I tried to explain the role of money in an earlier article, I now make an effort to explain what the ECB is up to. Of course that is no different to what any other central bank is up to, but they are in the spotlight just now. Disappointingly main stream journalism does not explain to the butcher, baker, candlestick maker, nor to the surgeon and barrister come to that, what is actually happening.
I attempt a short heads up here. It will be easier if you read the previous article on money and excuse me repeating myself at times. Central bankers don’t understand money, they labour under the illusion ‘money is wealth’ when in fact it is a medium of exchange for goods or services. It saves us bartering or lugging bags of salt or gold about. Central bankers are all of the traditional education school, steeped in Keynesianism, a theory long since discredited that purports that an economy can consume its way to prosperity. They believe that if we all rushed out and bought a whole heap of new stuff on borrowed money we would all somehow get richer.
Imagine if you will, peering over the garden wall and spotting your neighbour polishing his new BMW, sporting a suntan because they have just returned from two weeks in the West Indies. While their were away, and in order to avoid the disruption they had a new kitchen fitted, you know all this by the way because you had to let the workman in and out. They always seem to lead a better lifestyle than you don’t they, your neighbours? Yet Mr Jones, we’ll call him Mr Jones, doesn’t work any harder and is only a junior manager in the local factory. What you don’t know is the whole thing is based on borrowed money; the car is on finance, the kitchen on a second mortgage and the holiday on the credit card. He hasn’t put a penny into his pension for years. He neither saves nor even cares what the future will bring. He spends, on average, 1.8% every year more than he earns. To the central banker he is a model citizen. Because the banker and his good mate the politician do the same, they call it deficit spending. The difference between your spend thrift neighbour and the central banker is they have a money printing machine. So what they don’t borrow they print. Or more accurately in the modern world; create electronically. This should ‘stimulate’ the economy, but of course it doesn’t. How could it because it is only a medium of exchange? The central bankers have been printing money and giving it to the retail banks, but the banks don’t lend it to the punters, they buy government bonds and take a small fee for doing so. This is why bankers continue to get fat bonuses. Why risk giving money to a small business when you can buy government bonds? This is why money has not found its way into the High St, but has managed to inflate the CPI or RPI or whatever fake measures the State invents.
The money has to go somewhere however, squillions of it, so bonds become inflated, not just government bonds but corporate bonds and yields slump. Savers and pensioners get no interest, so investment dries up or goes into unsound schemes which become unviable when interest rates rise, as they must one day.
Banks are now considering zero rate or negative interest rates. In other words you pay the bank to hold your money. The bank is incidentally a bank which itself is broke. Fractional reserve banking means they only hold 10% of your money there at best.
The ECB has cut interest rates to minus .3% for state bond purchases, this is to drive money towards the High St but they have mooted the purchase of regional debt and asset backed debt. This sounds good until you realise that amongst other things this includes auto loans or third mortgages for the conservatory extension on the property already heavily overpriced.
So look at the audit trail. The central banks print money, the politicians back the play, the retail bank lends your neighbour the money for his BMW which loses a third of its value as soon as he drives it out of the showroom. The debt is syndicated, packaged, upgraded and bought back with fake money at the central bank. Is any of this sounding familiar? It should its known as sub prime debt.
Isn’t that where we came in ? The ECB is buying €60 billion of this rubbish every month. The national debt of every western industrial democracy increases every year to spend mainly on social and corporate welfare. Is this what you want? How much longer can it continue? Why have we learned nothing from the 2008 crash? Why is no one even discussing it?
Just for fun as we approach Christmas, the British are by far the worst offenders. Private debt is £1.4 trillion, saving is a net negative of 1.9%, we spend 2.55% on Christmas shopping, twice that of Italy, France and Germany. Britain is indeed a nation of shopkeepers albeit they survive on borrowed money.