Quantitative Easing and a bankrupt state
February 23, 2011Posted by on
Quantitative Easing is the method used by the UK government (past and present) to stimulate economic growth by injecting money electronically into the economy. The theory is that the sale of British Government bonds (gilts) and high quality Corporate Bonds from private sector companies (banks, pension funds, insurance companies and non-financial institutions) provides this economic stimulus. Quantitative easing to finance the purchase of these bond sales injects money directly into companies (and into the government coffers) thus increasing their available capital. The theory being that this in turn allows the release of money into the general economy, which also stimulates growth. In selling gilts the government effectively promotes a legal Ponzi scheme. In buying gilts or Corporate Bonds with money electronically printed for that purpose, the government and the banks are effectively laundering that money. When the State spends more money than it receives in taxes and resorts to printing more money; to paraphrase Frank Chodorov from Don’t buy Government Bonds, it is deliberately committing an act of bankruptcy.
A Corporate Bond is where money is invested as loan to a corporation in the expectation that the investment leads to increased profitability. The interest paid is part of the increased profitability made possible by the loan. This is a real investment that carries a real risk should the borrower default on the loan. The issue of the bond is not in itself inflationary, unless as in the case of quantitative easing, the money used to purchase the bond is itself inflationary.
A Government Bond cannot be classed as an investment it’s simply loan, the money is not put into profitable ventures, the state spends it. The capital cost of the bond is in effect postponed taxation, that is until redemption of the bond. There is little risk in such a loan, as the interest and capital repayment on gilts comes out of increased tax revenue raised to service the bond. The real risk is inflation, where money invested devalues. While this is true of any investment, inflation is inherent in the issue of gilts. In the case of quantitative easing , printing money to pay for the issue of gilts compounds what is already an effective inflationary fraud.
Regarding the Bank of England, a recent article by Robert Sadler suggested that the Bank of England regards quantitative easing as has a painless solution for an increase in wealth. But this notional increase in wealth may not apply to everyone: –
- the increased supply of money will cut its purchasing power
- meaning that the relative prices of consumer goods will rise over time
- this will increase the cost of living for people in general
- their real wages will fall
- most will become poorer
Printing money and handing it over to a favoured few in society (i.e. the banks) is pure and simple counterfeiting, or could even be compared to money laundering. This is because, in the case of quantitative easing, the banks will trade this money for real or financial assets, or to their employees in exchange for their services. Sadler would seem to agree with Chodorov, and I’m sure that they would both agree with exchanges in the above video.
“Increased monetary demand for financial assets or banking services increases their prices, leading to these assets and services being sold in the near term at a profit.
- The banking employees will spend their increased salaries and bonuses on consumer goods before prices start to rise.
- Bankers will certainly feel wealthier.
- This whole process represents a wealth transfer from one group of people in society to the banks and a shadow tax on much of the population.
This is because the early recipients of the new money (the bankers and the Government) will get to spend this money before the prices rise significantly. Slowly this new money disperses around the economy but the further you are from the source the less it will be worth when you finally receive it. To quote Milton Friedman; “Inflation is the one form of taxation that can be imposed without legislation”.
“The main beneficiaries of quantitative easing are the Government and the banks.
- The banks buy gilts from the Government and sell them to the Bank of England (just under £200bn’s worth) at a profit.
- The Bank of England pays for these gilts with freshly printed money.
- The Government has a buyer for its debt and the banks become more profitable and apparently more stable.
Quantitative Easing has resulted in a transfer of wealth from society at large to the banks and the Government, and has vastly extended the length of what would have been a short but sharp recession. It has made us poorer while benefiting a select few in society. This is a crime by any measure.”
Recent economic data convinced the Bank of England not to expand its Quantitative Easing program. According to the Office of National Statistics:-
- annual CPI inflation rose from 3.3% in November to 3.7% in December, 2010
- is now 4%.
- The expectation is that CPI inflation will peak at 4.4% by the middle of 2011.
- This plus poor economic data (with GDP contracting 0.5% last quarter).
The foregoing includes extracts from an article published by the Cobden Centre and written by Robert Sadler. While the suggestion is that these figures come as something of a shock to the Bank of England, which assumes that printing money through quantitative easing is the way to get the economy going, they are no shock to a lot of us.