Given the lack of panic in my reader mail inbox after the last three days’ worth of articles, I’ll have another go at explaining why central banks going bust matters. Our new investment director John Butler was the inspiration with his feedback to yesterday’s edition:

Currency devaluation is a likely effect of the “downward spirals” of which you write.

The entire central bank/government financing charade is really just about accounting identities. Whoever is at a loss can always be made whole by the creation of new money.

But as that new money is created, it simply debases the currency rather than doing anything to foster real production or economic growth.

If all you have is a money-printing machine and every problem looks like a lack of cash, you’re going to use the machine.

Pandemic? Print money!

Supply chain crisis? Print more!

Energy crisis? Keep the presses running hot!

Government going broke? Flood the bond market with more money!

That’s also the great irony of inflation. People who live through it complain about a lack of cash, not too much of it. They think higher prices require more cash to be paid, not that cash deluges push up prices.

Historically speaking, the “currency devaluation” and “downward spiral” that John referred to first became obvious in foreign exchange markets.

If your pound is worth less in dollars from one day to the next, then something about the pound or the dollar must be changing, rather than the price of the groceries you buy. They’re both just money, after all. But if their value is changing relative to each other, this exposes what’s really going on. It’s a devaluation of your money, not an increase in the prices of the things you buy.

If it’s possible for pound users to hold dollars to escape rising prices, then the social ill of inflation is easily exposed. You realise you’ve been running on a hamster wheel connected to a money printing machine over at the central bank or treasury by using the currency they print.

That’s why governments hate speculators. Via financial markets, they hold politicians and central bankers to account for bad policies as they happen, or even before the consequences are obvious.

Historically speaking, if a country began to follow an unsustainable and downright dodgy path fiscally and monetarily, its currency would crash relative to others and it was all very embarrassing. This stopped politicians from doing it.

But these days, the whole world seems to be pursuing the same mad policies. And so currencies are not crashing relative to each other. Not in the same way, anyway.

Instead, we have had asset prices surge. People have to invest their savings to escape inflation. They buy something, anything, to stay out of money.

Property is the best example given the poor performance of stock markets for decades now. Property has become unaffordable because so much money flows into it. Where does this flood of money come from? It’s inflation from central banks, we just don’t call it that.

But underneath it all, the same mechanics are playing out. Especially now that we have what you and I recognise as the usual inflation.

The story of how inflation plays out is getting so familiar you think we’d learn our lesson and avoid resorting to money creation to solve economic problems.

I mean, do you remember when the idea of quantitative easing (QE) was a taboo and everyone was outraged?

Do you remember when we thought we had rules against central banks financing governments because of the consequences this would lead to?

These days, financial markets and governments collapse at the idea of money not being printed anymore…

It’s not like we didn’t learn what the consequences of using money creation in this way would be. Historically speaking, we even learned the hard way. And yes, we can include the UK in that statement…

John Maynard Keynes published his famous “The Economic Consequences of the Peace” in 1919. It criticised the war reparations demands in the Treaty of Versailles, which Keynes had attended the writing of as a representative of the British government.

The simple version is that the demands were too heavy. And this burden would eventually lead to… well, you know what happened next.

You can contrast this episode with the Marshall Plan, which helped rebuild Germany after World War II. That worked out quite well, comparatively speaking.

Of course, a key consequence of the Treaty of Versailles was Germany’s hyperinflation. Germany’s industrial and coal-producing regions in the West were occupied by the French, and the Versailles reparations were to be paid in gold-backed money, leaving the Germans with only one tool to keep the government budget ticking over: print the money.

Giving up on coal and industry while printing money to fund the government? Yes, I’m sure all this sounds rather familiar to you…

Which is my point, of course.

Once the financial position of a country gets beyond a certain point and it begins to resort to printing money in order to keep itself financed, you’re on a mighty slippery slope to disaster.

Yesterday’s edition explained one source of lubrication – the connection between governments and central bankers dragging each other into going bust. But we’re following plenty of other historical scripts thanks to net zero, war and trade wars.

But I want to address the underlying issue today. It’s a version of Goodhart’s Law – if a measure becomes a target it ceases to be a good measure. My own version is that, once something becomes a policy tool, it ceases to be good at doing whatever it was supposed to do.

Diesel is a good example. Remember when diesel went from being a fuel to being part of the campaign to go “green”. Green subsidies were thrown at it. That didn’t go so well.

Biomass is another example. It’s a major source of green energy, especially in the EU. But its meaning has shifted to the point where the Europeans are burning down ancient forests instead of planting them.

Something just seems to go haywire with whatever governments set their sights on.

My argument to you today is that, with the advent of using monetary policy to control the economy, the government converted money and debt into a policy tool. This undermined the ability of money and debt to function as they’re supposed to.

You can’t save in terms of money – it gets inflated away. You’re not allowed to use too much cash to make a transaction in many jurisdictions. Try and send your money to Russia, a Canadian trucker protest, or a cryptocurrency exchange and you’ll discover whether it’s really yours to spend.

The next stage of “innovations” in money are even more extreme. Hoarding central bank digital currencies (CBDCs) like Britcoin won’t be allowed and there could be limits on how much you hold.

Then there’s the devaluation of wages, with wage growth lagging behind inflation. So while money isn’t worth what it used to be, neither is labour, thanks to the inflationary experiment.

That’s money. What about debt?

The recent spike in central bank interest rates has pulled the rug out from underneath people using debt to finance their purchases of homes and business investments.

That’s a deliberate central bank policy – your welfare is being used as an economic policy tool. People’s ability to buy and stay in one of the most basic human needs – shelter – is at the mercy of central banks. People’s ability to finance their businesses which they live off is another policy tool.

If governments confiscated your home and gave it to the bank, there’d be protests. If central banks raise interest rates enough to achieve the same thing, it’s fine…

The central banks’ climate change plans are another example of this.

We are living in an economy where our money is used by governments against us. It isn’t money, it’s something else altogether now. But what?

Let me know: [email protected]

Nick Hubble
Editor, Fortune & Freedom