You may or may not know that banks finance their own credit by borrowing. They borrow from each other over a shorter term than the term they loan the same money out at. This means that they are paying a lower premium (because shorter term = less risk) than they earn from the same money. The short-term loans are simply recycled and loaned out again to ramp up the revenue which the bank uses as security for the next batch. If this sounds circular, then that’s because it is. Without the next batch of lending the whole house of cards must collapse. Liquidity is therefore the number one concern in the banking system. If any bank fails, the risk of contagion is high as each bank is exposed to the next (in the form of their lending commitments).

When Lehmann failed in 2007, for example, the contagion threatened to bring down the entire banking system. Central banks intervened to provide liquidity into the system and, through QE (money printing) they have been doing so ever since. If you think that this means the spiralling debt mountain is now being financed by the taxpayer, that’s because it is. In fact liquidity (in the form of deposits) are guaranteed by the taxpayer. As much as the banks have been bailed out, the taxpayer has been fully bailed in.

If you believe that you elect a government in order to represent your interests then this must seem a curious phenomenon at first sight. You might suspect that the Government had in fact acted in the interests of shareholders, who after all received the benefits of their own speculation at risk, rather than voters, who have stood in the place of the shareholder when that risk was in fact realised. In the end you can only reconcile yourself to the current state of affairs by accepting that the Government perceived a systemic threat to our way of life and therefore acted only to protect us. The question thus becomes one of efficacy. How far has the Government protected us from this systemic risk? Are we thoroughly insulated from the threat now, or have we only succeeded in kicking the can down the road? Where are we at?

QE wasn’t the only measure taken by the authorities (in the form of their central banks). The financial system was further flooded with money supply by reducing the base rates towards zero, or lower. Now think about that in terms of your own finances. If your bank offered to loan you money at a zero rate of return, in other words, they pay you now and you pay them back later (or borrow more money to pay them) then what you would effectively be doing is drawing down your future earnings before you have earned them, at no premium to the undoubted risk of your not earning as you had in fact anticipated. If that doesn’t sound like a good deal to you, how about negative interest rates – where your bank actually pays you a premium for the privilege of loaning you money?!

So, what’s the problem? Well, the liability for all this ever-growing debt lies, as I’ve pointed out, squarely upon the taxpayer, and currently stands globally at £50trillion (although the true figure will be much higher by the time you read this). Easy to pay off? Probably not even possible – the recycling of debt leading to greater and greater debt can only continue on and on – at least until it does not. By this means the income of the entire world’s population is transferred to the banks as security for the liability, and since that income increases at a rate 100th of the rate of increase in debt, the ceiling is obvious. It is an empty kind of growth, sugar for the economy that cannot in the end nourish us. No wonder bankers are hated so much.

However, there might be light at the end of the tunnel. My sums above seem to demonstrate a fait accompli, but that is only the case if numbers have a set value. And in the world of finance, you may be surprised to hear they do not. If today I owe you a pound and tomorrow I owe you two pounds, then I only owe you twice as much money in value terms tomorrow if the value of a pound does not fluctuate in that time. Hence, if I can make tomorrow’s pound worth 49p today then I could justify borrowing that pound from you today and paying it back to you twice tomorrow, at a profit to me in value terms of 2p. That’s inflation, folks.

So in 2008 the authorities gambled that their money printing and low, low rates would deliver inflation, and growth, and that the debt mountain would in the end be less, not in number but in value, and that we would have more money (via GDP) to pay it off. Unfortunately until recently growth has been weak and inflation non-existent. Fortunately lately the US has posted pre-crash style quarterly GDP growth and the UK is relaxed about inflation overshooting the 2% target (due to Brexit pressures on the £). This could possibly be the proverbial light at the end of the tunnel. But it will punish savers, and reward those that borrow.

Let us look at a single case in point. One area in the UK where inflation has been very apparent is housing. Poor planning in infrastructure, house building, and ‘help to buy’ (subsidising housing at the tax payers’ expense) has driven demand for housing stock beyond supply and fuelled 8% inflation YOY despite near flat wages growth. Most house purchases are of course financed through debt. This money has been fuel for construction, estate agents, lawyers, surveyors, white goods, furniture suppliers, flooring suppliers and the DIY sector. In other words there’s been an economic steroid injection into these sectors owing to a housing bubble funded by debt. It’s the financial engineering of the economy at large in microcosm. However eventually, since only debt and not income is increasing to drive this inflation, the real workers will be priced out of the market.

I hope you can see now that it’s all about the money flow. These days, if you want more, you need to borrow more; and trust to inflation to drive down the emergent costs. And £50trillion of debt is such a huge problem that you can expect governments everywhere to collude in devaluing their own currencies in response and so bring about massive inflation. They need the inflation, or they will all drown in debt because the income of the populace will not be enough to support it and the financial system will still crash, only worse than before. Expect helicopter money in large amounts. The ECB and BOJ are already purchasing large amounts of corporate debt and securities with money they have simply electronically keyed into existence. My prediction is that eventually money will be credited into consumer accounts either through voucher schemes, electronic transfer (tax rebates) or wage inflation on a massive scale (funded by corporate debt). Negative interest rates will then ensure that the consumer spends that money rather than paying the bank to hold it for them. Probably cash transactions will be restricted to prevent the populace hiding their cash in the mattress instead of using the banks. This also allows the Government to track earnings and therefore tax much more efficiently. Hyperinflation follows, and inflates away the old debt. We won’t be counting banknotes anymore; we will be weighing them.


These days, if you want to protect your capital, the only way to do so is to make like the banks and borrow more of it. We live in the golden age of banking and finance, and this must continue, at least until somebody somewhere decides to reset.