The Ultimate Betrayal: The UK Government and Inflation

In his speech at the Mansion House [City of London] on October 11, 2012, Lord Turner, head of the Financial Services Authority and a leading candidate to be Governor of the Bank of England, revealed one of the darkest economic secrets that the infamous coalition government is fomenting. With the consent of the Treasury [Chancellor: the Right Honourable George Osborne PC MP] the Bank of England has created hundreds of millions of pounds in 'quantitative easing' [QE]. This notional credit has been used to buy bills and bonds that had previously been issued by the UK government, mostly from the holdings of 'reserve assets' that must be maintained by financial institutions. Much of the new spending-power has been used by the firms that sold the bonds to the Bank to buy new issues of government bonds, to enable them to retain their required 'reserve ratio' of relatively secure assets. Notionally this activity has not increased the 'money supply':because in principle the Bank of England has issued spending power that is matched by an increased stock of government debt that it holds as 'assets'.

Turner's innovative [implied] suggestion was that the Bank could 'write off' some of the assets that it has bought. This would mean that the selected bonds would simply cease to exist; they would vanish from the Bank's asset register, and be removed from the total of the government's debt. The coalition government claims that the  present national debt is a smaller percentage of the national income than it was when they took office in June 2010: notwithstanding the fact that the number of pounds that the government has borrowed has continued to increase rapidly. Cameron's government has continued to borrow more money each year to spend on benefits, and to maintain health service spending and to spend hundreds of billions of pounds on its plan to double-up the most efficient railway in the country: from London to Birmingham. Meanwhile some important spending has been reduced: the national defences have been despoiled, the effectiveness of the police has been reduced, and the construction of coastal and riverside flood defences has been deferred.

Over the last couple of years the government has ordered the commercial banks to reduce the ratio of the money that they lend to the assets that they hold. Their recognisable 'assets' were being reduced anyway as the credit crunch unfolded and they had to write down the value of many assets and to write some off. The government - partially in response to European Union diktats - has raised the ratio of assets that the banks must hold to what they can lend: so they can lend a lower proportion of a diminishing resource. The reduction in the total that banks can lend requires the banks to refuse to extend some 'old' loans that come up for review, as well as refusing to make new loans to businesses. Hence one of the main sources of funding for economic growth has been reduced almost to vanishing point: and the economy has effectively ceased to grow while government spending has continued to grow.

By tinkering with taxes Chancellor Osborne has increased the government's income as a percentage of national economic turnover, but that means that less spending-power [in real terms] can be extracted as taxation from a diminishing national income. The gap between the tax-take and the government's spending is filled by borrowing.

The banks' liquidity has been maintained by the Bank of England's QE: buying government debt certificates from them. Already the Bank has bought up almost one-third of the whole vast pile of debt certificates that the coalition and former governments have issued: and Turner's speech contained hints that some [or eventually all] of the government debt that is held in the asset register at the Bank of England could be written-off. This would mean that the national debt would be reduced by some 30%; and when that was done, interest payments on that debt would cease. The government's 'books' and the predictions for their future spending needs would suddenly become much more favourable; to the extent that it might be possible for the austerity to be relaxed.

But this would be disastrous for pensioners. In interpreting legal requirements on pensions administration the Actuaries have used their own archaic methodology to insist that pensions trustees should sell shares [that can rise with the success of companies] and to put an increasing proportion of the funds that they hold into government bonds. So when the real return on government bonds is reduced by the great coming write-off, the purchasing power of pensions and annuities will hugely be reduced. The millions of people who have  accepted reduced current purchasing-power throughout their working lives, while they saved in their pension funds to buy security in their old age, will inexorably be impoverished by the inflation. There will be a great show of handwringing on all sides of the political charade, but nothing can be done by a government of any party or by any coalition of established parties to protect the pensioners from the coming catastrophe. The calamity will almost certainly materialise. Impoverished pensioners will vote against whatever government 'betrays' them, only to find that no other gang of politicians has any idea of how to 'save' the situation. The powers-that-be have allowed this to happen through decades of purblind public policy: decent working people will pay the price of this incompetence, when they come to the most vulnerable phase of their adult lives.