Leo Foresta

During the French revolution, authorities issued assignats, which were IOU’s between bonds and actual currency.

As no limit was set to printing this new money, hyperinflation ensued, and soon enough assignats turned worthless.

Now consider the US, UK and EU in 2012. Printing assignats has taken the form of “Quantitative Easing” (QE).

With QE the central bank buys government debt and pays for it by crediting the accounts of commercial banks. Thereby money is created and long term interest rates are kept low, which enables government to run further deficits.

This, of course, cannot go on indefinitely.

But central bankers, in cahoots with governments and multinationals, do as if it could. Which keeps financial and commercial markets afloat for the moment and maintains the illusion of business as usual.

In the UK, land of credit and debts starting from university, authorities are particularly keen on QE, as outlined in the following article by the Financial Times’ chief economist “Why quantitative easing is the only game in town”:

http://www.ft.com/intl/cms/s/0/de9be724-6df6-11e1-baa5-00144feab49a.html#axzz1pGdNx1Gq

Here is an extract:

The sums involved are startling. At the end of its third round of asset purchases, the Bank of Englan will own £325bn of financial assets, predominantly government bonds (or gilts), which it will have bought with newly created money. It will own close to a third of the gilt market.

Yes, this is monetisation. So is it effective? Is it even dangerous?

The BoE’s view is that QE is a natural extension of monetary policy, necessary when the short rate is 0.5 per cent, the lowest rate in the 318 years of the BoE’s existence.

With conventional measures exhausted, the BoE, like the Federal Reserve and the European Central Bank, has been driven to try highly unconventional measures instead.

In plain language, the authorities are desperate and the system is near to collapse.

When the financial crisis broke out in 2008, the Queen of England, on a visit to the London School of Economics, famously asked why no expert had seen the crisis coming.

Is anyone telling her about the QE fireworks arranged by the Bank of England to celebrate her Jubilee?

Fear not, and do not believe official propaganda on economics, or on any other subject.

Love,

Leo

Copyright © Leo Foresta 2012