A tale of our inflationary times

Once upon a time there were three little Central piggy banks. Or to be more accurate, at three very different times  three  little Central piggy  banks were set up. First came the smallest one, the Bank of England. There was next the biggest, the Federal Reserve Board. Much later  there was the youngest one, the European Central Bank. 

 

They all had misleading names. The Bank of England is the Bank of the UK, not just England. It went in for understatement or historical lethargy about its name . The Federal Reserve Board is the Central bank for the whole USA . It has kept its old name too as a memory of how the dollar helped drive integration of the states of the Union through its federal approach. The European Central  Bank is not the Central Bank for Europe but just for some countries that joined. It launched with glorious overstatement. 

 

By 2000 the three Central piggy banks thought alike and started to hot things up. They all asserted they were very important and independent. They denied that the states who owned them and who appointed their top people had any influence over what they did. Armed with this moral right and their cleverness they allowed a massive bubble in credit, fancy derivatives and bank lending. By 2007/8 it was so extreme they decided to stop it. In doing  so it caused a Great Depression. There was the noise of a large banking crash. 

 

The governments were not very happy about this. Several of them were criticised  by angry electors who blamed them rather than the banks. So the banks and the governments got together and blamed everyone else in finance apart from themselves. Electors threw out the governments anyway. The top people in  the three little piggy banks kept their high salaries and important jobs.

 

The three little piggy banks reckoned they needed to try something new as the public might get cross with them as well as just sacking the governments. So they decided to make themselves very popular by printing lots of money and driving down interest rates. All they had to do was create a big figure in an account and then go out and spend it. And so they did. They were not very imaginative shoppers. They decided to spend all their newly made money on buying up government bonds. This meant all those who owned these bonds got richer as the prices went up, and some had lots of money to spend when they sold their bonds to the banks.

 

The big bad Inflation Wolf stood outside the doors of the little piggy banks. These were wise piggy banks who had learned from the old story of the three little pigs. All their banks were built of  stone or steel  so they did not fear the Inflation Wolf. They told him he could not blow them down.

 

A small number of monetarists told the piggy banks if they printed lots of extra money there would in the end be a big inflation. The banks ignored them .

They got away with the money printing for a bit. They were lucky because the commercial banks were all so damaged by the banking crash and by new rules stopping them lending so much, money stayed under reasonable control despite the printing. Even the  monetarists were not alarmed either all the time money did not grow too much.  The wolf got fed up with waiting.

 

When there was a new disease spreading fast around the world governments decided to lock down large parts of their economies and order people to stay indoors. Once again the little piggy banks cranked up their printing presses. The governments were so grateful as it meant they could borrow billions to give to people so they had some money when they could not work. Everyone agreed this would not be inflationary.

 

Unfortunately as the economies were unlocked and recovered quickly the little piggy banks kept on printing. Why stop now they asked? it makes us popular. There is still no inflation. The monetarists stirred and pointed out that  now there would be a big inflation because the new money was leading to lots more money around . The little piggy banks thought they were silly and  carried on printing and buying up bonds at ever higher prices. 

 

The bad old inflation wolf had learned a few tricks compared to his ancestor who had landed up on the fire by going down the chimney of the third ¬†little pig’s brick house. He saw that whilst the litttle central¬†piggy¬†banks¬†all had strong steel or stone buildings, they had very weak finances. They were buying many times as much in bonds as they had capital. If as he thought they started to lose money on all those very dear bonds, what would happen then?¬†

 

And so it proved. A great inflation took hold just as the monetarists had warned and the wolf had  hoped. The little piggy  banks decided they had to do something about it, as suddenly they were no longer popular . People had believed them when they said they knew what they were doing and there would be no inflation. So they did what they do best. They blamed the  big inflation on  a  nasty war though prices had been surging well before it started. Then they decided to  create a recession to make things cheaper again. This meant they would lose huge sums on all those bonds they had bought.

 

The wolf licked his lilps  about all those losses. They were going to run out of money and have to leave their strong buildings. In each case the losses would amount to far more than the capital the banks had. If they were normal businesses they would go under. But said the little piggy Central Banks, we are not normal . We do not have to worry about losses. The Bank of England had a good answer to the wolf. They had a guarantee that all their losses would be paid by the taxpayers, so they were financially secure. The Fed said we can just create more dollars. The world needs our dollars so we will just ignore all the losses and print what it takes to pay our salaries. You will not get us Mr Wolf. Which left the European Bank at a bit more of a loss. So they said most of their losses would be sent to the member state national banks , sparing the European Bank  the problem. If the member state banks  ran out of money they would need to get it from their governments.

 

Mr Wolf is dismayed outside the three little piggy central banks. It looks as if they are cleverer than him after all, just as the third little pig outwitted the original Mr Wolf all those years ago. The little Central piggy banks will live on, with the taxpayers having to pay colossal bills for their latest mistakes. 

 

 

 

 

 

 

 

32 Comments

  1. Mark B
    December 23, 2022

    Good morning.

    Very good, Sir John.

    Only one slight criticism, if I may. Maybe, perhaps, if the wolf were to be replaced by a certain cephalopod ?

    ūüėČ

  2. Shirley M
    December 23, 2022

    … and the UK piggy kept his job, was awarded a gong and a huge pension, and lived happily ever after in the House of Frauds. The UK taxpayers were needlessly impoverished, but who cares? Certainly not those on the gravy train who benefitted from it all! For every gain, someone has a loss, and for every loss, somebody somewhere has a huge gain!

    1. Lifelogic
      December 24, 2022

      Indeed but not all losses cause a gain or gains cause matching loss. A good technology breakthrough for example usually causes gains for nearly everyone. Vast misguided over regulation or over taxation is a lose, lose for nearly everyone.

  3. Narrow Shoulders
    December 23, 2022

    I thunk in this parable the wolf is actually a blue whale who does not eat the big fish but just swims around hoovering up the ordinary plankton of which there is a plentiful supply. True renewables.

    A happy Christmas to you Sir John and everyone in this little community whose agreements and disagreements supplement your own thoughts so well.

  4. Bloke
    December 23, 2022

    The Wolf at the Door should eat the pigs to solve the problem and save his breath.

    1. formula57
      December 24, 2022

      @ Bloke – alas the Wolf is voracious and would eat us all, as the example of the Weimar Republic shows.

  5. No Longer Anonymous
    December 23, 2022

    I’m not wishing you Merry Christmas, Sir John .

    You are part of the problem.

    I don’t like you any more.

    I’m off.

  6. Mike Stallard
    December 24, 2022

    I have never understood your point of view. Now, thanks to the parable, I think I do!
    Merry Christmas – and thank you for your super blog!

  7. BOF
    December 24, 2022

    The three little piggies are presiding over the greatest transfer of wealth from the masses to a tiny proportion at the top. That must be the plan, as they continue with this modus operandi.

    A very happy Christmas to you and yours Sir John.

    1. Donna
      December 24, 2022

      What on Earth are you Finking? (see what I did there?) We know there’s a plan.

  8. DOM
    December 24, 2022

    It’s not CB inflation we need to worry about but CB plans concerning digital currencies. If such plans become real the State will have COMPLETE AND TOTAL ACCESS over all aspects of each person’s life. What does Mr Redwood think about this?

    1. Cuibono
      December 24, 2022

      +many
      Does anyone know whether the intention is to immediately get rid of all cash?
      I know that Hunt or Sunak said cash and digital would run concurrently.
      But obviously what they say is no guarantee.
      And so the nightmare grows!

    2. BOF
      December 24, 2022

      Yes DOM. Combine CBDC with carbon credits and facial recognition equals total control of our lives.

  9. Dave Andrews
    December 24, 2022

    And now according to the government the country’s finances are to be saved by the recently retired over 50s go back to work.
    No, shrink the state, rather than expect the ordinary people of this country to solve the financial problems the government has created.

  10. Mickey Taking
    December 24, 2022

    The three little pigs are safely wrapped in blankets, hoovering up all the scraps and the wolf is going hungry. The wolf has never heard of Wall St, but others have taken it to heart.

  11. Sir Joe Soap
    December 24, 2022

    Well as always everyone lives happily ever after except the poor old taxpayer. At some stage he decides he’s had enough being the backstop and then what?

    1. Christine
      December 24, 2022

      Then he stupidly votes in Labour and things get much worse. Will he never learn that all the main parties are the same. Vote Reform.

  12. Sir Joe Soap
    December 24, 2022

    You forget to mention Little Ms Red Riding Hood and her friend who were consumed not by the wolf but bizarrely by one of the pigs who got there first….

  13. Cuibono
    December 24, 2022

    And then the three little piggies Broke, Woke and Joke decided that they’d had enough fun worrying everyone to death and baiting the poor old wolf. They were sick and tired of all those cumbersome notes and coins.
    So, without consulting anyone…they went digital.
    Finally, they were in complete control of everyone and everything.
    (The wolf, Bless him, died screaming on the bonfire of cash and liberty).

  14. Donna
    December 24, 2022

    And the Governments which created the lockdowns, started the war and allowed the banks to print vast sums of money (to be repaid by taxpayers) will be quite rightly blamed and kicked out AGAIN.

  15. Cuibono
    December 24, 2022

    Christmas is coming, the geese are getting fat
    Please put a penny in the old man’s hat
    If you haven’t got a penny, a ha’penny will do
    If you haven’t got a ha’penny, then God bless you!

    ( traditional Nursery Rhyme)

    HAPPY CHRISTMAS EVERYONE! ūüéĄ

  16. Bryan Harris
    December 24, 2022

    A very apt fairy tale of our times – but far too accurate.

    Will there ever be a happy ending to handle all of these problems?

    In any case – Happy Christmas to all – especially our host who has provided a great platform for us to shout out our concerns as well as keeping us informed, even if we disagree so often with his position.

  17. Bill B.
    December 24, 2022

    SJR I think the three piggy banks are already on to their next move – Central (Piggy) Bank Digital Currency.

    For now, never mind. Have a relaxing Christmas and New Year break, and thanks for your untiring efforts throughout the year to provide a platform for grumpy old so-and so’s like me to comment on.

  18. Original Richard
    December 24, 2022

    ‚ÄúThe little Central piggy banks will live on, with the taxpayers having to pay colossal bills for their latest mistakes.‚ÄĚ

    These are not mistakes, but deliberate actions. As is the false claim that the economy destroying Net Zero Strategy is necessary to avoid a further 0.5 degree C increase in temperature causing the complete destruction of the entire planet.

    The giveaway was when our PM, then Chancellor, said at COP26 :
    ‚ÄúSo our third action is to rewire the entire global financial system for Net Zero.‚ÄĚ

    Remember it was the Communists in the last century who caused the deaths of tens of millions of people with false ideologies and this century they intend to destroy the West using the false CAGW ideology and regular financial crises.

  19. Cuibono
    December 24, 2022

    Beleaguered tories…PLEASE note.
    The armed forces are doing a FANTASTIC job at airports etc.
    Military precision and discipline. THAT is what is needed to get things running.
    Plus Labour is handing the tories a fab opportunity re section 35 of the Scotland Act.
    The secret is out! Labour would follow Sturgeon’s lead.
    Shout…SCREAM this from the rooftops.
    Santa’s totally undeserved present to the tories.

    1. Mickey Taking
      December 24, 2022

      and the reward? £20 extra per day for covering strikers safe at home in the warm but wishing misery on the masses.
      Bah Humbug!

      1. Cuibono
        December 24, 2022

        No!
        I’m no Tory but the reward would be no Starmer and a country that worked!
        You don’t want that?

  20. Geoffrey Berg
    December 24, 2022

    The underlying problem and hardly a soluble problem is that not just in politics but also in banking, the civil service, law, big business and practically everything else society is led by people who are usually followers of current fashion and are not personally even truly competent in their field. There are just far too few people of real ability to hold the senior positions in human societies. Furthermore if perchance anybody of real ability comes along (unless he is running his own business or competing in an activity where only individual ability really counts such as playing Chess), he is generally kept down or conspired against by those of very little genuine ability (as happens in our politics and elsewhere).
    We live in a world of pretence, as so well satirised by Hans Christian Andersen in his story of The Emperor’s New Clothes.
    Well deserved Compliments of the Season to you , Sir John for all your efforts amid society’s madnesses.

  21. Peter Martin
    December 25, 2022

    @ Sir John,

    You, yourself, have written about the myth of the independence of central banks. How, therefore, do comments such as: “The governments were not very happy about this” , ” The governments were so grateful as it meant they could borrow billions” , “…… with the taxpayers having to pay colossal bills for their latest mistakes” make any sense?

    Either the central banks are independent or they aren’t. I happen to agree with the John Redwood who wrote that they aren’t in the FT article below. In which case any “mistakes” in economic policy are government mistakes rather than those of their central banks. With the exception of the ECB which is another story, both the BoE and Fed could formally have their monetary policy setting powers removed, just as they were given to them in the first place. That in itself can be argued to be a mistake of government.
    https://www.ft.com/content/040f5210-2099-41ed-86ce-1073af06b9aa

  22. Margaret Brandreth Jones
    December 27, 2022

    Martin Lewis was explaining the actual meaning of inflation. Inflation is the rate of acceleration of prices , so it wouldn’t mean that if it was controlled ,goods would become cheaper but rather prices wouldn’t rise as quickly over time. There are not many examples of prices falling except in deflation. The example Martin gave was government subsidised petrol . All must realise the difference between now and a couple of months ago is approximately 20 p a litre.

    We see in small ways certain goods in supermarkets marked at lower prices for a short time , but balanced with other goods at higher prices .Both Aldi and Tesco attempt to price a few healthy basics to meet most people’s pockets , but then of course cooking these basics becomes a little more pricey. When I was a child at school domestic science classes taught us how to weigh up the whole process of buying, housekeeping with attention to travel , seasonal difference, energy used to cook, and healthy simple recipes. People not used to this type of education are beginning to work it out for themselves and it is difficult for them to have the energy with a lack of time and supermarket trolleys full of pre prepared food to adjust ,however some prepared foods are actually less expensive than going through the whole process of cooking without waste. Then we also need to think about the health benefits of processed foods , does the fact that we have tinned products capturing Vit C for example outweigh the many ‘E’ numbers / preservatives. Domestic science is not as useless as many think and can be applied to the much bigger picture,

  23. Ralph Corderoy
    December 29, 2022

    I may have been wrong in the earlier comment I submitted about the four ways the UK Government could balance the books and how none of them can be achieved but I’m surprised it wasn’t published given it was polite and on-topic.‚ÄāPerhaps it just wasn’t thought seasonally suitable.

    (Tax the rich, cut spending, grow the pie, default on the debt.)

  24. a-tracy
    January 1, 2023

    I missed this post the first time around.
    The State looks far too much just after itself and its workers whilst throwing the rest ūüź∑ to the wolf ūüźļ .
    When public sector pensions make bad investments with their pension funds, nothing is there to stop them taking more from ratepayers and taxpayers to top up their pots. Pots that aren‚Äėt taxed like the little piggies pots outside of the club. Then there are all the ex-public sector workers such as those in HAs that just top their pensions up instead of building new homes or repairing old ones that they bought for buttons from the Council. It‚Äės all just one big payroll/pension with little good, or any growth being achieved other than that taken by theft from taxpayer subsidies.

    It is savers and investors who have all paid for low interest mortgages to bail out the banks. So who are the bond holders in compensation for this (who got the gold – old money people).

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