The Money Tree: Part II – Where Does Money Go, and the Implications for the West

Jesus drives out the money-changers from the temple: Wikimedia Commons

Where does money go once it’s created?

We have established in Part I that banks expand the money supply by creating credit. In broad terms, newly created money, or credit, can either be used for GDP transactions or non-GDP transactions. GDP transactions are those which could be considered productive by virtue of contributing to the production of goods and services. This kind of credit results in non-inflationary growth since the increase in the money supply corresponds with an increase in the supply of goods and services. Non-GDP transactions are non-productive, typically characterised by financial or speculative credit used in, say, the housing or stock market. This type of money growth creates asset bubbles.

So the only way to control the growth of the money supply and where new money is allocated in the economy would be to impose absolute limits on banks’ credit growth. In other words, a quota on credit growth. Which is precisely what most central banks used to do. The BoE abolished credit controls in the early 1970s.[i] A fascinating documentary, based on Richard Werner’s book Princes of the Yen, explains how Japan’s economy was deliberately reshaped after its central bank abolished credit quotas, or ‘window guidance’ as it was called there.

No good can come from central banks. One need look no further than the BoE to understand that. The famously misnamed “Glorious Revolution” of 1688 ushered in the era of central banks when merchants and goldsmiths of the Corporation of London lobbied for and got a privately owned bank with public privileges – the BoE. They also got the secession of one square mile of London as a quasi-sovereign state within a state. From that point onwards taxation of the citizenry became a tool for the state to repay debts to wealthy private sector creditors.[ii] The BoE lubricated our transition from medieval serfs to modern-day serfs.

A PhD in rocket science, or even economics, is not a prerequisite for understanding which type of credit growth has plagued the Western world in the neoliberal market era that began in the 1980s. In one sense, banks were simply following the money, or rather following the economic activity. A massive structural shift in the West occurred as the productive sector was offshored to China and elsewhere. The business of banks is to lend and, as productive lending was choked off by neoliberalism, new money had to find a new home. It got channelled into property and financial speculation. ‘Innovations’ in unproductive lending were almost inevitable: to a large extent, they were driven by structural changes in the economy.

The allocation of credit in the economy is not some mysterious undecipherable process. Banks decide where to allocate credit in the economy and they tend to favour lending against collateral or existing assets rather than lending for investment in production. In an economy that has been de-industrialised by offshoring real production, new money has been channelled into the shrunken space left for it – property and financial speculation. It has then blown up that space into a bubble. This is where money, or too much of it, has gone in the West. This is what is meant by the term ‘financialised economy’.

While the authors of Where Does Money Come From rightly bemoan the decoupling of bank credit creation from the real economy, they don’t link this to the structural economic change caused by neo-liberal economics. The decoupling of credit creation from the real economy was inevitable given that the real economy was packaged up and shipped off to China.

Tethering the money supply to GDP growth seems to me to be an inherently obvious way to control inflation. You will hear a lot of nostalgia for backing a currency with gold but I don’t subscribe to this view. Many people associate an era of low inflation with the gold standard, but, wrongly in my opinion, assume that the latter caused the former. Money didn’t hold its value because it was ‘backed by gold’. It held its value because money growth through credit creation, with window guidance as the guardrail, was backed by real GDP growth in the economy.

Inflationary principles dictate that the currency must be ‘backed’ by the level of activity in the real economy. The measure of that relationship is the velocity of money, which describes the ratio of GDP to money supply. It recognises that, if GDP is the measure of all goods and services exchanged in the economy, there has to be a fairly consistent relationship between the value of goods and services and the money supply used to facilitate their exchange.

Quantitative Easing

No discussion of contemporary money creation would be complete without a discussion of Quantitative Easing (QE), which is a distinct form of money creation driven by central banks as opposed to commercial banks. Let’s take a look at where QE money comes from and where it goes.

Trialled unsuccessfully in Japan in 2001, QE was revived in the West as a response to the Global Financial Crisis (GFC) of 2009. The money supply did increase, and yet mysteriously it did not find its way into the real economy. There was no significant expansion of lending into the private business and consumer section and there was no significant inflationary effect. In short, it did not achieve its purported objective of stimulating the economy. It did, however, save the banks. Funny that.

QE in the GFC era was a form of central bank-driven money creation in which the central bank effectively bought ‘poor performing’ assets from the banking sector in exchange for base money or central bank reserves. Now that readers are fully au fait with double-entry accounting as explained in Part I, I can present a diagram to illustrate why QE didn’t burst the money dam but did save the banks.

In the diagram below, the poor performing assets are given the generic label of ‘bonds’.

A significant component of the poor performing assets transferred from the commercial banks to the central bank were securitised loans. These were loans made by a financial institution and then packaged up and sold to other banks. When banks originate loans that they intend to sell to others, there is less incentive to be careful in assessing the credit risk since they are passing on the risk and reward to someone else in exchange for cash[iii]. This was the essence of the mortgage-backed securities or ‘subprime’ debacle that triggered the GFC.

As the diagram illustrates, the banking sector simultaneously offloaded its dodgy assets and was flooded with new central bank reserves or base money. It could have chosen to expand its lending, creating deposits on the liability side of its balance sheet. Instead, having been rescued, it sat on the reserves. Bank credit creation shrank in 2011 and the economy moved into a double-dip recession in 2012[iv]. I am not advocating for unceasing creation of money by a commercial bank monopoly on credit creation, but merely pointing out how QE money creation did not have the effect we would have expected given what we now know about how money is created.

GFC QE followed a similar course in the US, but central bank money creation in the covid era was different. QE during the GFC involved the purchase of mainly bank assets that shored up liquidity in the banking system with central bank reserves but did not result in onward lending and deposit creation. In the US, covid era QE involved massive purchases by the Federal Reserve of non-bank assets, which resulted in a corresponding increase in bank deposits since commercial banks would have had to create deposits for the non-bank institutions on realisation of their assets. A significant portion of those deposits went into blowing up asset bubbles, particularly the stock market in the US, as well as the real economy.

As for QE in the covid era in the UK, this scholarly paper notes that “the Covid-19 epidemic that started in March 2020 gave QE a whole new lease of life: the assets held by the Bank of England’s Asset Purchase Facility Fund (APF) increased from £450bn in February 2020 to a maximum figure of £895bn by the end of 2021. This increase of £445bn represented 20.1% of 2019 GDP.”

So what’s the problem if all these dodgy assets are sitting on the BoE’s balance sheet? It’s the bankers’ problem, right? You ought to know by now that bankers are skilled in the art of transferring their problems to the public. The golden rule of banking is that banks are private when things are going well for them, and public when things aren’t going well. So you won’t be surprised to hear that the ever dependable taxpayer has indemnified the BoE against any losses it incurs on the assets it purchased under its QE operations.

The House of Lords Economic Affairs Committee – not exactly a bunch of rebels without a cause –issued a report at the height of the second round of QE titled “Quantitative easing: a dangerous addiction?”. This is how it broached the delicate issue of the taxpayers’ steadfast commitment to being rogered by their betters at the banks:

“The contractual document (the ‘Deed of Indemnity’) between HM Treasury and the Bank of England which commits the taxpayer to paying any financial losses suffered by the Bank of England that might result from the quantitative easing programme has not been published and is hidden from public scrutiny [...] [T]he Chancellor refused to make the document public without explaining why. We believe this is extraordinary and we call for its publication.” [emphasis added]

“Extraordinary” is Lordy language for bullshit. Not only are we on the hook for the bankers’ endless money-printing schemes, but the Chancellor spat in our faces when we begged him to see the small print on the blank cheque he generously signed on our behalf. Anyone would think that ‘democracy’, with its much vaunted values of accountability and transparency, is the best thing that could ever have happened to crooked bankers since the BoE opened for business in 1694.

Those bond purchases by the BoE are in fact linked to the increase in government debt. As our chums in the House of Lords astutely noted:

“…there is a widespread perception, including among large institutional investors in Government debt, that financing the Government’s deficit spending was a significant reason for quantitative easing during the COVID-19 pandemic. These perceptions were entrenched because the Bank of England’s bond purchases aligned closely with the speed of issuance by HM Treasury.” [emphasis added]

The point of controversy here is that the BoE is not supposed to directly finance government spending through the direct purchase of government debt instruments. This would amount to simply printing money to finance government expenditure, which is what sparked Zimbabwe’s slide into hyperinflation in the late 1990s. So instead, the government issued bonds to private investors in the market, only for the BoE to step in soon afterwards and purchase those bonds from the private investors. Which looks a lot like money printing for the government using a middleman. But the BoE is in good company – the European Central Bank has done the same thing.[v]

The implications for the West

We’ll first discuss the implications of QE generated debt. Then, putting aside the aberration of QE, we’ll move to a more general discussion of the whole way in which money and credit is created, and whether it’s possible to break free from the central bank mafia.

So here we are, up to our eyeballs in debt and the law of debt is the same as the law of gravity – what goes up must come down…eventually. The higher it goes, the greater the force with which it crashes to the ground. The effect of QE – that mountain of questionable ‘assets’ on the BoE’s balance sheet and government debt – is going to have to be reversed, whether we like it or not. That is going to entail less government spending, increased tax to pay off debt, and of course more bills for the taxpayer when the BoE eventually recognises the losses on its purchased assets – the losses against which we’ve generously indemnified the bankers.

Reversing the effect of QE – Quantitative Tightening – would essentially involve the BoE liquidating the ‘assets’ it purchased from the bankers and other financial institutions during both the GFC and covid eras. There’s just one small problem with that: if those assets were marketable, the BoE would not have been forced to buy them in the first place. Printing money to buy those ‘assets’ and rescue the banking system was an act of desperation. Nobody wants those assets back because they represent a mountain of government debt that can’t be repaid. That’s why they’re in cold storage with the BoE.

In order for those assets to become attractive to institutional investors, they would have to be convinced that the debt they represent could be repaid. Repayment of the debt requires turning budget deficits into budget surpluses – in other words, the taxpayer coming to the rescue. Again. That, of course, is why the BoE was incorporated in the first place – as a tool for the state, using the taxpayer, to repay debts to wealthy private sector creditors. The banksters and their stooges in government would love to keep that game going, but even they might have come to the realisation that the government cannot, either in the short or medium term, turn budget deficits into surpluses by orders of magnitude sufficient to pay off the debt.

So what is the solution on offer from the current iteration of the uniparty? Attacking the weakest in society and giving money to one of the ruling class’s herd-culling industries – the war machine.

Britain is literally the sickest it’s been since WW2 and getting sicker. The Guardian, one of the Establishment’s most reliable tools, points out that it is “one of the few countries in the developed world with an employment rate lower than before the pandemic, after a sharp rise in the number of adults leaving the labour force because of long-term sickness.”

Meanwhile the government is planning to “drive economic growth and create jobs across the UK” by tooling up the war machine. What sort of mind is capable of reconciling economic growth with extinguishing life?

There is method to the madness of attacking a sick population, made sicker by lockdowns and covid ‘vaccines’, while setting out the biggest increase in ‘defence’ spending since the Cold War. Both are anti-life measures, which is the path the West has deliberately chosen, starting with the covid psyop in March 2020. This is how the West has chosen to resolve its debt problem. Debt that cannot be repaid implies that the economy is awash with worthless ‘assets’ that must somehow be extinguished. To deflate the debt, the psychopaths who got rich off it will deflate the economy and deflate life itself. As this death spiral gathers momentum, the financial vultures at the top of the pecking order will be swapping the worthless debt on their books for real assets.

Trump instructing the EU to look to its own defences is not a spat between a new US administration and its EU puppets, and nor is it an acrimonious breakdown of NATO. It is a well-orchestrated march to war by the Owners and Controllers of Global Financial Capital. This ‘spat’ has provided the needed cover for the EU to start its €800bn ‘rearmament’ programme, echoing Germany’s pre-WW2 rearmament. It’s a sickeningly familiar script, poorly adapted for a new era.

The GFC in 2008 was an alarm announcing that the West’s financialised economic model had gone off the rails. It chose to answer that alarm by piling more debt on debt with its first major round of QE. Borrowing from Peter to pay Paul only buys time, and when the second alarm was sounded in 2020, the West, like a Pavlovian dog, replied with another round of QE.

Right now, the West looks like an angry old man armed with an Uzi and suffering from dementia. There is no way for an economy that is not only in structural decline, but has been deliberately sabotaged, to repay the banking mafia’s mountain of debt. So, even more debt will be incurred in an attempt to march the West to war, because the fog of war is the tried and tested method for reshaping the global financial order. Whether this plan will work is another matter but, so far, everyone seems to be playing their parts to perfection. An alliance of Russia, China and Iran is coalescing against the West and the rabid Israeli attack dog it foisted on the Middle East in 1948. As long as the people don’t play their part by refusing to go along with war, it won’t work.

To summarise this pivotal moment in the West’s history: the plutocracy has created the ultimate crisis which will be used as an opportunity to implement its desired ultimate solution. The ultimate crisis is the debt-driven collapse of the monetary and financial system as we know it. The ultimate solution, in the eyes of the ruling pathocracy, is the replacement of that system with a fully digitalised monetary control grid, synchronised with a technocratic social control system that maximises population compliance with a neo-feudal order.

Pain and suffering will accompany the controlled demolition of the economy and life itself, but there will also be resistance to the measures and increased crime. The pathocracy has a plan to manage that: an anti-life hyper-control grid is being rolled out in tandem with the anti-life economic measures. This is both part of the opportunity side of the crisis equation, and vital to ensuring the success of the New World Neo-feudal Order. Thus, it’s no surprise to learn from Off Guardian that the Crime and Justice Commission is advocating for, among other things, a “universal digital ID system”, “live facial recognition and other artificial intelligence tools” to bolster the police’s armoury, and the scrapping of trial by jury to “speed up justice and reduce court delays”.

So what is to be done about the banking cartel’s monopoly on money creation for the wrong purposes, about the mountain of debt created by the central bank mafia’s preferred heist weapon of QE, and about central banks themselves?

Apply the Quantity Theory of Credit

The supply of money is driven by credit creation. However, credit creation itself is not driven by the demand for credit, but rather the supply of it. It is commercial banks that ration and allocate credit, and therefore it is the quantity of credit that is the decisive factor in macroeconomic outcomes.[vi] History has shown that prudent control of the quantity of credit has led to successful economic management. In the East Asian economies of Japan, Korea and Taiwan, this control over the absolute amount of credit creation was called ‘window guidance’. The central banks there simply calculated the desired growth in GDP, and then calculated the necessary amount of credit creation to achieve this.[vii]

Crucially, they were able to direct that growth to specific sectors by allocating it across various types of banks and industrial sectors. Unproductive credit creation should be suppressed since it is obvious from the West’s casino banking culture that financial credit creation ends up in lending to hedge funds, and fuels asset inflation and banking crises.

Developing countries need not be dependent on external debt, and could achieve non-inflationary growth by creating credit in their own banking system and guiding it towards productive use.

Drive out the money changers: abolish privately owned central banks and turn money creation over to the people

As I mentioned at the end of the BIS series of articles, central banks are a law unto themselves, and the US Federal Reserve, which in theory is still accountable to Congress, has embarked on a propaganda campaign to achieve the same outrageous level of autonomy as the European Central Bank. The whole concept of “central bank independence” must be turned on its head. The central banks should be utterly dependent on the people. The perversion of putting a public utility – banking – under the total control of a private mafia, along with all the abuses that has entailed, must end. It is a matter of life and death.

I am not averse to a moral government then printing money under the supervision of a central bank that it truly owns, to finance real growth, when required, of targeted goods or services in the economy, and driven by a consensus of the people. I emphasise a “moral government” as a prerequisite for any chance of this happening since the government is now a wholly owned subsidiary of the corrupt corporatocracy. The struggle to regain ownership of the money supply and the struggle to make government moral are in fact one and the same. We cannot win one unless we win the other.

The BoE is a privately owned company that acts solely in the interest of the banking cartel and its private owners. The deceit that it is a public corporation has been thoroughly exposed by Iain Davis, whose well-researched piece should be read. Further proof that the BoE is not a public corporation was provided in its QE programme in the wake of the pseudo pandemic, which we’ll analyse now.

If the government issued money to finance growth, that credit expansion would be interest free – which is certainly at least one reason why the banking cartel which owns the central banks would fight that to the bitter end. A clue to the canard that the BoE is owned by the government lies in the open market operations it conducted in 2020-21, which amounted to the government printing money to finance its debt. Recall that the government borrowed from the private sector by issuing bonds, which were then almost immediately taken up by the BoE. If the BoE were truly publicly owned, then the government has effectively bought its own debt, or just printed money. We know this is nonsense simply because the BoE is not owned by the government.

What’s more, the interest that the government is paying the BoE on those bonds is effectively interest that it is paying to itself, by virtue of its supposed ownership of the BoE. So there would effectively be no interest bill for the taxpayer. This is of course another nonsense: we’re getting an interest bill, and we are forced to pay it, because it’s coming from a private entity.

The reason the BoE went through the backdoor to print money for the government is because it is a money-printing and interest-charging racket run by the banking cartel. And of course printing money on that scale to finance government expenditure that is entirely unrelated to productive growth is inflationary. The only way to counteract that type of inflation is to tax the money issuance back out of circulation. I wouldn’t object to that if the tax were aimed at the right criminals – the bankers, billionaires, and the global corporatocracy that doesn’t pay tax. Fat chance of that happening as long as those criminals run the government.

Another clue to the lie that the BoE is government owned is revealed in the taxpayers’ indemnification of the BoE against any losses on its debt purchases. Again, if the BoE is government owned, where is the sense in the taxpayer indemnifying the taxpayer against the expected losses on those ‘assets’?

So there you have three big fat clues exposing the lie that the BoE was ‘nationalised’ and is publicly owned. First is the nonsense of the government issuing and then immediately buying up its own debt using the supposedly publicly-owned vehicle of the BoE. Second is the challenge we could put to the BoE to cancel the interest on the debt instruments it bought since they are government issued instruments and the BoE is supposedly government-owned. And third is the nonsense of the government effectively indemnifying itself by indemnifying the supposedly government-owned BoE. All quite laughable.

Which is a neat segue into what to do about that mountain of QE debt sitting on the privately owned BoE’s balance sheet. Liquidate the BoE and realise those losses. Behind the façade of the 1946 BoE ‘nationalisation’ will lie the web of true ownership, and behind that web of ownership will lie hundreds of billions (perhaps trillions) of personal ill-gotten wealth that the liquidator should seize to make good the BoE’s losses on liquidation.

It is way past time to make banking boring again. It’s the one profession in the world that should be banned from being ‘innovative’. To this end, a radical proposal put forward by the authors of Where Does Money Come From is to institute a 100% reserve requirement on banks, which is to say making them a true intermediary by matching savers and borrowers pound for pound, which already happens with peer-to-peer lending. The authors seem confident that it could work:

“This proposal has recently been endorsed by two research economists at the IMF who examined the 100% reserves proposal using state-of-the-art macroeconomic modelling to show it would be effective in reducing existing debt and stabilising the economy.”[viii]

This could only work in a system where only the government was permitted to expand the money supply. In other words, it all comes back to abolishing the privately owned central banks. So, how hard would that be? Difficult, difficult, lemon difficult. Imagine that we finally storm the barricades of Parliament, lock up 649 criminals (one of them might be okay), and throw away the keys. We can dream. Unless we were ready for the banking terrorists, it would fail on day two because the international banking cartel would cut us off at the knees. In a world where every country needs to trade and make international payments to survive, the international banking mafia would hardly need to draw on its most innovative terrorists to find a way to bring a single ‘maverick’ nation to its knees. It’s been doing it for centuries.

Several countries which could collectively form an independent trading and currency bloc would have to break free simultaneously and institute their own radical financial reforms, starting with liquidating central banks. Difficult but not impossible. In the US, it would take a handful of states to secede from the union and go their own way.

No matter what form the struggle takes, if central banking is not in the crosshairs, we are doomed. As I argued in the Bank for International Settlements (BIS) series of articles, the BIS is the global head of all the central bank snakes. Several central banks will have to collapse almost all at once for the BIS to be defanged. 1694 was an excellent year for banking and a horrible year for humanity. That was the year in which a new form of slavery was introduced. It was the year in which “the privately owned Bank of England transformed the sovereign’s personal debt into a public debt and then, eventually, in to a public currency.” [emphasis added]. This is the point at which “modern capitalism gave birth to a hierarchical form of regulatory control, with the central bank at the apex of the hierarchy.”[ix] [emphasis added]

This form of slavery is inextricably linked to taxation. We are first debt slaves by virtue of the fact that the government goes into debt to fund expenditure, much if not most of which is used to our detriment. And then we are tax slaves as we pay off the expenditure.

In the final analysis, if we understand nothing else about money, we must understand that it is a social and political construct.[x] It is a claim on future resources. For it to be an effective claim – a claim that you can rely on – it has to be accepted by the greatest number of people in the economy. And acceptance depends on its utility as both a medium of exchange and a reliable store of value. Bitcoin is proof of economist Hyman Minsky’s maxim on money: “anyone can create money; the problem is getting it accepted.” Banks, by virtue of the monopoly on money creation, have forced us to accept their money and have then abused their monopoly position. Of course, abuse of the monopoly position is an inherent feature of monopoly.

But there is a quandary in bemoaning the banking cartel’s monopoly of the money supply. Some type of monopoly is required for money to work properly since allowing everyone to create money would obviously impair its utility as a reliable claim on future resources.

The solution is for the community to collectively own and control its money supply; to take it out of the hands of criminals in pinstriped suits. The solution is a community monopoly, not a gangsters’ monopoly. That, by now, should be obvious to all of us. After all, money is not a commodity, and therefore banking should not be a for-profit enterprise. It is time we all recognised that it is unquestionably a public utility. It’s not their money. It’s ours. And we want it back.

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[i] Ryan-Collins, Greenham, Werner and Jackson, Where Does Money Come From, New Economics Foundation, London, 2012, section 2.8.

[ii] Ryan-Collins, Greenham, Werner and Jackson, Where Does Money Come From, New Economics Foundation, London, 2012, section 3.4.3

[iii] Ryan-Collins, Greenham, Werner and Jackson, Where Does Money Come From, New Economics Foundation, London, 2012, section 5.3.

[iv] Ryan-Collins, Greenham, Werner and Jackson, Where Does Money Come From, New Economics Foundation, London, 2012, section 4.7.3.

[v] Ryan-Collins, Greenham, Werner and Jackson, Where Does Money Come From, New Economics Foundation, London, 2012, section 6.1.1.

[vi] Ryan-Collins, Greenham, Werner and Jackson, Where Does Money Come From, New Economics Foundation, London, 2012, section 5.6.

[vii] Ryan-Collins, Greenham, Werner and Jackson, Where Does Money Come From, New Economics Foundation, London, 2012, section 5.7.

[viii] Ryan-Collins, Greenham, Werner and Jackson, Where Does Money Come From, New Economics Foundation, London, 2012, section 7.6.3.

[ix] Ryan-Collins, Greenham, Werner and Jackson, Where Does Money Come From, New Economics Foundation, London, 2012, section 7.1.

[x] Ryan-Collins, Greenham, Werner and Jackson, Where Does Money Come From, New Economics Foundation, London, 2012, section 7.3.