If you are new to this blog, you are invited to read first “The Largest Heist in History” which was accepted as evidence and published by the British Parliament, House of Commons, Treasury Committee.

"It is typically characterised by strong, compelling, logic. I loosely use the term 'pyramid selling' to describe the activities of the City but you explain in crystal clear terms why this is so." commented Dr Vincent Cable MP to the author.

This blog demonstrates that:

- the financial system was turned into a pyramid scheme in a technical, legal sense (not just proverbial);

- the current crisis was easily predictable (without any benefit of hindsight) by any competent financier, i.e. with rudimentary knowledge of mathematics, hence avoidable.

It is up to readers to draw their own conclusions. Whether this crisis is a result of a conspiracy to defraud taxpayers, or a massive negligence, or it is just a misfortune, or maybe a Swedish count, Axel Oxenstierna, was right when he said to his son in the 17th century: "Do you not know, my son, with how little wisdom the world is governed?".

Friday, 18 February 2011

Inflation trap

There has been a common wisdom - which was put to practice - that when inflation was going up above the set target, Bank of England (or a relevant central bank in other countries) responded by increasing interest rate. The reasoning behind was that there was too much money in circulation (called broad money supply). This was according to the following mechanism: people were borrowing a lot, they typically spent this money, this money returned again to banks and was re-lent again. The increased interest rate made money more expensive to borrow, hence people could borrow less and usually existing borrowers had to pay more interest on the existing loans. This was suppressing inflation as people had simply less money to spend but the actual mechanism worked through suppressing the volume of money on the market: broad money supply.

The current wave of inflation in Britain is a result of the pyramid scheme engineered by the financial industry. Once the financiers - using a crude pyramid scheme mechanism which was lending with loan to deposit ratio greater than 100% - raided the banks cash reserves the government stepped in and pumped hundreds of billions of pounds into the banking system by directly rescuing the banks and by quantitative easing. The former put the government into heavy debt. In the latter case money is finding its way to the consumer markets causing inflation. All these resulted in pound stirling losing credibility. The situation of other major currencies, US dollar, euro, yen are the same or worse. Hence investors, globally, started moving to a safe heaven of commodities. They started to convert their currency based investments into investment linked to commodities. This causes inflation which in turn undermine currencies even more and the process continues.

The current figures show that the growth of broad money supply in the UK is very low and is lower than the growth of narrow money supply (see graphs below). This means that money multiplier is going down (as money multiplier can be expressed as a ratio of broad money to narrow money). The financial market keeps balancing itself but in the meantime the currencies have little credibility and investors want to minimise a risk of holding them by moving to commodities. Therefore Bank of England faces unprecedented situation: the inflation is going up but raising interest rate would not stop it as the inflation is not a result of high growth of broad money supply. In fact raising interest rate can further damage economy and make things worse by slowing the growth thereby ability to repay the public debt.

Raising interest rate is not a solution and Bank of Englad knows it. Its Governor acts wisely but does not say everything. The problem is, however, that the money multiplier is so high that inflation caused by it is likely to be going up for quite a while. We are getting poorer thanks to the pyramid scheme engineered by the financial industry. The Bank of England Governor Mervyn King observed that "inflation could cause serious problems for families over the next three years". You can say it again, Mr King. And in the meantime the captains of the financial industry keep rewarding themselves handsomely with the money raided from the middle classes since this is what high taxes, spending cuts and inflation are all about. "Prime Minister, sort out this mess, please"

Source: Bank of England


  1. I don't buy this analysis. If you look at "M4 lending," the stock of credit owed to the banks, it has been decreasing sharply since 2009. The first downturn in the series for the publicly available data release which goes back to 1963! The definition of M4 changed around the same time to incorporate some securities that had previously been 'off balance sheet.' This generates the illusion that M4 was still increasing. So effectively the money stock is decreasing - there is no demand pull inflation, it must all be cost push. All the hullabaloo from businesses about how the banks are not lending to productive businesses, and we are asked to believe that too much money is chasing too few goods. Commodity prices are increasing globally, partly because of increasing oil scarcity. Why ignore this?

  2. Hi Nick

    Thanks for your comment but I think you did not understand my article. Of course there is a cost push... on commodities this is exactly what I wrote. And this causes inflation. I simply wrote that typically inflation was a result of increased money supply so increasing interest rate helped. This time it would not.

    Banks are not lending because they do not have money to lend. What they have got - after they pay some on bonuses - they have to keep in order to keep their still ballooned balance sheet solvent.



  3. Hi Greg,
    Thanks for replying. Your piece says that "money is finding its way to the consumer markets causing inflation" and in the graphs the money supply is still increasing. Further, it attributes the rise in commodity prices to monetary causes only. Which is why I think the analysis is implausible - it makes sense for the up side of the credit bubble, but we are into the downside.

    As for banks not lending because they don't have money - this gets things back to front. There is not enough money around because the banks are not lending. Banks don't lend customers' money, they create it, from nothing, backed by a small amount of liquidity. In the current climate businesses would default on loans, which under the rules of account would be written down as losses. So they are not creating credit to match the flow volume of loans repaid. Which makes the situation on the ground even worse.

    Of course if they were still pumping up the credit bubble that would also be intolerable, but all goes to show that we need a different money creation system, rather than fiddling around with "stronger regulation" and all that twaddle. Are you familiar with the "positive money" campaign?

  4. Hi Nick

    I never wrote ONLY (I think). I was talking about overriding reason. (It's rather obvious that the current events in the Middle East also cause inflation increase.

    ANY lending increases money multiplier. Banks cannot afford to do so as it is way too high and they are scared of losing liquidity again.


    PS. Please send me info on "positive money" campaign.

  5. Hi Greg,
    Well, I guess I still don't see how monetary factors can be the predominant reason behind recent price increases if money (ie credit) supply has actually been contracting since at least 2009.

  6. Hi Nick

    Putting briefly: those who hold currencies (e.g. Chinese) are worried that they will be worthless. So they convert currencies into commodities or rights to have/buy commodities etc. thereby dumping currencies and increasing price of commodities. These process happens on massive numbers.

    I think I was a bit unclear: contracting credit is NOT the cause of inflation. Usually expanding credit was. And interest rates were suppressing credit. This time round as inflation is not caused by expanded credit increasing interest rate will not help. Quite the contrary it is likely to undermine the economy and in turn undermine the currency reducing its value further thereby increasing commodities relative value and increasing consumer inflation.



    Thanks for the link!

  7. Got to say this is one of the best written and most informative articles I have seen for a while.

    Surely though there comes a point when the effect of the currency dumping does significant damage to an economy and puts it into recession. Especially if the commodity being bought is essential food and business production materials. Then you have a downward spiral and the country becomes more of a wasteland where people can no longer afford to live there and companies cannot make money because their costs are too high.

    New laws, rules and regulations should be introduced to stop such immoral speculation that affects the average person on the street.

    Why should my hard earned money be devalued and living costs go up because of someone else's greed and speculation? It seems like theft.

    What can I do to avoid this. Am I supposed to jump on the bandwagon myself and also convert all my own money into commodities?

  8. Hi Miken

    Regarding your point on regulation. May I suggest reading this:


    Maybe this would be better solution after all...



  9. It is not as if China adds value to the commodities, when was the last time you bought something from China that lasted a year?
    They don't trust our currency? Fine, lets wake up to their quality and not buy their PPC