There comes a time, sometimes later, sometimes sooner, when you realise that much of what underpins the modern world exists because we choose to believe it exists. Primarily, but not solely, I’m thinking about money here. (1)

You see, money may be experiencing an existentialist crisis.

This year, the Bank of England has created, almost unremarked upon, £450B of new money. This is in addition to the £445B already created in the last ten or so years. Printing money has become increasingly the go-to policy for government / BoE financing. (2)

But what the hell is the Bank of England - and other central banks - doing printing money? We all thought - until recently anyway - that printing money was the preserve of failed states where a richly embroidered President for Life might fire up the state money machine to pay for his next golden toilet whilst his people ate shit from garbage heaps?

In other words, what is the difference between the infamous hyper inflation of the Weimar Republic or Zimbabwe, and a modern, oh so sophisticated, economy like the UK?

One hundred years and a new terminology frankly.

We don’t print money anymore, we ‘quantitively ease’ (QE). Lofty economists hide money creation behind high sounding phrases designed to obfuscate. They distain the commonly held view that printing money is generally a bad thing. “Don’t you know,” they will pontificate - probably with half moon spectacles sliding down their nose in the manner of clever people everywhere - “Commercial banks create money all the time? What do you think fractional reserve banking is?”

Good point. We all know, via the credit crunch of 2008, that banks - sometimes recklessly - take a pound and lend out ten. Hence fractional reserve banking. The argument for QE is that, in bad times, banks lend less and so the creation of money is tightened. Hence the need for quantitive easing, i.e. creating money to persuade banks and others to lend money to get the economy moving. At some theoretical date in the future - never defined or realised - central banks will unwind their position and pass back their holdings from their balance sheet. This is to avoid the perils of hyper inflation.

And what are those centrally held holdings on the BoE’s balance sheet? What do they buy with all this new money? Well - since you ask - mainly government debt.

Oh.

So, this is quantitive easing; a government wants to inject money into the economy, they issue debt, the banks and insurance companies buy the debt, the central bank buys it back, the markets make a small ‘turn’ on this as the price is rising due to demand, meaning the yield falls on those bonds so servicing the debt is now cheaper for the government. Happy days! Doubles all round. Some corporate bonds are bought, but, not so much. Mainly government gilts. (3)

Well, that’s ‘vintage’ quantitive easing.. We’ve progressed since the good old days of the credit crunch. Now, in 2020, the central banks and government can’t be arsed in issuing and re-purchasing gilts and so just think - ‘fuck it’ - and go route 1 and cut out the middle man. So the BoE directly buys government debt with their newly created money.

Think about that for a moment; the government spends like a pissed up sailor on leave with a stolen credit card and, fearing the usual methods of raising income - boring stuff like raising taxes, borrowing or, here’s a novel one - growth - just prints the money it needs.

It’s a bold strategy, an ‘unconventional monetary approach’ in the jargon. These are unprecedented times, okay? But, erm, tap tap on the shoulder, is this right? Legal? Even moral?

Personally, I don’t like short cuts. We all know state fiat currency is make believe - it exists because we choose to believe it exists. But you like to comfort yourself that behind the mist there are real things dimly in view - productivity, innovation, balance of payments, demand. You know, the stuff of the actual economy. It’s why we get up in the morning and work.

But what’s the point if you can just fire up the printing presses and create money? It’s easier than actually earning the money. And who doesn’t like free stuff? This is a shortcut that undermines the real economy. As we all trade in the same currency (money) the actions of the government must surely degrade the productive part of the economy.

The classical economic view is that if you increase the supply of something, the price will drop. For money, we call this inflation. Inflation is a tax that we all pay. Print loads of money and you get hyper inflation and we all have to get out the wheelbarrows to buy a loaf of bread. The economy falls apart causing real and sustained damage.

So I’ll end with two scenarios and a comment:-

1) We have entered a new norm. Inflation has been conquered. The masters of the universe have defied the economic gravity and are floating above what used to be held as a truism; that printing money is bad and will cause hyper inflation and crash the economy. We are truly living an age of giant economists who shame those pygmies Keynes, Friedman and Hayek.

2) We are living on borrowed time. The poison is acting slowly but will eventually start to work. It’s only a matter of time before the inflation kicks in and then we’re all screwed.

2020, we all appear to be living through scenario one. But I fear scenario two is our ultimate destination. QE, printing money, is a fool’s shortcut. Intrinsically, we all know this. Why don’t our political and financial masters know it too?

NOTES

1) Big Tech, Elections, Fractional Reserve Banking, MSM News

2) UK Government / Bank of England. I use the terms interchangeably. They are, in effect, one and the same thing.

3) Governments - and oppositions - have been talking up the advantages of cheap interest rates on state debt for a good ten years. The argument seems to go, it would be irresponsible not to borrow when money is so cheap. These typically tend to be same people who say, governments can run large debts because a country is not like a household. Said with a sneer. We shall see.