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Bankers are running the country Democracy is being sacrificed for the sake of more cash

LONDON - OCTOBER 13: A grim reaper figure holds a globe pierced by the scythe of capitalism in front of the Bank of England during a protest on October 13, 2008 in London. The UK Government has announced a ÂŁ37 billion bail out of three retail banks. (Photo by Peter Macdiarmid/Getty Images)

LONDON - OCTOBER 13: A grim reaper figure holds a globe pierced by the scythe of capitalism in front of the Bank of England during a protest on October 13, 2008 in London. The UK Government has announced a ÂŁ37 billion bail out of three retail banks. (Photo by Peter Macdiarmid/Getty Images)


August 4, 2021   5 mins

Power doesn’t always corrupt, but it is habit-forming. One needn’t be a conspiracy theorist to suspect that experts err on the side of maintaining their relevance. So will we ever be rid of them?

In the case of Britain’s bankers, I suspect not. After all, if the past year has taught us anything, it’s that they can provide something that the politicians will always want: money. 

There was a time when the function of a central bank was to regulate the wider banking system, set interest rates and keep inflation under control. Though an important role, it was a limited one.

But then, in 2008, the global banking system almost collapsed. The shock was such that slashing interest rates wasn’t enough to revive the economy. And so the central banks embarked upon a course of quantitative easing (QE) — i.e. creating money electronically and using it to buy up government debt and other financial assets.

This was meant to be a temporary measure. As soon as things went back to normal, the plan was to reverse the process of QE. The central banks would sell off the assets they’d purchased and electronically destroy the money they’d created. Job done; the balance restored.

But things didn’t go back to normal. By 2012, vast amounts of money had been created — £375 billion in the UK alone — but there was little sign of inflation and not much growth either. And so QE was never “unwound”. Politicians realised this was an endless fountain. In the wake of Brexit, the Bank of England conjured up enough funny money to buy a further £70 billion of government bonds.

Now with Covid, the QE binge has become an orgy. All the central banks are at it. In the UK, we’ve plucked another £450 billion from the magic money tree. To put it another way, our national debt now stands at over two trillion pounds, but getting on for half of that is owed to the Bank of England.

It’s getting hard to deny that the central banks are printing money to finance government spending. The central bankers won’t admit to that, of course. They’ll say that QE is just the equivalent of an interest rate cut and intended to stop inflation from turning into deflation.

However, that alibi is wearing thin. Firstly, there’s not much risk of falling prices right now — quite the opposite in fact. And, secondly, one can’t help but notice that the more QE there is, the more the Government borrows.

But why worry? Isn’t owing money to the Bank of England better than borrowing it from the Chinese? And given the fragile state of the economy, isn’t borrowing preferable to tax hikes or spending cuts?

There is the risk of inflation, of course — a real concern right now. Then there’s the risk that the money markets might run out of patience — and start charging higher interest rates on government debt. When a government owes £2.2 trillion, like ours does, then every 1% increase in the interest it pays on that sum costs an extra £22 billion a year — or roughly half the defence budget. 

But there’s a more disturbing possibility: that economic gravity doesn’t reassert itself — and that the QE orgy continues.

Ultimately, this would be terrible for democracy. When governments rely on their own citizens for money, they become beholden to them. The principle of “no taxation without representation” puts nations on a path to universal suffrage and keeps them there.

However, governments that get their cash from elsewhere — oil revenues for instance — can afford to ignore their people. As the absolute monarchies of the Middle East prove, “no representation without taxation” is also a potent political force. 

So what happens if central bankers replace taxpayers as the key source of government finance? We saw what happened in Greece, which ceased to be sovereign state as soon as it became dependent on the European Central Bank. The Greek people voted for a government of the populist Left, but extreme austerity was imposed anyway — and continues to this day. Similarly, Italy is controlled by the EU establishment — the Prime Minister is Mario Draghi: a former President of the European Central Bank.

In Britain, we can be thankful that Brexit has removed that possibility. But what’s the point of giving the Eurocrats the slip, if we replace them with a homegrown caste of over-mighty central bankers?

Take the Bank of England’s “net zero mandate”. The Old Lady of Threadneedle Street already interferes in the market by using QE money to buy up corporate bonds from the private sector. Purchases total ÂŁ20 billion so far. This amounts to a major subsidy for the qualifying businesses — who are able to borrow more and at a lower cost. Deliberately skewing this to favoured companies would mean using QE to pick winners — a bizarre position in which to place a central bank.

I’m all in favour of green government policy. But these are decisions that should be made democratically in Parliament, not by unelected central bankers picking winners. 

Meanwhile, the central bankers could become more powerful yet if the Chancellor goes ahead with a scheme to introduce what he calls “Britcoin” — a digital currency overseen by the Bank of England. This could have all sorts of benefits — from reducing transaction costs to ensuring that our national currency isn’t displaced by a cryptocurrency or Facebook’s Diem system.

But there are dangers to Britcoin too. For instance, a digital currency administered by the Bank of England could be used to monitor our purchases and transfers, thus ending the privacy that comes with using cash. In theory, the Bank could also apply its climate mandate to our transactions — for instance, imposing a penalty on purchases deemed to be unsustainable. 

And then there’s the risk that a central bank digital currency (CBDC) would destabilise the banking system. 

At the time of the last financial crisis, governments moved fast to prevent bank runs. With a few exceptions, they succeeded. That said, their job was made easier by the fact that most of us don’t want to empty our accounts and store our savings as banknotes under the mattress. However, if we could withdraw our money in the form of digital cash and keep it in a safe with the Bank of England, that would present fewer obstacles. Conceivably, the entire private banking system could collapse within minutes if enough people went online to transfer their bank balances into their Britcoin accounts. 

I’m presuming these possibilities will be anticipated, and preventative measures put in place before an official digital currency is launched, but there’s no doubt that any such move would further expand the role of the Bank of England. 

How can we stop this? Ideally, our elected representatives would be dealing with this stuff on our behalf. But I doubt that most of them are capable. The next time you meet a politician, ask him or her to explain quantitative easing to you. Or ask them where the money that banks lend to their customers comes from. If they say “from savers”, then they haven’t got a clue. 

If we can’t rely on our politicians to provide effective oversight, what can we do? One solution would be to end our addiction to QE — though I’m not convinced we’re willing to endure the austerity that would entail. Another would be to end the independence of central banks. But this would mean putting politicians in full charge of the QE printing press — and do we really want to risk that?

Unless there’s an inflation crisis that brings the whole pack of cards crashing down, the most likely scenario is that the central banks continue to grow in power — until we stop thinking of them as banks at all, and instead as parallel governments. 


Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.

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Galeti Tavas
Galeti Tavas
2 years ago

“Inflation is always and everywhere a monetary phenomenon” Nobel laureate Milton Friedman.

UK says the inflation is 3%, USA Fed says 4.5%. It is higher.

No income taxation will ever pay the National Debts, Inflation is how they will be paid. USA and UK wish for that optimum 2% inflation, they say. ‘M2’, the money supply (cash, bank balances, and such) needs to be increased (I think) about 6% in order to get 2.5% inflation – what they want – But in USA M2 increased 25% last year! Many say 10% inflation is very real. USA has been creating more money than anyone, they are drunken sailors, and the hangover is going to be terrible.

Inflation is Regressive Taxation. It devalues currency and so reduces debt in real terms. If you have 1000 in the bank 0.0% interest savings account with 4% inflation after a year it is worth 960, you paid an inflation tax of 4%, your savings shrank.

At 4% inflation the 2,000,000,000,000 National debt is now only 1,920,000,000,000 (in real terms – in nominal terms it is still two trillion, but the money is devalued). This was paid down by the inflation tax on everyone’s money in non-appreciating asserts. Cool, isn’t it – you just paid 4% stealth tax and never even knew.

BUT here is the big trick – ZERO interest. My understanding is Gilts are running 1.15% and 10 year US Treasuries 1.4%. (These are the very safest place to put your money in the world, so give a poor return.) Sooo – You put 1000 into either and get, say 1.5% return per year. Inflation is 4.5%, you are LOSING 3% of your money every year. (this is called ‘Real Interest rate’)

See, this is the thing. Savings (pensions) were always supposed to be 60% equities (stock market) and 40% Bonds, and as one aged, becoming risk adverse switching to 60% bonds, 40% equities. The bonds giving a low, but dependable gain as ‘Real Interest Rates’ are always normally Positive, your savings grow, your pension pot grows. Now ZERO interest, even Negative interest rates are the reality. If interest rates rise due to inflation the global $300,000,000,000,000 of debt cannot be serviced and everything collapse…The governments will keep interest zero, or almost..,.

Now you cannot have savings as safe bonds have a Negative Real Interest Rate – and so all savers are forced into the stock market! Everyone is forced to risky investing BECAUSE THERE IS NO SAFE INVESTING ANYMORE! There is no slow and safe savings anymore. If you put money aside every year into gilts or Treasuries to retire you would lose half of it…. Government redistribution spending is taking your savings and giving it to the super wealthy – See, the wealthy own Appreciating Assets. They own companies, banks, businesses, hedge funds, hard assets – they get Dividends and appreciation more than inflation – they get more wealthy wile you get less so as you wealth is taxed away to give to them by the Inflation Tax…

All this insanely wasteful spending, it is sent out and you may get some, but then it must be paid back, and it is paid as devaluing the currency – inflation, and you pay it back. Your income is dropping in real terms – and one day you will get a pay rise, but all that time wile it lagged – you LOST that money too.

The Middle class are toast – this lockdown insanity – it is to break the middle class. Close the economy, keep paying for everything anyway (by importing by deficit spending debt, and just paying to sit at home producing nothing) Productivity, GDP, is shattered – And all that money created will end up in the hands of the wealthy – the game is rigged. You cannot hang onto it, savings are negative….

The last thing is Equities… the stock Market. The P/E ratios (price to earnings) are insane, higher than ever seen except right before a crash…so if you put all your money in them many are saying 50% and worse ‘Correction’ is coming, and I believe it. I have lost a great deal on this thinking as I put all my money into silver, Gold, and cash a year ago thinking it must happen – but the market hits greater and greater highs – but still I am too scared of it. I am totally wrong so far – Cathy Woods is right. I fallow Peter Schiff, Harry Dent, Jim Rodgers, Dalio, Michael Bury and the doom Sayers – and am wrong as them – so maybe there is wealth yet, and the market is the place, and I am totally wrong…..

But the economy is in a totally crazy place. I worry for the future. Then CBDC…. (central bank digital currency – that is a huge issue, but another day.) I cannot believe Unherd did economy finally….

Tony Taylor
Tony Taylor
2 years ago
Reply to  Galeti Tavas

I’ll give you another Friedman, Sanford: nothing is as permanent as a temporary government measure. Govenments talking temporary GFC mechanisms were music to the bankers’ ears.

J Bryant
J Bryant
2 years ago

The small number of comments on this article is interesting.
I’m one of the people who has been wondering why Unherd doesn’t post more articles on economics. I believe the economy will rapidly become the big story dominating our lives in the next few years mainly because of the massive debts national governments have incurred. Another commenter has elaborated on this idea.
But this article attracted only seven comments over a period of about 15 hours. There are three times as many comments on a concurrent article dealing with the dividing line between art and porn. Ok, porn always attracts attention (positive or negative), but still…
Perhaps I’m beginning to understand why Unherd avoids economics, but I continue to believe it will soon be the dominant story of our age.

RALPH TIFFIN
RALPH TIFFIN
2 years ago
Reply to  J Bryant

How right you are – we should all enjoy the summer

Bernard Hill
Bernard Hill
2 years ago
Reply to  J Bryant

…it is bewildering I agree. Clearly Unherd commentators ‘get’ the significance of the chaos being induced by the ascendant apocalyptic/collectivist thinking, but no many seem to want to hear about or engage with the relevant economic and financial policy issues.

William Murphy
William Murphy
2 years ago
Reply to  J Bryant

Very good point, JB. Probably because most people, even Unherd readers, lack basic knowledge and confidence in commenting on complex economic issues. We can blather for the rest of eternity on the morals of Boris and pornographers, but not on the basic processes driving the modern world.

Andrew Fisher
Andrew Fisher
2 years ago
Reply to  J Bryant

It is because we don’t understand it, economics isn’t a science, economists don’t agree, and we feel insecure and uncertain about it. But the ones who are certain entirely disagree about money supply, inflation, debt, taxation etc. Some are passionate advocates of MMT, others strong opponents.

We now have Conservative governments spending like there is no tomorrow. Margaret Thatcher propagated a homely if inaccurate economic narrative which at least people could understand.

Malcolm Ripley
Malcolm Ripley
2 years ago

Want to know where “the peoples” future is for currency. Simply identify what the central banks and governments are terrified of……..cryptocurrency. The HAVE to create their own CBDC in order to have some control in this space. God forbid people put their savings into Crypto and start trading in the stuff. Oh hang on Amazon are hiring crypto experts, Paypal is going to allow crypto to be used. More and more financial institutions are supporting crypto for their clients.
It is only in the last couple of months that I got into crypto and when you do and take an interest you can see that this is (even now) a very new technology that is expanding very rapidly. The tech behind it, the blockchain, is the thing that terrifies banks and government, no more fiddling the books (impossible), a fully de-dentralised system, fully verifiable ownership, business transactions and contracts WITHOUT lawyers! It will be impossible for banks and governments to hide behind BS and nobody will be able to deny transactions took place!
You don’t need to adopt CBDC. There are stablecoins pegged to the dollar. There are coins that have interest! some as high as 16%.If you carefully purchase your crypto (buy the dip as they say) then stake it (lock it away to get the interest) this is far better than a fiat currency bank.
Granted it is still a bit of minefield out there knowing where to get to started, how to store your coins, how to use crypto day to day BUT this is changing VERY rapidly. Watch for the likes of Amazon, Paypal etc and “shopping” apps on smartphones. There are billions of people in the world without a bank account but have access to the internet via their phone and blockchain solutions are coming thick and fast.
Just remember there is more fiat currency in accounts than physical money in circulation so we are currently already 100% dependant on computers for our money!

Antony Hirst
Antony Hirst
2 years ago
Reply to  Malcolm Ripley

Surely crypto is a government’s wet dream, now they can track every transaction. Although they may not be able to modify the ledger, but when they can directly control who can spend and who can’t, who cares?
I think people think crypto is one big decentralized wild west. In reality, the concept is ripe for central control and perfect for central banks.

Last edited 2 years ago by Antony Hirst
Bernard Hill
Bernard Hill
2 years ago
Reply to  Antony Hirst

…I think you conflating digital currency, with cryptocurrency. Not the same.

Galeti Tavas
Galeti Tavas
2 years ago
Reply to  Malcolm Ripley

“There are stablecoins pegged to the dollar.” I assume you mean like ‘Teather’ – a opaque tool likely completely corrupt which is exceedingly dangerous to the global economy!

Tether supposedly keeps 1$ for every tether in a Cayman bank, but there are billions of them, and there is no audit, and it cannot be true…

But the thing is Tether is how Bitcoin is bought. Turning actual $ into bitcoin means buying tether as it is convertible – but what happens if there is a huge sell off? Do you want tether? Is there enough of it? It seems this fake tether is how Bit coin price is inflated so much – just ‘print’ unbacked tether and buy bit coin, and then you have inflated bitcoin, manipulated it… it is CRAZY.

Anyway, there are 12,000 digital currencies – almost all worth ZERO. They have NO intrinsic value, they are very expensive and slow to use in commerce (that blockchain takes a LOT of computing power), Etherium seems best in many ways as it is much more useful in speedy transactions – but all of them are pure Speculative assets – have no intrinsic value, and thus store of value.

Money has to be: A store of value, usable in commerce, and fungible. (fungible = every unit is tradable, and equal to any other unit – say gold. 1 oz gold in USA can be swapped for 1 oz in China as each oz is exactly equal to the other – thus the trade is in fact a swap electronically) Block chain money is not the first at this point, is expensive and slow for the second, may be the third, but may not be) Central bank digital meets all three as it is a FIAT Money.

CBDC is an entire paradigm change – it is a HUGE difference, way more than the writer mentions. I will spare that lecture, but it is going to shake economic reality to the very core.

Bernard Hill
Bernard Hill
2 years ago
Reply to  Galeti Tavas

The intrinsic value lies in the cost of its production, which as everyone knows, is energy intensive, as well as the nature of its being a finite quantity. In these respects it has real value which no fiat currency has. Fiat is just the result of the state’s monopoly of coercion over its citizens. As you say, CBDC has huge implications for public pacification, so its introduction is likely to drive wealth onto the crypto ‘high seas’. From there liberal capitalism has some hope of recovery.

Last edited 2 years ago by Bernard Hill
Galeti Tavas
Galeti Tavas
2 years ago
Reply to  Bernard Hill

“The intrinsic value lies in the cost of its production”

But that is just not true. The high costs of mining make it cost more to produce, but that money is not recoverable, it still gives no intrinsic value. If you burnt dollar bills because then the ash would be a form of money as it cost a great deal to produce, you would just be crazy.

Mining copper is expensive, but then you have copper, a great use.

Antony Hirst
Antony Hirst
2 years ago

As far as I can figure out, Central Banks can only exist because we pay tax. So long as we have to pay our taxes in the same currency that the CB issues, then that currency has value and meaning.
Central Banks, therefore, have nothing to do with capitalism. They are there to set the overnight rates to feed the bond market in the favour of the chosen few.
Central Banks are run parallel to any political system, They are out of reach, unaccountable, mysterious and dark. This is not capitalism, this is cronyism. Just by their very existence, democracy is superficial and meaningless.

Bernard Hill
Bernard Hill
2 years ago

…why are you concerned that displacement of the national currency by a cryptocurrency is something to be avoided Peter? Frankly, that looks like the only thing that is going to save the planet.

Galeti Tavas
Galeti Tavas
2 years ago
Reply to  Bernard Hill

I think you mean ‘enslave the planet’

Revelations 13:16 “16And the second beast required all people small and great, rich and poor, free and slave, to receive a mark on their right hand or on their forehead, 17so that no one could buy or sell unless he had the mark—the name of the beast or the number of its name.
”

No vaccine? Then your digital wallet (a phone app tied to your Central Bank digital account) will not buy you entry to the club. Your digital wallet is always watching, it is the all seeing eye of Sarun….

Andrew Fisher
Andrew Fisher
2 years ago
Reply to  Galeti Tavas

Edited reply to wrong person…

Last edited 2 years ago by Andrew Fisher
Galeti Tavas
Galeti Tavas
2 years ago
Reply to  Bernard Hill

I think you mean ‘ensl *ve the planet
Revelations 13:16 And the second beast required all people small and great, rich and poor, free and sl *ve, to receive a mark on their right hand or on their forehead, 17 so that no one could buy or sell unless he had the mark—the name of the beast or the number of its name.
”

No vaccine? Then your digital wallet (a phone app tied to your Central Bank digital account) will not buy you entry to the club. Your digital wallet is always watching, it is the all seeing eye of Sarun
.

Unherd is playing the Awaiting for approval game, so I repeat my Blocked post below with redacting * used to see if this gets by…. (Hi Mods, hope you are having a good day)

But then – it can automatically deduct the additional ‘Green Tax’ if you buy a bus ticket on a diesel bus more often than your allotted Carbon credit.

Bernard Hill
Bernard Hill
2 years ago
Reply to  Galeti Tavas

….Sanford, a government/central bank issued digital coin, is not the same thing as a bitcoin. Governments can’t control the latter, which has no issuing authority, who can enlarge the coin supply at will. Bitcoin is the fork in the road away from the neo-feudalism your bible reference points to.

Last edited 2 years ago by Bernard Hill
Galeti Tavas
Galeti Tavas
2 years ago
Reply to  Bernard Hill

I understand very well the difference.

But as far as bitcoin. Do you know USA outlawed owning gold in 1933″

“All Americans were required to turn in their gold on or before May 1, 1933 to the Federal Reserve in return for $20.67 of paper money per troy ounce. Americans who did not turn in their gold were subject to arrest on criminal charges and faced up to 10 years in federal prison.”

People complied because it just could no longer be sold or traded – and so the Gov took the gold. This continued till 1974! When owning gold was legal again.

If USA outlawed bitcoin it would be finished.

But the BCDC is a Big thing, the biggest seemingly is the privacy, and how the gov can turn off your wallet, or time it out, or what ever – but really, even bigger, is how it changes private banking as the digital wallet is no owned by the Central Bank – and if you know money creation it is all done by private banks loaning it into existence – this function will likely become changed – and now the Central Bank will actually ‘Create Money’ as it wishes, by self loaning it into your wallet as you want loans. This is huge.

Andrew Fisher
Andrew Fisher
2 years ago
Reply to  Bernard Hill

I think the very fact that a few IT literate nerds are strong advocates and the general public haven’t a clue just shows what a divisive and elitist project this would be in reality, in fact very much like share ownership now.

It is a right liberal / libertarian fantasy that we can all be, or even want to be, mini speculative capitalists!

Alan Thorpe
Alan Thorpe
2 years ago

It isn’t bankers generally that are the problem. it is the central banks that were created to stabilise the economies and they have done exactly the opposite by printing worthless money for governments.

Peter Hall
Peter Hall
2 years ago

The bankers are one issue, but the government’s fiscal profligacy is the real problem. This has two elements 1. A baked-in and structural fiscal deficit 2. Random acts of madness such as HS2, royal yacht and the massive overreaction to Covid.

Julie Kemp
Julie Kemp
2 years ago

That which Catherine Austin Fitts understands re what is going on in tandem: viral control, tech and currency controls with people sandwiched in the middle with their phones which ipso facto details what we sheep are doing? Sad, sad, sad. Utterly terrible. Our cultures gone. Perfect for the puppeteers whether mortal or ‘alien’. Just all strikes me as what is going on – at least in the overt. “Economic Totalitarian” sucking up any money the people have or may gain.

Kristof K
Kristof K
2 years ago

Dear Mr Franklin,

Why did you not mention raising taxes on wealth and the really wealthy?