Ponzi Quantitative Easing[QE] Scheme — Quonzi
The Devil’s Finance Pentagram: (1) Invented Digital QE Money (2) Global “Offshoring” of Work — (3) Corporate Tax Avoidance (4) Global Debt Mountain (5) Rise in Organised Crime
“The Process by which Banks Create Money is so Simple That the Mind is Repelled. When Something so Important is Involved, a Deeper Mystery Seems Only Decent.” — J.K. Galbraith, Money: Whence It Came, Where It Went, 1975.
“It is the innate conservation of the people that has kept our money good in spite of the fantastic tricks which financiers play-and which they cover up with high technical terms. The people are on the side of sound money. They are so unalterably on the side of sound money that it is a serious question how they would regard the system under which they live, if they once knew what the initiate can do with it.” — Henry Ford, My Life and Work, 1925.
“We know who loses, citizens and governments of these heavily indebted nations as the income disparity grows wider and wider as QE benefits those at the top of the pyramid who hold all the assets, and deflation destroys any sense of ability to save or generate returns for those that don’t — Nell Sloane, Capital Trading Group Chicago (Ref. 6)
“This is the essence of modern money. Advanced-country central banks can engage in quantitative easing to bail out banks that are losing money, because their banks are too big to fail. The difference between quantitative easing and a Ponzi scheme is that the interest rate promised in the former is near zero to negative, but the escalation of scale is the same. I call these Qonzi schemes. Countries whose currencies depreciate gain by passing “losses” to others, because they gain a competitive trade advantage. But if everyone depreciates at the same rate, the whole world ends up with more deflation. Remember, when the Ponzi music stops, all losses are realised. As Warren Buffett said, when the tide goes out, you know who has been swimming naked”. — Andrew Sheng SCMP (Ref. 9)
Investopedia (Ref. 1): “Quantitative Easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to increase the money supply and encourage lending and investment”.
This is a fairly bland description of a fairly complex process. Without going into the mechanics, steps and details of what is actually done and by whom, I initially and for some time afterwards found it virtually impossible to determine where the QE money truly came from, to what ultimate purpose and more importantly where most of it ended up, regardless of what was claimed by interested parties.
…..(cont.): “The Federal Reserve buys and sells U.S. Treasury Securities on the Open Market in order to regulate the supply of money that is on deposit in U.S. banks, and therefore available to loan out to businesses and consumers”.
In order to accept the following step-by-step process, it would be necessary to accept the Credit Creation Theory of Banking over the older Fractional Reserve Theory (Starkey 2018: Ref. 7). The Bank of England recently issued a paper recognising Credit Creation Theory as useful in understanding the process of money creation (McLeay et al, 2014: Ref.3).
Credit Creation Theory (Ref. 7) proposes that individual banks can create money, and banks do not solely lend out deposits that have been provided to the bank. Instead, the bank creates bank deposits as a consequence of bank lending. The money a bank can create is not constrained by their deposit taking activities, and the act of bank lending creates new previously non-existent purchasing power.
The key words with regard to securities purchase are “open market” (see (b) below). In summary, the QE process which has been utilised since 2009 (Ref. 8) appears to consist of the following series of events and actions. In this case the example adopted is the US Fed, but the process is essentially the same whether it is the US Federal reserve Bank [Fed], the European Central Bank [ECB], the Bank of Japan [BoJ] or the Bank of England [BoE].
The following plot shows the reserves of the four main central banks plotted against the S&P 500 (Ref. 10). The correlation is quite clear.
(a) Large quantities of Treasury Bonds [TBs] are purchased by the Fed, in order to “expand their balance sheet” (using digitally created money without Gold Standard, asset base or other collateral. An announcement is made about what will be purchased and on which date.
(b) The Fed does not buy TBs directly from the US Treasury, but from major banks (the “open market”). That appears to be a major, deliberately organised process. Reasons given as to why the purchases are not made as a direct transaction between Treasury and Fed seem spurious.
(c) The group of selected banks can “front-run” the Fed, setting prices well in advance of any economically logical point in time. There is undoubtedly a lot of collusion and price-gouging to affect those prices.
(d) The Fed subsequently issues the purchased TBs to a separate group of selected banks. The legal “owners” of the Federal Reserve Bank are the commercial banks themselves. Ownership of the ECB, BoJ and BoE differ somewhat, but the ownership principle is the similar.
(e) This group of banks create funds (or “capital”) using the issued TBs as collateral to then purchase quantities of physical or financial “assets”, again on open markets in order to also “expand their balance sheet”. Capital/funds are then freely available.
(f) These banks provide what are tantamount to IOU’s to the Fed, who in theory could call it in.
(g) All the central banks listed have always been heavily “influenced” by former bankers.
(h) This all essentially the provision of relatively “free money” for selected banks and their owners, shareholders and directors and consists partly of blatant theft from ordinary people.
Several authors have started to point out (Refs. 4, 5 & 6), that Quantitative Easing is analogous to a pseudo PONZI scheme:
Investopedia: Ponzi Scheme (Ref. 2): “A fraudulent investing scam promising High Rates of Return with little risk to investors. Returns for early investors are generated by acquiring new investors, similar to a pyramid scheme in that both are based on using New Investor Funds to pay earlier backers. Both eventually bottom out when the supply of new investors dries up and there is insufficient money. At that point, the schemes unravel”.
In the case of QE, “New Investor Funds” are represented by the tranches of digital created money. “Returns” are the profits generated following the bank purchases of price-inflated assets carried out as a result of the transfer of TBs to all participating banks. The “IOUs” given in return by those banks to the Fed are unlikely ever to be called in, although in theory this could occur. The High Rates of Return are ensured by continually ensuring that stock, bond and property asset prices are maintained and increase, through “financial engineering”.
Alleged interest rate increases claimed by Central Banks are usually not real increases. Under-reported inflation rates are usually higher, such that real interest rates fall. If stock or bond markets start trying to sell off, the Central Bank often steps in and purchases market futures, before too much damage can be done, thus ensuring rising stock prices, over the medium to long term.
The system has become constricted into a deathly “liquidity trap”. Interest rate manipulation and the trillions in asset purchases was never likely to stimulate borrowing or lending, because the required levels of consumer demand were unlikely to (re)appear. This “QE pump” appears to have been the only solution available to maintain a stable system and avoid implosion. Escape from the liquidity trap may be impossible, like light trapped in a black hole. Japan in the 1990s is a prime example. The central banks who have adopted QE are unable to raise or lower taxes, direct more infrastructure spending, change education systems or force China to revalue their currency. The question as to “will it work and create a bond market bubble” has always been a huge whispered unknown.
References
1. Investopedia: Quantitative Easing
www.investopedia.com/terms/q/quantitative-easing.asp
2. Investopedia: Ponzi Scheme
www.investopedia.com/terms/p/ponzischeme.asp
3. McLeay, M., Radia, A., & Thomas, R. (2014), “Money Creation in the Modern Economy”, Bank of England Quarterly Bulletin Q1 2014.
4. New Economics Foundation (2012), “Where Does Money Come From: A Guide to the UK Monetary and Banking System”, 12th December 2012.
neweconomics.org/2012/12/where-does-money-come-from/
5. Social Democracy 21st Century (2014), “Who Knew!? Banks Create Money out of Nothing”, 22nd December 2014.
socialdemocracy21stcentury.blogspot.nl/2014/12/who-knew-banks-create-money-out-of.html
6. Seeking Alpha, (2019), “Quantitative Easing… Forever”, 17th February 2019.
seekingalpha.com/article/4241716-quantitative-easing-forever
7. Starkey, M. (2018), “Credit Creation Theory of Banking”, The Economics Network
www.economicsnetwork.ac.uk/archive/starkey_banking
8. Guardian (2019), “The Verdict on 10 Years of Quantitative Easing”, 8th March 2019.
www.theguardian.com/business/2019/mar/08/the-verdict-on-10-years-of-quantitative-easing
9. South China Morning Post (2016), “Modern Money is Being Managed Like a Mutant Ponzi Scheme”, 4th March 2016.
www.scmp.com/comment/insight-opinion/article/1920455/modern-money-being-managed-mutant-ponzi-scheme
10. Yardeni Research Inc.(2020), “Central Banks: Balance Sheets”, 9th April 2020, p. 16.
