Friday 7 August 2020

Bank of England Doublespeak

The Bank of England, yesterday, as with other central banks described its reasons for engaging in more QE, i.e. printing money tokens on a vast scale, despite the fact that the world is awash in such worthless paper.  The Bank admitted that without addition QE, the level of borrowing by the UK government to finance its insane lockdown policy had reached a level where it would not have been able to borrow enough in capital markets, and where, consequently interest rates would have skyrocketed.  What the bank did not admit is that is the reality, and that the actions of central banks have not changed that reality, but only delayed, and changed the form of its appearance.

Bank of England Governor, Andrew Bailey, proclaimed that, of course, the Bank does not but government paper in the primary market.  In other words, when the government debt office issues new government bonds to borrow money, the Bank of England does not print money in order to buy those bonds.  That is possibly against its charter.  It amounts to monetising the government debt, the equivalent of what in previous times was achieved by states reducing the amount of gold in the coins they minted, and using these devalued coins to pay its creditors.  The Bank of England, Bailey pronounced, only buys government bonds in the secondary markets, i.e. existing government bonds that individuals and institutions have previously bought, and now seek to sell.

But, of course, this is just Doublespeak.  What Bailey didn't say was that when the Ban buys these bonds in the secondary markets, the money tokens it pays for them, money tokens it has just printed, does not just disappear.  It goes into the bank accounts of those who sold those bonds.  Then that money is used by the sellers of those bonds to buy other financial assets, and at a time when central banks are printed oodles more money tokens, with the stated purpose of buying bonds and inflating their prices, the sensible thing for the owners of that newly minted, devalued currency is to buy those also newly printed government bonds, because their prices are likely to rise, and so large capital gains can be had on them.  Moreover, if that doesn't happen, then those bonds will themselves become saleable in the secondary markets, and so the Bank of England can always then be on hand to buy those bonds too, so as to reflate their price, and avoid the top 0.01% who are the main owners of such fictitious capital from suffering any capital loss from it.  This is what is called moral hazard.  It means the super rich, the owners of all this fictitious capital get to keep any capital gains from the rises in these asset prices, but any capital losses they might have suffered are not born buy them, but are socialised, because the state steps in to rescue them, by printing money to buy up those bonds, and inflate their price.  Its like the government saying it will repay you any money you spend on the lottery, but you can keep any winnings you get from it.

No wonder the owners of this fictitious capital, the shareholders in companies, have been loathe to use profits to invest in new productive capacity, and instead prefer to continue speculating in the casinos of the financial and property markets.

But, what Bailey also didn't say, is that the fact that the government almost came to a point, in the last few weeks, where the level of borrowing to finance its lockdown policy was unsustainable, is not just a matter of the astronomical scale of that borrowing but of what that borrowing is for.  When central banks print money tokens and use it to buy bonds, whilst governments are not issuing them, or issuing them on a reduced scale, a part of their programme of austerity, the money tokens that the Bank throws into circulation, simply goes to buy up existing bonds (or other financial and property assets) which causes their price to rise, and the yield on those assets to fall.  It gives the delusion of falling interest rates.  What is different now, is that governments are issuing bonds to finance astronomically inflated levels of borrowing to cover astronomical levels of unproductive consumption.

Its one thing when governments borrow money for productive consumption, for example to build a new road, school, or to employ more teachers, and so on.  All of this represents capital accumulation, and the value it represents get put back into the economy, at shorter or longer time periods.  A new road, for example, is value that is reproduced, via the wear and tear of the road, as part of the value of goods and people along that road, which is repaid to the government either out of tolls, or out of taxes.  But, the vast amounts of government borrowing now being undertaken are not for such investment, quite the opposite.  It is government borrowing to finance consumption, whilst simultaneously paying people not to produce all of the commodities whose consumption is being financed!  Its the equivalent of the Common Agricultural Policy paying farmers not to produce food, whilst the subsidies given to those farmers, provide them with a revenue that enables them to consume commodities.

So, assume I own £100 million of government bonds.  The Bank of England prints £100 billion of new funny money, via QE, and uses it to buy £100 billion of existing bonds in the secondary markets from me, and 1,000 or so other people also holding a similar quantity of bonds.  So, now the £100 million that the Bank of England pays me for my bonds, goes into my Bank Account.  I now have £100 million to spend, as does each of the other 1,000 or so people who sold their bonds to the Bank.  But, now the government issues £100 billion of new bonds to finance all of its borrowing.  Seeing, that the Bank of England continues to be prepared to destroy the currency via QE to keep bond prices inflated, I use the £100 million the bank has given me, and buy £100 million of these newly issued government bonds, confident that, even though they are now producing a negative yield in nominal let alone real terms, the price of the bond is likely to go higher still, given the role of the central bank, and so I stand to make a 10, 20,30, 40, 50 or 60% capital gain, in short order, more or less free of any risk, so long as the Bank can step in to bail me out. 

As I pointed out a while ago, that is what happened with Austrian 100 year bonds, which were issued with a 2% coupon, but which within a matter of a few years had risen in price by 60%!

The difference now is that, instead of me using the £100 million the Bank has given me for the bonds it bought from me, to myself buy existing bonds, or shares, or property, in anticipation of them providing me with these large risk free capital gains, I buy the newly issued government bonds.  Previously, in buying existing bonds, shares, or property, my £100 million would go into the bank accounts of the pother speculators who owned those assets, and they would, in turn us the money to buy other existing assets, in an endless paper chase that simply pushes these asset prices to ever higher and more ridiculous and unsustainable levels.   It means that more bigger fools get on the treadmill driving prices higher.  For example, recently a new stock trading platform - Robinhood - has come into existence that charges no commissions on the buying and selling of shares.  It has encouraged large numbers of amateur speculators into the market.  In recent days on the announcement that Kodaak was going to be producing chemicals for use in COVID19 medications, its share price rose 20 fold from $2 to $40, driven by large numbers of retail speculators using Robinhood.  This is a pretty sure sign that all of this speculation is in hyper bubble territory, which inevitably means a massive crash is at hand.  It has been driven by the vast oceans of funny money that central banks have pumped into circulation precisely to bring about such rises in asset prices, to protect the paper wealth of the top 0.01%.

But, now, instead of buying these existing bonds, shares, and property, and thereby inflating their prices further, I buy the newly issued government bonds.  Given that share prices have rocketed in the last two years, driven by all of this speculation, and I might now feel a bit wary of these high prices at a time when government lockdown of economies might send companies out of business, so that their shares become worthless no matter how many money tokens are printed, I am more likely to buy bonds than shares.  But, also, the last few weeks has shown that with negative yields on bonds, and that reflecting the fact that their prices are at astronomically high levels, I might also be a bit wary of buying bonds too.  So, I might decide to buy something that appears to have real value like gold.  So, the price of gold has gone from around $1200 an ounce a few months ago, to over $2000 an ounce.  Gold, of course, unlike Bitcoin, does have real value.  It is a commodity, and so a use value, and it requires labour to produce it.  But, its exchange-value, or more precisely its price of production (cost of production plus average profit) is more like the $1200 an ounce it was selling at previously that the $2,000 it has been driven up to by speculation.  It is again an indication that massive bubbles in asset prices have been created in all asset classes as a result of central bank money printing, and that when they burst they will all burst spectacularly.

Instead of all this funny money simply going round and round to push up asset prices, therefore, the fact that the government issues large quantities of bonds itself changes things.  The fact that the government issues these bonds not even to pay for productive consumption but to finance unproductive consumption changes things even more.  Now, as the government issues its £100 billion of bonds, the £100 billion of new funny money printed by the Bank of England, and used to buy existing bonds from me and other bondholders, goes out of my bank account, and buys these new government bonds.  The money tokens then goes into the governments bank account.  From the government bank account it goes out to individuals via companies, as part of the furlough scheme, and other similar schemes.

So, now, this £100 billion of funny money printed by the Bank of England goes into circulation and is used by its recipients to buy commodities such as food, clothing and so on.  But, these payments were payments for people to stay at home, and not produce all of this food and clothing etc. that they are now being paid to consume!  The consequence of all this funny money chasing after the goods and services that have not been produced, because the government has paid them instead to stay at home as part of its lockdown that has destroyed the economy, is that inflation inevitably rises.

But, as inflation rises, this has other consequences.  The households that see the prices of food, clothing hair cuts and so on rising, need higher wages to cover these inflated costs.  Businesses, faced with higher prices for the raw materials and the wages they must now pay as a result of the inflation, themselves increase their prices, causing inflation to rise faster, but they must also borrow more money tokens to be able to buy these commodities in order to produce.  The government, also sees the prices of commodities rise, such as the things it buys for hospitals, schools, to build and repair roads, and so on, as well as seeing its own wage bill rise sharply.  So, it too has to borrow on an even more massive scale in order to deal with the inflation that the printing of funny money by the Bank of England, to cover all this borrowing, has in the first place created.

And, so as households, businesses, and government have to borrow on an ever increasing scale to compensate for this ever rising inflation, this increased borrowing again pushes up interest rates that the inflation inducing money printing was supposed to have prevented!  It hasn't, its simply deferred it, changed its form, and made it worse.  But, it hasn't even started yet.  Its not just all of the unproductive consumption that the government has financed that represents the biggest borrowing that is to come.  Its the loss or government taxation as businesses go bust, and workers lose their jobs in the millions.  Its the vast rise in welfare payments to cover that mass unemployment.  It is the loss of taxation, as company profits disappear, and the trillions of Pounds that will have to be spent bailing out the large strategic companies such as airlines, aircraft manufacturers, and so on that will put the £2 trillion bail-out of the banks after 2008 in the shade.

There is no amount of printing of funny money that is going to cover all of that borrowing to finance unproductive consumption, as inflation rises inexorably over coming months.  And, as in 1990, when unemployment rises, and interest rates rise, causing mortgage rates to rise, so that even those in work find them can't pay them, and those not in work, become forced sellers of massively overpriced, and rapidly depreciating houses, the collapse in asset prices that ensues will expose the true nature of the continued bankruptcy of the banks and financial institutions that has simply been paper over by money printing to inflate the prices of assets on their balance sheets.  So, this time round the bail-out of the big industrial companies will not be instead of but, in addition to the need to bail-out those banks and financial institutions.

Alternatively, of course, we could demand that the government undertakes no such bail-outs, which amount to a bailout of the shareholders in all these companies.  We could say, them go bust on paper, let their shares and bonds become worthless.  The let the workers in all those companies simply take over what is really important - the actual productive-capital, the factories, shops and offices, the machines and equipment, the raw materials and so on.  That is, let the associated producers exercise the control over the socialised capital, which is actually their collective property in the first place.  Let us end the control over that capital by the shareholders and speculators that have created this economy of the asylum, and begin to produce for human needs, and to use profits rationally to expand that production, rather than to pay out dividends to speculators so that they can continue to gamble with our futures. 

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