Regretfully Yours

This year I finally got my tubes tied, and one thing that sticks in my mind about the whole experience is what my mum told me. It’s been a couple of years and that concept has lived in my mind ever…


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How Government And The Central Bank Work Together?

Source: Financial Times

There is a symbiotic relationship between the government and its central bank. I say “its” because it essentially belongs to the government as central banks are considered independent but are under the indirect influence of government policies. The US central bank is independent as it makes decisions without needing the approval of the federal government but the President appoints its governors.

Who and what is creating the massive $30 trillion US deficit resulting in high inflation? The answer is government profligacy and it is financed through the central bank. The government’s main source of revenue is taxation. Western governments do not collect enough in taxes and manage their economies using deficit spending to maintain a high standard of living. In the US its yearly deficit is over $2 trillion and this is financed by issuing bonds that are sold in the private market, usually to pension funds and insurance companies at a market-competitive interest rate. In parallel, the central bank will step in to purchase government bonds, usually set at a lower interest rate, and put the debt on its balance sheet. As the old saying goes, one hand washes the other.

Currently, the central bank has $8 trillion of debt on its balance sheet and with inflation running hot and interest rates climbing that debt is becoming more expensive to finance. As a result, the central bank has gone from quantitative easing (printing $$$$$) to quantitative tightening and selling bonds from its accounts, taking in cash and removing money from the economic system to bring down inflation.

During the Covid 19 lockdown, not only the cantankerous President Trump but also sleepy Joe and his climate alarmists spent trillions on covid relief. The Federal Reserve came to the rescue and purchased US government debt that was used to lend to households, businesses, and state and local governments. Fed chair Jeremy Powell in April 2020 said: “We are deploying these lending powers to an unprecedented extent and will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.”

To sum up, central banks control the money supply, expanding or contracting the amount of money in the economy, through changes in interest rates. The bank increases interest rates when inflation is deemed high and decreases rates when inflation becomes too low and economic stimulus is needed. Governments drive the inflationary cycle by borrowing too much money and in unison the central bank prints money the government needs to finance its fiscal agenda. The cozy relationship between the government and the central bank in an era of cheap money (artificially low-interest rates) has led to an economy built on debt, asset bubbles that are starting to pop, and a recession that is needed to clean up the excesses…

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