Economists and central bankers often chastise us for likening the global capitalist system to a game of Monopoly. But according to US investment advisor Bill Gross from Janus Capital that is exactly how we should see it:
“If only Fed Governors and Presidents understood a little bit more about Monopoly, and a tad less about outdated historical models such as the Taylor Rule and the Phillips Curve, then our economy and its future prospects might be a little better off.”
In particular, the one thing that keeps a game of Monopoly going is the £200 players collect every time they pass go. Without it there would not be enough money in the game to both purchase the property and pay rent on it:
“And it’s the $200 of cash (which in the economic scheme of things represents new “credit”) that is responsible for the ongoing health of our finance-based economy. Without new credit, economic growth moves in reverse and individual player ‘bankruptcies’ become more probable.”
According to Gross, the mistake politicians and central bankers have made in the real economy is to believe it is the central bank that hands out the £200:
“So how is this relevant to today’s finance-based economy? Hasn’t the Fed printed $4 trillion of new money and the same with the BOJ and ECB? Haven’t they effectively increased the $200 ‘pass go’ amount by more than enough to keep the game going? Not really. Because in today’s modern day economy, central banks are really the ‘Community Chest’, not the banker. They have lots and lots of money available but only if the private system – the economy’s real bankers – decide to use it and expand ‘credit’. If banks don’t lend, either because of risk to them or an unwillingness of corporations and individuals to borrow money, then credit growth doesn’t increase. The system still generates $200 per player per round trip roll of the dice, but it’s not enough to keep real GDP at the same pace and to prevent some companies/households from going bankrupt.”
In this, the failure of central bankers around the world is all too clear. Despite round after round of quantitative easing coupled to low – and in some countries negative – interest rates, they have been unable to persuade households and firms that are already up to their eyes in debt to borrow even more. In the absence of new borrowers, banks find it easier to use quantitative easing money to fuel asset bubbles rather than economic growth.
In a sense, after 2008 most of the players stopped passing go; and the banks stopped handing out the £200. To continue the Monopoly analogy, when we look at the bankers, the economists and the politicians, we could be forgiven for thinking it is time that they ‘go to jail – go directly to jail – do not pass go – do not collect £200’!