.

Any new currency system will need a metallic ingredient.

Mr Azzopardi Vella, economic consultant with DBR Investments Ltd, has promoted the Malta Development Fund and advised S & P.

johnazzopardivella@hotmail.com