As the Chancellor of the Exchequer, Jeremy Hunt, announces £54 billion in increased taxes and cuts to public services in order to reduce a fiscal deficit being blamed on everything from the Pandemic to Putin and Brexit, this is a look at the actual causes of our spiralling inflation, not just in the UK but across the globe.
By Simon Elmer / The Expose
In June 2019, the Bank for International Settlements (BIS), the world’s central bank, published its Annual Economic Report. This began with the statement: ‘It was perhaps too good to be true’ — the ‘it’ being the recovery from the 2007-2009 Global Financial Crisis. Describing financial markets as ‘jittery’, the report warned investors about the social and political backlash against what it called the ‘open international economic order’, which the BIS predicted would continue to cast a ‘long if unpredictable shadow’ over the global economy: From a historical perspective, it is not unusual to see such surges of sentiment in the wake of major economic shockwaves: the Great Depression marked the end of the previous globalisation era. It is too early to tell how this surge will evolve; but it will clearly be a force to contend with in the years to come.
What the BIS was describing here are not only the classic symptoms of a financial crisis produced by the internal contradictions of capitalist accumulation — according to which, as the wages of workers are deflated so too is the purchasing power of consumers, threatening the profits of capitalists and resulting in an inflated credit bubble — but also the threat of the social unrest they cause in the body politic. As the bank of highest appeal on monetary policy, the BIS is more than aware of the threat this presents to the global financial system.
The following month, accordingly, in July 2019, the BIS called for ‘unconventional policy’ in order to ‘insulate the real economy’ from further deterioration in conditions, specifically advocating that, by offering direct credit to the economy, central banks could ‘replace commercial banks in providing loans’.
By August 2019, the global debt-to-Gross Domestic Product ratio had risen to an all-time high of 322 per cent, with total debt reaching close to $253 trillion. Germany, Italy and Japan were on the verge of a recession, and the economies of the UK and China were contracting. That same month, BlackRock, the largest investment fund in the world with $6.5 trillion in assets under management at the time (and since then risen to $10 trillion), published a white paper titled ‘Dealing with the next downturn’. This instructed the Federal Reserve, the central banking system of the USA, to inject liquidity directly into the financial system, in order to prevent a dramatic downturn in the economy it predicted would be even worse than that of the Global Financial Crisis of 2007-2009.
BlackRock argued that, since monetary policy (interest rates on loans and the amount of money in circulation) was exhausted, and fiscal policy (government taxation and spending) would not be sufficient to reverse such a crisis, what was needed was an ‘unprecedented response’. It therefore recommended ‘going direct’. This meant ‘finding ways to get central bank money directly into the hands of public and private-sector spenders’ while avoiding hyperinflation. Significantly, as an example of the dangers of
the latter, BlackRock cited the Weimar Republic in the early 1920s, at precisely the time when fascism took root in both Germany and Italy. Later that month, in August 2019, central bankers from the G7 nations (the USA, the UK, Germany, France, Italy, Japan and Canada) met to discuss and approve BlackRock’s ‘unconventional’ proposals.
In response to the subprime mortgage crisis of 2007 and the Global Financial Crisis, it triggered, in 2010 the US Congress had limited the amount to which the US Government would insure depositors to $250,000. This meant that large institutional investors like pension funds, mutual funds, hedge funds and sovereign wealth funds had nowhere to park the millions of dollars they held between investments that was at once secure, provided them with some interest and allowed the quick withdrawal of funds like a traditional deposit account. It was in response to this need that the private repo market evolved. ‘Repo’, which is shorthand for repurchase agreement, is a contract whereby investment funds lend money against collateral assets, typically treasury debt or the mortgage-backed securities that had financed the US housing bubble. Under the terms of the contract, banks undertake to buy back the assets at a higher price, typically the next day or within two weeks. As secured short-term loans, repos are the main source of funding for traders, replacing the security of deposit insurance with the security of highly liquid collateral.
However, although the repo market evolved to satisfy the needs of large institutional investors, it also allowed banks to circumvent the capital requirements imposed by regulations on the banking system after the Global Financial Crisis. As a result, by 2008 the repo market provided half the credit in the US, and by 2020 had a turnover of $1 trillion per day. The danger was, a lack of liquidity in repo markets can have a knock-on effect on all major financial sectors. This happens when banks borrow from their depositors to make long-term loans or investments, and the depositors and borrowers want the money at the same time, forcing the banks to borrow from somewhere else. If they can’t find lenders on short notice, or if the price of borrowing suddenly becomes prohibitive, the result is a liquidity crisis.
This is exactly what happened in September 2019, by which time the borrower side of the repo market had been taken over by aggressive and high-risk hedge funds, which were using them for several loans at once. As a result, many large institutional lenders pulled out of the market, causing a sudden spike in repo borrowing rates from 2.43 per cent to 10.5 per cent in a matter of hours. However, rather than letting the banks fail and forcing a bail-in of creditors’ funds, the Federal Reserve System, following the advice of BlackRock, initiated an emergency monetary programme, injecting hundreds of billions of dollars every week into Wall Street in order to ward off substantial hikes in interest rates. Over the next six months, the US Federal Reserve injected more than $9 trillion into the banking system, equivalent to more than 40 per cent of the Gross Domestic Product of the USA.
By March 2020, the Federal Reserve was making $1 trillion per day available in overnight loans, effectively providing backup funds for the entire repo market, including the hedge funds. But more was needed.