We are about to be propelled into a global economy with a Synthetic Hegemonic Currency (SHC). Major geopolitical, financial and economic events have been exploited in order to establish the SHC. It is intended as the foundation of a new multipolar International Monetary and Financial System (IMFS).
Some have suggested that the war in Ukraine has reignited international political realism. Whether this is true or not, there has been a re-emerging focus on geopolitics, spotlighting the growing confrontations between nation-states.
But while antagonisms among nations are evident, we must keep in mind that these international conflicts are set within the broader context of widespread agreement on many issues—notably, Sustainable Development Goals (SDGs) and the imposition of digital ID.
This cooperation between national governments is perhaps most evident, however, in the creation of a new CBDC-based IMFS. All leading national governments are vying for position within one new global monetary and financial system, the design of which is universally accepted. Thus, even as apparent political and military tensions between East and West escalate, simultaneously there appears to be unparalleled global collaboration on the creation of an SHC.
The Synthetic Hegemonic Currency will take the form of interoperable Central Bank Digital Currencies (CBDCs). Each nation-state’s individual CBDC will be linked to all the other CBDCs to form a single centrally controlled IMFS. This goal has long been planned by the central bankers of the Group of Seven (G7) and the Group of 20 (G20). It is considered both a solution to the inevitable failure of the current debt-based global monetary system and a monetary realignment in preparation for the intended multipolar world order.
The monetary conditions that have arisen in the wake of the pseudopandemic and the war in Ukraine—and which are alleged to be the consequences of both events—have coalesced to prepare the world to accept the SHC. That both of these major global events occurred consecutively on the heels of the bankers’ call for a new SHC, suggests the possibility, at the very least, that the “pandemic” and the “war” are being deliberately exploited to justify the imposition of a SHC.
The Bankers’ Need for an SHC
Speaking at the Jackson Hole (Wyoming) G7 Central Bankers Symposium in August 2019, then-Governor of the Bank of England Mark Carney talked about the need to create a new International Monetary and Financial System (IMFS) “worthy” of a proposed “multi-polar global economy.”
Carney envisaged the role that a Synthetic Hegemonic Currency would play in creating this new global economic and financial order. The SHC would be required, he suggested, to “smooth the transition” as the US dollar’s position as the world’s dominant reserve currency came to an end.
Carney said:
“While the world economy is being reordered, the US dollar remains as important as when Bretton Woods collapsed. [. . .] In the longer term, we need to change the game. [. . .] When change comes, it shouldn’t be to swap one currency hegemon for another. Any unipolar system is unsuited to a multi-polar world. We would do well to think through every opportunity, including those presented by new technologies, to create a more balanced and effective system. [. . . .] [A] multi-polar global economy requires a new IMFS to realise its full potential. That won’t be easy. Transitions between global reserve currencies are rare events. [. . .] [I]t is an open question whether such a new Synthetic Hegemonic Currency would be best provided by the public sector, perhaps through a network of central bank digital currencies. [. . .] [A]n SHC might smooth the transition that the IMFS needs. [. . .] The deficiencies of the IMFS have become increasingly potent. Even a passing acquaintance with monetary history suggests that this centre won’t hold. [. . .] Let’s end the malign neglect of the IMFS and build a system worthy of the diverse, multi-polar global economy that is emerging.”
The G7 bankers knew that the “centre” of the existing IMFS would not hold. While the US dollar remained important, there was an urgent need to “change the game.”
Like Carney, the other G7 central bankers present at the Jackson Hole symposium ascertained that the near-“unipolar” hegemony of the US dollar as the dominant global reserve currency was “unsuited to a multi-polar world.” That’s why they considered that the “world economy” needed to be “reordered.” They recognised that “new technologies,” such as “a network of central bank digital currencies,” could be used “to create a more balanced and effective [monetary] system.”
Hence, a transition “between global reserve currencies” to better suit a “multi-polar global economy” was the goal. The only question was how to achieve it.
The Antecedent
Commercial banks “settle” the balance of payments between each other using nothing but base money (central bank reserves). They can use only base money for such settlements. However, these reserves also form part of commercial banks’ high-quality liquid assets (HQLA) and are central to the risk-weighted asset (RWA) calculation that supposedly controls bank lending limits.
Until very recently, neither the public nor businesses could access central bank base money (of any kind). Instead, the private sector—excluding commercial banks—could exchange only “broad money.” This broad money is the fiat currency we’re familiar with. Let’s just call it “currency.”
Prior to “going direct” (more on this shortly), base money (central bank reserves) and broad money (currency) were in separate split monetary circuits. Base money issued by the central banks could not be used to directly finance government expenditure. Instead, governments borrowed money by selling bonds on the open market to investors.
More than 97% of the currency in circulation is initially created by commercial banks—created from nothing!—when they make a loan. Central banks do exactly the same thing when they create base money.
As revealed by the Bank of England (BoE)—the UK’s central bank:
“The money we used to buy bonds when we were doing QE [Quantitative Easing] did not come from government taxation or borrowing. Instead, like other central banks, we can create money digitally in the form of ‘central bank reserves’. We use these reserves to buy bonds.”
We should perhaps note that there is no “credit” when banks—whether commercial or central—create either broad money or base money. Rather, “credit” is an exchange of value. For example, we are told that banks “lend” money to homebuyers in exchange for a mortgage agreement. But the bank hasn’t really “lent” the home buyer anything. The money didn’t exist until the homebuyer agreed to the mortgage contract.
The only person creating any “value” in these transactions is the homebuyer taking out the mortgage. The homebuyer works in the “real economy” to earn enough to pay the bank back its principle and interest in whatever amounts and on whatever timetable the bank requires.
For its part, the bank did absolutely nothing except enter some numbers and currency symbols in a computer. There is no “exchange” of value and therefore no “credit.” Usury would be a more accurate term to describe bank “lending”—erroneously called “credit creation.”
Following the 2008 financial crash, central banks started pursuing the monetary policy they called Quantitative Easing (QE). They rolled out QE in two distinct phases. Looking back, we can consider these phases “pre-going direct” and “post-going direct.” For the moment, we will focus upon the pre-going direct QE of the BoE. Keep in mind, though, that the BoE’s QE operations at that time were similar to those first implemented by the US Federal Reserve (the Fed) and later by other central banks.
The man who first proposed the concept of QE all the way back in 1995 was Richard Werner, an economist and professor of banking and finance. Werner suggested that governments should draw a distinction between the “use of money for transactions that are part of the real economy (real circulation credit) and the circulation of money used for financial transactions (financial circulation credit).” He proposed “a division of monetary flows into two distinct streams.”
Why did Prof. Werner differentiate between the “real economy” and the financial markets? Because value creation and thus economic growth, he maintained, was driven by the commercial activity of small-to-medium-size enterprises (SMEs) and by households with sufficient purchasing power. In fact, his original QE plan aimed at stimulating purchasing power in that “real economy.”
Acknowledging that most of the money used in the “real economy” is created by commercial banks when they extend so-called “credit,” Werner noted that competition had driven commercial banks to increasingly favour lower-risk investments in “real estate or stocks.” In other words, the commercial banks had become risk averse. Consequently, they had limited the money supply to SMEs and households, thereby stifling the value creation necessary for economic growth.
Werner observed that throughout the 1980s the commercial banks had created a money supply for “financial circulation credit” that “vastly exceeded the amount necessary for the ‘real’ economy.” He warned that this practice was ultimately inflationary and thus was not a sustainable monetary policy.
The only reason expansion of the money supply had not led to rampant inflation, he noted, was that nearly all of that newly created money had gone into long-term investments in financial assets (land and stocks). While these investments had naturally caused the prices of the financial assets to increase, the financial “price” inflation had not yet trickled down to severely impact the consumer price index (CPI), by which inflation is measured.
To address the resultant economic slowdown in the face of an impending inflationary time bomb, Werner’s offered solution was “Quantitative Monetary Easing.” He suggested that central banks should enter into specific long-term loan agreements and borrow directly from commercial banks and other non-bank financial institutions. This newly created “broad money,” he argued, could then be used to finance the “real economy” and effectively divert the commercial bank money supply back to SMEs and households.
Werner advised against the “conventional” monetary policy of central banks simply expanding the money supply by creating additional “base money” reserves for commercial banks. He also said that slashing the cost of borrowing, by cutting the “base rate,” wouldn’t induce the needed “division of monetary flows” either.
The model of QE Werner proposed would see commercial banks and non-bank financial institutions consent to loan agreements with central banks that would contractually oblige them to create “credit” in the “real economy”:
“Put simply, the central bank can print money and purchase assets in the markets from participants beyond the banking system. It can intervene in the foreign exchange markets, without sterilising the monetary expansion. In these ways the central bank can inject new purchasing power in the [real] economy. If this were done, then the overall amount of purchasing power in the economy would increase and commercial transactions throughout business would be revived.”
Following the 2008 financial crash caused by the commercial banks’ profligate lending, the commercial banks all but stopped lending (that is, “creating credit,” as they call it). Somewhat disingenuously naming their monetary policy response “QE,” the central banks slashed interest rates and started buying longer-term government bonds and higher-risk assets, such as mortgage-backed securities (MBS), from commercial banks.
In the UK, for example, the “base rate” of interest was 5% in October 2008. By March 2009 it had dropped precipitously to 0.5%. As the cost of money rapidly approached zero, it severely limited the effectiveness of “conventional” monetary policy. Thus, the banks combined this strategy with the “unconventional monetary policy tool” of bulk asset-buying. This hugely increased the commercial banks’ liquidity by boosting their reserves (base money). The central banks then paid interest to the commercial banks for their increased “excess” reserves.
Allegedly the BoE hoped that, by slashing the cost of borrowing and increasing commercial bank liquidity, the commercial banks would start “credit creation” in the “real economy” and increase “purchasing power.” However, absent the specific loan agreements Werner stipulated, the BoE’s efforts appeared to be a “hit and hope” version of the QE model he proposed.
Unsurprisingly, the UK central bank’s model of QE did not stimulate the “real economy.” That is because it had not done anything to address the risk aversion of commercial banks.
In 2020, the BoE Monetary Policy Committee published Working Paper 883, which evaluated the impact of its initial QE efforts:
“The Monetary Policy Committee (MPC) didn’t expect there to be strong transmission of the APP’s [Asset Purchase Programme’s] impact through the bank lending channel. In line with that, we find no evidence that suggests that QE directly boosted bank lending to the real economy. [. . .] QE banks reallocated their assets towards lower risk-weighted investments, such as government securities [bonds].”
Not only had the UK’s central bank adopted a model of QE divorced from Werner’s original prescription, apparently it did so deliberately in the expectation that the money creation would not actually stimulate the “real economy.” This premise is entirely at odds with what the BoE had hitherto claimed the purpose of QE to be:
“One of the ways in which QE worked is by making it cheaper for households and businesses to borrow money, encouraging spending.”
But, as Werner had highlighted, encouraging spending could not be achieved simply by cutting interest rates and haphazardly bolstering commercial banks’ liquidity. The BoE and other central banks appear to have known this!
The result of Western central banks’ QE was to expand the money supply and pump it into the financial markets. In fact, the BoE openly admits:
“QE increases the price of financial assets other than bonds, such as shares. Here’s an example. Say we buy £1 million of government bonds from an asset manager. In place of those bonds, the asset manager now has £1 million in cash. Rather than hold on to that cash, it might invest it in other financial assets, such as shares. In turn that tends to push up on the value of shares, making households and businesses and other financial institutions that own those shares wealthier.”
At the same time that the BoE’s monetary policy was feeding money into the financial markets, the UK government was imposing the fiscal policy of “austerity” for the alleged purpose of reducing the fiscal deficit.
The trouble was, this fiscal policy removed investment from the “real economy.” It also depressed wages. True, that had the positive effect of increasing the UK employment rate, but this was at the expense of increased in work poverty, as “zero hour contracts” replaced job security and wages fell further behind the cost of living.
London School of Economics Professor John Van Reenen commented on these trends in 2015:
“Compared with historic trends, GDP per capita was nearly 16% lower in 2014 [since 2008] — a loss of about £4,500 per person. The much-lauded growth rate of 2.7% in 2014 is flattened by population growth (net immigration is running at triple the government’s 100,000 target). [. . . ] Jobs have held up surprisingly well with almost three quarters of the working age population in jobs, back to pre-crisis levels. But this is largely due to average real wages falling by about 9% since 2008, which has kept labour costs down. [. . .] [Austerity] was particularly severe in fiscal years 2010-11 and 2011-12 with an enormous 40% real cut in public investment.”
There certainly appeared to be a “division of monetary flows” but money was being siphoned out of the real economy and into financial asset bubbles. This was opposite to the flow direction suggested by Werner. Indeed, the BoE and the UK government had “coordinated” monetary and fiscal policy to reduce “purchasing power” in the real economy that central bank QE was supposedly intended to increase.
So we see that the pre-going direct central bank model of QE represented an inordinate transfer of wealth from the “real economy” to the financial markets and investors. All the inflation occurred in the financial asset classes. A cursory look at the Financial Times Stock Exchange 100 Index (FTSE 100) shows the aggregate investor share price for the UK’s top 100 corporations and clarifies who the beneficiaries of this wealth transfer were.
For example, in February 2009 the FTSE 100 index sat at a low of 3830. Following the pre-going direct bouts of QE, over the next decade the index doubled, standing at 7772 by December 2019. Over the same time period, economic inequality increased dramatically in the UK.
Though the expansion of monetary supply caused inflation in the financial markets, it reduced purchasing power in the real economy. This, in turn, created what many have come to refer to as the “everything bubble.” While this was good news for early investors who held assets, it was terrible for longer-term economic prospects. Inevitably, the bubble had to burst.
The central banks had effectively amplified the precise conditions that led to the 2008 financial collapse that their QE “tool” was initially supposed to address. At the same time, the newly created base money had not “leaked” into the “broad money” circuit. Combined with fiscal policies that suppressed “purchasing power,” the conditions for CPI inflation were yet to emerge.
All of that was about to change, however.
Enter the Going Direct Proposal
To summarize: The QE response to the 2008 financial crisis was a deliberate monetary policy decision taken by the central banks. They could have chosen to pursue Werner’s model, but they rejected it. The outcome was entirely predictable.
Pre-going direct QE saw the BoE and other central banks hoover up government bonds, which they bought from private financial institutions. The central banks were compelled to keep the base rate low to minimise payments to commercial banks for their excess reserves. At the same time, the central banks earned a fixed rate of interest on the acquired bonds above the suppressed base rate. The central banks returned some of this “profit” to their respective governments, effectively reducing government borrowing costs but also exploding the overall scale of “public” borrowing.
During the same period, the fiscal policy of austerity was depressing economic activity, which meant that governments had to increase deficit spending. If we look at the UK deficit, for example, the record of “public sector net borrowing”—the fiscal deficit—shows that government spending has been continually outstripping government revenue since the 1970s. It spiked to more than 10% of GDP as a result of the 2008 financial crash. Austerity was the response, but QE made the long-term outlook worse.
UK government national debt, or “public” debt, can be defined as “the total amount of money the British government owes to the private sector and other purchasers of UK gilts (e.g., Bank of England).” As reported by the Financial Times, by 2017, following QE, central banks owned 20% of all public debt. The FT wrote:
“In total, the six central banks that have embarked on quantitative easing over the past decade — the US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England, along with the Swiss and Swedish central banks — now hold more than $15tn of assets, according to analysis by the FT of IMF and central bank figures, more than four times the pre-crisis level. Of this, more than $9tn is government bonds — one dollar in every five of the $46tn total outstanding debt owed by their governments.”
In other words, the central banks had massively increased public borrowing and debt, yet none of the increase had benefited the “real economy.” Instead, deficit spending and debt were at historic highs, while government fiscal policy had simultaneously crushed the population’s “purchasing power” and economic prospects.
The impact of QE on the scope of “conventional” monetary policy, which is under the control of the central banks, was harsh. Their primary lever for meeting target inflation is setting the base rate, a.k.a. the “bank” rate. By eschewing Werner’s model, which was not dependent upon permanently lowering the bank rate, the central banks appeared to have boxed themselves into a corner.
Because they held so much government debt, the central banks couldn’t increase the base rate without reversing the situation they had created and smashing government finances to pieces. Doing so would result in central banks paying the commercial banks handsome profits on their new, sizeable reserve accounts. Central bank “profits” would quickly become losses, as governments (meaning the taxpayers) would have to significantly increase payments to service national debts.
At the same G7 symposium where Carney outlined the potential creation of a Synthetic Hegemonic Currency, the global investment firm BlackRock presented its paper, Dealing with the Next Downturn.
Agreeing with Carney, BlackRock outlined the nature of this “base rate” problem:
“The current policy space for global central banks is limited and will not be enough to respond to a significant, let alone a dramatic, downturn. Conventional and unconventional monetary policy [QE] works primarily through the stimulative impact of lower short-term and long-term interest rates. This channel is almost tapped out.”
The scope for lowering interest rates was virtually nil, and QE had increased government debt to such elevated levels that there was a serious risk of default, especially if the central banks had to raise rates to tackle inflation, which would simultaneously destroy government finances. Seemingly with no room to manouvre, BlackRock outlined a potential remedy should further “emergency” measures be required:
“An unprecedented response is needed when monetary policy is exhausted and fiscal policy alone is not enough. That response will likely involve “going direct”: Going direct means the central bank finding ways to get central bank money directly in the hands of public and private sector spenders.”
Without a shred of irony, despite the years of low rates and monetary expansion, BlackRock offered all kinds of possible explanations why economic activity was depressed. It suggested that greater integration of technology in the global economy—or perhaps it was low wage expectations—were to blame. It made no mention of the fact that QE had thus far been used to fund nothing but financial asset bubbles.
“Going direct” would end the split monetary circuit. BlackRock proposed that central banks could either fund fiscal policy directly or possibly purchase equities, corporate bonds, exchange traded funds (ETFs), and other kinds of investments from the financial markets:
“Any additional measures to stimulate economic growth will have to go beyond the interest rate channel and “go direct” — when a central bank crediting private or public sector accounts directly with money. [. . .] This can be done directly through fiscal policy or by expanding the monetary policy toolkit with an instrument that will be fiscal in nature, such as credit easing by way of buying equities.”
BlackRock’s acknowledgement that central bank QE had apparently failed completely was tacit. With negative interest rates seemingly the only remaining “conventional” option, the global investment giant rejected the possibility and presented its alternative “going direct” plan because “interest rates below zero could harm the profit model of the banking sector.”
Instead, BlackRock outlined that central banks could set up a standing emergency fiscal facility (SEFF). The SEFF was supposedly founded upon the principle of “helicopter drop money” first espoused by the economist Milton Freidman in “The Optimum Quantity of Money.”
Freidman speculated what would happen if central banks gave money directly to the public, as if dropped by helicopter. He suggested this could counterbalance deflationary spirals.
The former governor of the US Federal Reserve (the Fed), Ben Bernanke, earned the nickname “Helicopter Ben” from his reference to Friedman’s metaphor in a November 2002 speech. In 2016, he expanded on this idea:
“A “helicopter drop” of money is an expansionary fiscal policy—an increase in public spending or a tax cut—financed by a permanent increase in the money stock.”
BlackRock’s SEFF was offered as a contingency plan that would be activated in an “unusual” financial crisis. The central banks would issue base money reserves to directly finance spending in the “real economy,” thereby putting “central bank money directly in the hands of public and private sector spenders.”
Importantly, this “plan” would fuse monetary and fiscal policy together. The purpose for this fusing, BlackRock claimed, was to avoid deflation and consequently increase inflation and productivity to target:
“After a decade of unprecedented monetary stimulus around the world, actual inflation and inflation expectations still remain stubbornly low in most major economies. [. . .] An extreme form of “going direct” would be an explicit and permanent monetary financing of a fiscal expansion, or so-called helicopter money. Explicit monetary financing in sufficient size will push up inflation.”
The SEFF would enable the fiscal expansion—at the cost of further increasing budget deficits—to cause inflation:
“The central bank would activate the SEFF when interest rates cannot be lowered and a significant inflation miss is expected over the policy horizon. [. . .] The central bank would determine the size of the SEFF based on its estimates of what is needed to get the medium-term trend price level back to target. [. . . ] Monetary policy would operate similar to yield curve control, holding yields at zero while fiscal spending ramps up. [. . . ] The central bank would calibrate the size of the SEFF based on what is needed to achieve its inflation target.”
BlackRock and the G7 bankers were acutely aware of the potential for “helicopter money” to spike inflation:
“If [. . .] helicopter money is delivered in sufficient size, it will drive up inflation — in the long run, the growth of money supply drives inflation. [. . .] That highlights the main drawback of helicopter money: how to get the inflation genie back in the bottle once it has been released.”
Assuming they could fine-tune the global economy with immaculate precision, the G7 bankers and BlackRock were undeterred by the prospect of causing inflation—despite the massive risk to the global economy this represented.
BlackRock insisted that it would be important to have the SEFF in place “well in advance of the next downturn.” This would allegedly remove potential market fears by building confidence in fiscal policymakers’ ability to get “inflation and the output gap back to target.”
Stressing the “independence” of the central banks, and the separation of their powers from government, BlackRock thought central banks should “calibrate the size of the SEFF based on what is needed to achieve its inflation target.” This would effectively give central bankers the upper-hand in setting fiscal policy.
At no point were electorates in any country asked if they thought central banks should dominate government spending and tax decisions. Most people had no idea it had even been proposed. Going direct was an international coup that very few people even noticed.
In an effort to obfuscate this fact, BlackRock flipped reality on its head. Rather than discussing how the entirely private and independent central banks’ seizure of fiscal policy fundamentally undermined democracy, they actually argued that the central banks were at risk:
“The response to the next downturn will inevitably blur the lines currently dividing monetary and fiscal policy. Without clarifying and adjusting the policy framework, the threat to central bank independence and of uncontrolled fiscal expansion will only get worse in the next downturn, in our view.”
In “Dealing with the Next Downturn” BlackRock said that this “historically unusual” policy coordination would only be necessary to “provide effective stimulus” in “unusual circumstances.” BlackRock was perhaps surprised when, just a few weeks after presenting its plan to the gathered G7 bankers, those “unusual circumstances” arose with the collapse of the US repo market.
Launching Going Direct
Repurchase agreements (repos) are basically short–term loans, typically overnight. Investors temporarily purchase government bonds under a contractual agreement that the seller will repurchase them at a marginally higher price the next day. This price difference is the “repo rate.” Typically the “repo rate” is around 2%.
The US National Bureau of Economic Research (NBER) reported that the 2008 financial crisis “stemmed from a run on the repurchase or ‘repo’ market.” On 17th September 2019, just four weeks after the Jackson Hole symposium, the US repo market ground to a halt again, forcing bond sellers to hike the repo rate to 10% in one day.
This appeared to be a repeat of the conditions that led to the 2008 crash. As previously mentioned, pre-going direct QE simply transferred the toxic assets held by commercial banks to the central banks. The frailties that caused the financial disaster in 2008 had been absorbed by the central banks, creating an even deeper systemic weakness.
To this day, the Fed has not offered any explanation for why the US repo market crashed. However, given the Bank for International Settlements (BIS) 4th Quarterly Report for 2019, we can speculate.
Noting that the repo market was crucial to help “financial markets to function smoothly,” the BIS reported:
“The liquid asset holdings of US banks and their composition have changed significantly since the GFC [Great Financial Crash 2008]. [. . .] Banks accumulated large amounts of reserve balances [pre-going direct QE] remunerated at the Fed’s interest on excess reserves (IOER) [. . .] As repo rates started to increase above the IOER from mid-2018 owing to the large issuance of Treasuries, a remarkable shift took place: the US banking system as a whole, hitherto a net provider of collateral, became a net provider of funds to repo markets. The four largest US banks specifically turned into key players: their net lending position increased quickly, reaching about $300 billion at end-June 2019. [. . .] At the same time, the next largest 25 banks reduced their demand for repo funding.”
According to the BIS, what happened next seems to have been the likely instigator of the 2019 repo market collapse:
“Cash balances held by the US Treasury in its Federal Reserve account (the Treasury General Account, TGA) grew in size and became more volatile, especially after 2015. The resulting drain and swings in reserves are likely to have reduced the cash buffers of the big four banks and their willingness to lend into the repo market. After the debt ceiling was suspended in early August 2019, the US Treasury quickly set out to rebuild its dwindling cash balances, draining more than $120 billion of reserves in the 30 days between 14 August and 17 September alone, and half of this amount in the last week of that period.”
The US government relinquished deficit spending controls in mid-August 2019. In the final week prior to the repo failure, it took $60 billion out of its Fed account. With that degree of volatility, it seems the big US commercial banks were reluctant continue funding repurchase agreements.
The Fed responded immediately by going direct. While giving central bank money directly to private investors was novel, the repeat of the same old pattern of monetary flows was not:
“This past Friday, as the Fed released its December meeting minutes. [. . .] The Fed’s minutes [. . .] acknowledge that its most recent actions have tallied up to “roughly $215 billion per day” flowing to trading houses on Wall Street. [. . .] And yet, there is no discernible financial collapse occurring on Wall Street. In fact, the Dow Jones Industrial Average and Standard and Poor’s 500 Index achieved multiple record highs in the month of December 2019 – making it appear that the Fed’s money to these trading houses is going straight into the stock market.”
It is an extraordinary coincidence that the “historically unusual” monetary and fiscal policy coordination should be needed less than a month after BlackRock suggested the idea. Even more extraordinary is that the cavalier fiscal policy of the US government seemingly created the required “unusual” circumstances.
In another truly remarkable coincidence, which came to pass only a few weeks later, an alleged global pandemic suddenly emerged to prolong the necessary “unusual circumstances.” The post-going direct era of QE had arrived.
Post-Going Direct QE
If the pre-going direct version of QE made problems for “real economies” worse, the post-going direct period looked like an all-out assault on economies worldwide.
Speaking at the August 2020 Jackson Hole Symposium, then-Fed Chairman Jerome Powell said that the US central bank was content to allow inflation to run hotter than usual. He then added:
“Many find it counter-intuitive that the Fed would want to push up inflation. However, inflation that is persistently too low can pose serious risks to the economy.”
There can be little doubt that the central bankers knew the inflation risk they were running. As originally highlighted by BlackRock, inflation was hardwired into their “going direct” thinking.
Knowing full well that it was letting the “inflation genie” out of the bottle, the Fed’s initial response to the pseudopandemic was to add an additional $3.5 trillion to its balance sheet. All of that money was created, as usual, out of the ether with a few keystrokes.
But this time, there was a major difference. According to John Titus:
“What marks the Fed’s maneuvers in March 2020 as unprecedented really is not its sudden creation of $3.5 trillion in reserves. [. . .] No, what made the Fed’s 2020 pandemic maneuvers novel was what the Fed did with its new reserves: it disbursed them so as to cause the parallel, mirror-image creation of $3.5 trillion in new bank money.”
Thanks to the pseudopandemic, the central banks found “ways to get central bank money directly in the hands of public and private sector spenders,” to quote BlackRock.
The Fed explained the “notable development” this way:
“A notable development in the U.S. banking system following the onset of the COVID-19 pandemic has been the rapid and sustained growth in aggregate bank deposits [broad money]. [. . .] The Federal Reserve’s asset purchases [post-going direct QE] led to deposit creation. [. . . ] If the Federal Reserve buys the security from a bank, no new bank deposits are created [pre-going direct QE]. [. . .] In contrast, purchases of securities from the nonbank private sector will increase the size of a bank’s balance sheet [the post-going direct QE unified monetary circuit].”
Unmitigated Policy Disaster?
Professor Werner’s original intention for QE monetary and fiscal policy coordination was that combined policy would improve “purchasing power” in the real economy. The post-going direct QE “coordination” was utterly at odds with this crucial element of his proposed model.
While central bank monetary policy, in response to the pseudopandemic, massively increased the money supply, lockdown countermeasures simultaneously shut down the real economy. As early as May 2020 the impact was abundantly clear:
“The staggering economic costs of fighting the COVID-19 pandemic are becoming clear as stay-at-home orders in the United States drag on for months and freeze economic activity. [. . .] In addition, 44 percent of the population experienced a decline in earnings and 54 percent experienced a decrease in savings. This had a domino effect on spending as average monthly consumption plunged from $4,000 before the crisis to $3,000 by April.”
With businesses shut down, consequent fiscal policies were geared towards enabling people to subsist by increasing their reliance upon state welfare payments. There was no stimulus of the “real economy” at all. Instead, in the US, supplemental unemployment insurance benefits, pandemic unemployment assistance and the Paycheck Protection Program (loans for small business) were all deployed.
Just as in other countries, all these dole programs were “financed” with an enormous expansion of US government borrowing:
“Between the Coronavirus Aid, Relief, and Economic Security (CARES) Act and other legislation, Congress authorized borrowing more than $3 trillion. The total value was equivalent to about 14.5% of U.S. GDP in the fourth quarter of 2019. Thus, the fiscal package during the current crisis has been substantial and much larger than the fiscal package enacted in 2009.”
In the UK, the BoE responded to Covid-19 by launching the Covid Corporate Financing Facility (CCFF). Going direct just six days after the WHO declared an alleged global pandemic, the BoE used the base money it had created from nothing to purchase unsecured, short-term corporate bonds and other debt instruments (commercial paper):
“The facility is designed to support liquidity among larger firms, helping them to bridge coronavirus disruption to their cash flows through the purchase of short-term debt in the form of commercial paper.”
While the UK’s global corporations were covered, the BoE did not support the SMEs in the same fashion. Instead, it initiated the Term Funding Scheme with additional incentives for SMEs (TFSME). On the face of it, this did seem to be closer to Werner’s original QE concept. But appearances can be deceptive.
The BoE offered commercial lenders a 0.1% bank rate loan facility for up to 10% of any “credit” they extended to small businesses for up to four years. This was managed through the British Business Bank’s Bounce Back Loan Scheme (BBLS). Smaller businesses could potentially access a “loan” of up to £50,000. While the BoE’s TFSME supported up to 10% of this lending, the entire BBLS loan was guaranteed by the government—i.e., the British taxpayer.
The British Business Bank is the UK’s national development bank for SMEs. It coordinates lending from a wide range of “partners,” including high street banks, non-bank lenders and venture capital funds. Many of these non-bank “partners” could avail themselves of the CCFF, and the commercial bank “partners” were the primary beneficiaries of the BoE’s QE.
Again, thanks to the pseudopandemic, these private corporate partners could happily extend loans to the small businesses—cafes, hotels, children’s play groups, etc.—that were shut down by the government. As their “loans” were guaranteed by the government, they faced absolutely no risk. With access to virtually free money, the 2.5% interest charged after the first year represented a tidy little pseudopandemic profit.
Medium-size enterprises—those with fewer than 250 employees—could access up to £5M in loans through the Coronavirus Business Interruption Scheme (CBILS). This was also administered through the British Business Bank’s private finance network. Like the BBLS, it was funded by the BoE’s post-going direct QE—government (taxpayer-funded) borrowing. And the loans were similarly guaranteed by the government (taxpayers), with the state covering the initial fee and first 12 months repayments.
Unlike BBLS, CBILS interest rates were at the discretion of the lender. This is where the British Business Bank’s “partners” could make a decent pseudopandemic profit. With any outstanding repayment balance underwritten by the government, the “lenders” still faced no risk and could charge interest rates that varied between 1.8% and 7.4% APR, depending upon the lender, with the rate fixed upon initial loan approval.
For both the BBLS and the CBILS, the SMEs bore all the risk. Corporate profits were protected by taxpayers throughout the pseudopandemic. This is precisely the expansionary monetary and fiscal policy that BlackRock and the G7 bankers envisaged at Jackson Hole just a few short months prior the “global pandemic.”
It is crucial to appreciate that none of this massive upheaval was necessary. There was never any reason to imagine that lockdowns and social distancing would work to halt the spread of a respiratory disease. These were unwarranted government policy decisions. Equally, were it not for government policy, the related monetary and fiscal response wouldn’t have been required either.
Nor were any of these decisions “caused” by COVID-19. The constant refrain from the Establishment and the mainstream media that inflation, business closures, increased economic inequality or spiralling private and public debt were “caused” by a respiratory disease is resoundingly false. All of it was “caused” by deliberate policy decisions.
Assessing the impact of this apparent folly upon SMEs, the BoE wrote in June 2021:
“The Covid-19 pandemic and the public health measures introduced to contain it have had a huge impact on the UK economy. According to the latest data, GDP was 10% lower in 2020 than in 2019. This could be the largest annual fall in around 300 years. [. . .] Small and medium enterprises (SMEs) were likely hit hardest. [. . .] UK SMEs faced a significant reduction in turnover from April 2020 onward. This coincides with the first national lockdown. [. . .] Around 1.5 million businesses had borrowed a total of around £45 billion under the BBLS. [. . .] The government-guaranteed loans were available to all SMEs but in practice were more likely to be extended to mid-sized SMEs [CBILS] (£100,000 to £1 million).”
Once the first year of government-funded loan repayments ceased, the complete lack of any kind of “real” economic stimulus meant that the struggling businesses, which had taken the loans just to survive, were in no position to start repaying them back at interest. Thus, the UK government fiscal policy response was the inevitable debt restructuring.
Despite the promise of the BoE’s Term Funding Scheme, the familiar QE effect remained in play. All the benefits were gleaned by the corporate and financial sector, and all the risk and pain was felt by SMEs and households. There was a clear centralisation of wealth by the wealthiest at the expense of the erosion of the “real economy.”
The financial and economic cost of this apparently Kamikaze approach to monetary and fiscal policy coordination is almost beyond comprehension, as related by this CNN report:
“Between 2009 and 2022, purchases of long-dated government bonds and assets such as mortgage-backed securities by the US Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan totaled an eye-watering $19.7 trillion.”
Effectively, the central banks delivered precisely the inflationary conditions that Prof. Werner warned against. Going direct, in particular, literally enabled central banks to directly finance “financial circulation credit” with a money supply that “vastly exceeded the amount necessary for the ‘real’ economy.”
Having flooded the global economy with cheap money, which financial institutions then used to buy up large quantities of financial assets—most notably government bonds—the central banks have now responded to the problems they caused by embarking upon an unprecedented programme of Quantitative Tightening—QT for short.
Yes, these same institutions are now contracting the money supply to tackle the inflation they clearly planned to instigate. The genie has escaped the bottle and run away. The result of the central banks’ “response” has been to centralise financial power among the largest banks and push small to medium size “lenders” out of business, while exposing the entire banking sector to enormous losses.
The impact of “unconventional” monetary and fiscal policy coordination has certainly been marked. It is 100% deleterious and 0% beneficial. By hiking bank rates to supposedly tackle self-inflicted inflation, governments (taxpayers) now need to pay higher interest on their burgeoning debt. Further borrowing is the only way to fuel ballooning deficits.
In April 2022 the Fed’s then-Chairman Powell said:
“The US federal budget is on an unsustainable path, meaning simply that the debt is growing meaningfully faster than the economy. And that’s by definition unsustainable over time.”
He then added reassuringly:
“It’s a different thing to say the current level of the debt is unsustainable. It’s not. The current level of debt is very sustainable. And there’s no question of our ability to service and issue that debt for the foreseeable future.”
A comforting statement for the jittery markets, perhaps, but barely plausible. Indeed, it seems the entire US economy has been destabilised.
Less than a year before Powell’s comments, US Treasury Secretary Janet Yellen had successfully lobbied the US Senate to raise the US debt ceiling to finance public spending and avoid a US government default. And now, a year after Powell’s comments, Yellen is warning of “catastrophe” unless US regulators increase the debt ceiling again.
The global economy is a highly complex integrated system. As the BoE puts it, “no economy is an island.”
In 2019, prior to implementing the subsequent policy coordination calamity, Carney observed that all the evidence suggests that the “centre won’t hold.”
He’s right. It certainly won’t hold now.
We must ask: Was this all the result of hubris?
Part 1: Conclusion
If you believe that these institutions of finance and government are working together to protect and serve the people, then you would conclude that their collective efforts have resulted in an unforeseen, unplanned, and sadly unmitigated disaster.
Yet is it really plausible that the so-called “experts” cannot only be consistently wrong but that every single one of their “mistakes” delivers the same outcome?
From the initial response to the 2008 financial crisis to the “going direct” application of QE following the pseudopandemic, every “error” has resulted in the enrichment of the financial sector, has increased deficits and public debt, and has steadily ground down the “real economy.”
Let’s assume, for a moment, that the enrichment-of-the-wealthy-versus-the-erosion-of-everyone-else results are not all the product of benign ineptitude. Let’s hypothesise, instead, that the intention was to create the very conditions that would logically necessitate the transformation of the International Monetary and Financial System.
If we go with that assumption, then what do the policy “decisions” look like in retrospect?
Immediately following the pseudopandemic, before the global economy even had time to take a breath, a European war broke out. We were told that the war was making the monetary and fiscal mayhem of the previous decade worse.
No sooner had that war begun than the United Nations declared:
“The Russian invasion of Ukraine has been the “main contributing factor” to the potentially devastating one per cent drop in projected global economic growth this year.”
But if we consider our hypothesis of intentionality, could the war really have made the global economy even weaker? Or does the evidence suggest that, once again, it is not the fault of the blamed event itself, but rather the policy response to it that is “causing” the problem?
Remember, in 2019 the G7 bankers said they wanted to “end the malign neglect of the IMFS and build a system worthy of the diverse, multi-polar global economy that is emerging.”
If we take them at their word, is there any evidence to suggest that, from their cozy quarters in the Jackson Lodge Hotel, they were already eyeing the potential for the transformation they had initiated to continue after the alleged COVID-19 crises?
Consider that, in its September 2020 Working Paper 883 (referenced above), the BoE stated:
“If the policy objective is to provide an additional boost to the economy through supporting bank lending in a time of stress and uncertainty, it might be valuable consider using alternative credit easing tools. This may include programs such [. . .] Term Funding Scheme (TFS) and Term Funding Scheme with additional incentives for SMEs (TFSME). Other alternatives include guaranteed lending to small businesses, with no access to capital markets, or allow access to central bank balance sheet, maybe through a central bank digital currency.”
However, nothing that the central banks and governments have done over the last few years has provided “an additional boost to the economy.” On the contrary, coordinated monetary and fiscal policy strategies have unerringly undermined the “real economy,” especially in the West.
It is not without reason that we might have our suspicions. If we look at the policy decisions supposedly prompted by the war in Ukraine, the economic and financial “stress and uncertainty” is indeed leading to a monetary crisis.
Can this crisis be “resolved” only by establishing a “network of central bank digital currencies”? Is it true that “an SHC might smooth the transition that the IMFS needs”? Or are we all being corralled into believing that the SHC is necessary when, in fact, the current situation has been deliberately engineered to allegedly justify a predetermined “solution”?
These are the questions we will explore in Part 2.
