Monday, June 02, 2008

The seven horcruxes of inflation

Have you wondered recently where all this inflation seems to be coming from? Well, forget all that nonsense about a world growth in demand for oil pushed out by those moronic propagandists at the BBC and other government-licensed broadcasters. The real root of this monster is, of course, Gordon Brown’s tax and spend policy.

As a single example, let’s examine how he got himself out of the recent 10p tax dispute he fought with his own backbenchers.

1) Gordon Brown needed £2.7 billion pounds to make the pain of the 10p tax revolt go away. Obviously, he could have cut government spending by this much, but then he would have upset some of his parasite-state clients. He could also have raised this sum by further taxing the productive part of the UK economy. However, he has finally reached his ceiling on stealth taxes, so this route was politically closed off to him too. Between a political rock and a political hard place, what could he do? Well, easy really; he decided to stoke inflation instead. Here’s how.

2) What Gordon needed to get off the hook was to sell £2.7 billion pounds worth of UK government bonds. But who on Earth was going to buy them? The major holders of government bonds, and certainly the only ones who could pony up this much cash in a tight time frame, are the major commercial banks. However, even Gordon may have noticed that these organisations are in a tight financial fix at the moment, so how could he enable them to find the required sum? Easy.

3) Without really anyone noticing it, the Bank of England would have been ordered by the Treasury to surreptitiously buy up some old government bonds from commercial bank holders, via the BoE’s own open market operations. The BoE would have bought up around £135 million of extant UK government bonds, a pin-prick in this vast market. This would have been spread across various bond sellers, to hide the source, just like any good laundering counterfeiter, but most likely spread over the Treasury-licensed gilt-edged market makers, who gain enormous privileges on the buying and selling of UK government bonds, in return for generally agreeing to buy up any new ones which are issued by the Treasury. (These privileges include the stripping of gilts, but now we’re getting technical. BTW, you can see a list of these GEMMs, here). So where did the BoE get this £135 million from? Well, that’s where the magic comes in. They would have created it painlessly from out of 'fresh air'. Marvellous. But it gets better.

4) The current minimum reserve ratio for UK banks is 5%, which means that if a bank holds £5 million pounds in a Bank of England reserve account, they can then use the fraudulent fractional reserve system to lend out a further £100 million from out of even more 'fresh air'. In the words of the late Freddie Mercury, it really is a kind of magic.

5) Major bond buyers in the banking industry would then have found an extra £135 million pounds scattered across their various accounts, in exchange for offloading their bonds at a tidy profit. What would they have done with this extra loot? They would have immediately plugged it into their BoE reserve accounts, to then enable the commercial lending of a further £2.7 billion pounds. But where to spend this new money first, in the middle of the credit crunch? Well, the gentlemen’s agreement which governs GEMM licensing would have told them exactly where to spend it: protecting Gordon Brown’s fat arse by soaking up his £2.7 billion bond to finance his get-out-of-jail-free card on the 10p tax rate. Fantastic. It's almost symphonic in its crooked majesty.

6) In return for this favour of unloading bonds at a profit, the banks now also own £2.7 billion pounds of AAA-rated collateral to help with the credit crunch squeeze, plus interest payments from the British taxpayer for the next 10 years or so, plus the return of the £2.7 billion from the taxpayer again, when this new bond matures. Alistair Darling also gets to remain as Chancellor, because his Finance Bill will get through, and Scotsman Gordon Brown gets to remain as Prime Minister for another two years, for having managed to save his Scottish chancellor’s scrawny central belt neck.

7) So what does this give the rest of us poor saps who funded all of this Machiavellian bond skulduggery, ultimately at gunpoint? Well, we got one miserable tax rise cancelled for a single year, all of the bond coupons and principal lumbered onto us to pay off in the future, and a further £2.7 billion pounds worth of currency let loose to float around our sterling economy, pushing up prices all round as more money chases the same number of scarce goods.

So the next time you go to Tesco's and you cannot quite believe what the till receipt says, which is about 30% more than what a similar till receipt would have said this time last year, don’t be fooled by all the BBC's nonsense about a growing world demand for energy. There is just one fat man to blame for your continuing impoverishment. And I think we all know who that fat man is.

Anyone interested in learning more about the criminality of inflation can do no worse than read Uncle Murray’s The Mystery of Banking, which is freely available as a PDF from the Mises Institute.

So how do we ultimately solve all of this inflationary theft? The only way is to tie money back into a commodity which people want to hold and which cannot be created out of thin air by central banks and also by abolishing the fraudulent legal theft privileges of fractional reserve banking. The chosen commodity can be anything you like, from cocoa pods through to cigarette packets, but the most likely commodities are either gold or silver (or even both in a dual floating rate system). But I'll leave all of that detail for another day.

UPDATE: Related article today in the Torygraph. Maturin comment: Jack Maturin on June 2, 2008 11:56 AM.

UPDATE: Another related article, another Maturin comment: Jack Maturin on June 3, 2008 11:21 AM. Gotta get out more! :-)


Gekko said...

Marvellous post.

It was actually Uncle Murray's "Mystery of Banking" that started me on the anarcho capitalist path from being a deluded classical liberal. After reading it and having the light switch on I had to find out more about this Rothbard character. Though I didn't realise it at the time, I had taken the red pill and life was never going to be quite the same again.

Anyway, thanks for the enlightening ride on the financial merry-go-round. While I understood in principle the bizarre turns that were taken to hide the essential counterfeiting operation of govt bond issues via the BoE, I didn't realise it was quite as convoluted as it is. No wonder 'mere mortals' can't/won't follow it. As a laundering operation it probably has the undying respect of non-governmental mafiaosa everywhere.

On a separate thread I was interested to see Janet Daleys article in the DT today about how the current level of Stalinist authoritarianism in Britain is the dying lashes of a political philosophy that is nearing it's end. Is she serious? Doesn't she see (as only one comment poster has pointed out) that this bullying fascism is the end result of handing over any remaining freedoms and protections (such as they were) at the ballot box. It looks to me like a political philosophy in full flight and thoroughly enjoying itself rather than one on it's sick bed. Perhaps she ought to re-read her Orwell. Sometimes I am glad I emigrated - but then down here NZ views itself as a UK Mini-Me.

Jack Maturin said...

With the UK Tories promising us more of the same environmentalist/EU socialist crap as the Labour party, I think the philosophy of socialism has some way to go yet before it runs out of steam, here in the envious state of Britain. I suppose Daley's point was that Brown and his cretins have run out of steam. But socialism founders ever onwards. In the global scale of things, over centuries, and perhaps millenia, socialism will either kill us all or disappear, but certainly over the next couple of decades it will remain strong. It is not until democracy is seen by most people as being a busted flush, that the end of the beginning will come into view. That is some way off yet. However, I'm a Rothbardian optimist. I see the short-term as being terrible and the long-term as being fantastic. Once Scotland is free, and Northern Ireland becomes an Irish problem rather than an English one, and we manage to free Wales too, this force of secession may accelerate the movement away from socialism. Unless the bastards kill us all first, in their procrustean drive of envy, the spirit of individual liberty will one day defeat the bastards. Though I see this as being more of a 'western frontier in space' thing, rather than an Earth bound thing. But we must still keep fighting, because we could be wrong. Our future could reach us sooner than we realise. In our lifetimes we could finally achieve micro-countries, seceding US states, and Rothbardian freedom, as glimpsed through the haze of places like Scotland achieving independence and hopefully, let us hope, the collapse of the Euro and the Dollar, and the subsequent collapse of the US and EU superstates. Though this, admittedly, is rather unlikely, we can but hope. Let us hope this process is easier in NZ. What you need are two independent islands plus an independent non-welfare-dependent Maori state, or even two, one on each island, making up four micro-countries. Whatever you do, don't get into bed with Australia. The route to the superstate is the route to oblivion.

Ted said...

haha, awesome account!!

Jack Maturin said...

ted, if you want the full banana, you will get it all, here:

ted said...

I must say I have a soft spot for "What has government done to our money" myself. And those good people at LvMI sure know how to organise a university too. Thanks for taking the time to write the blog, 'ppreciate it.

Jack Maturin said...

It's one of my personal ambitions to one day make it to Auburn to take one of their summer classes. You'll recognise me. I'll be the one in the black 'Enemy of the State' Rothbard T-shirt! ;-)