• The only indicator that reveals inflation’s true fate
  • The Bank of England can’t be serious about fighting inflation
  • They’re doing it on purpose

Hjalmar Schacht believed one simple act is the key to putting inflation back into Pandora’s box. And he would know. The man credited with ending Germany’s hyperinflation saw his autobiography re-titled to Confessions of the Old Wizard by its French and American publishers. Not bad for a Nazi.

Schacht was rather frugal in his professional habits. To the point that his secretary claimed he worked out of an old broom cupboard while in charge of the central bank. And it was from there that he rescued the value of the German currency. Indeed, he raised it from a laughingstock to a legend that lasted until the introduction of the euro.

It wasn’t just for symbolism that Schacht was frugal with everything but his telephone bill and cigar budget. He reckoned civil servant pay was the crucial policy tool to control inflation. And he had to spend all his time explaining this to people on the telephone, as his secretary recalled it.

If you had to spend all day on the phone with the heads of various German government departments, explaining why the value of their national currency depended on them not raising wages, you’d smoke too.

The idea behind this is obvious in hindsight. Aside from leading by example, the civil service’s pay sets the market price in the economy.

Unemployed workers face a choice between working for the government or the private sector. Whoever offers higher wages gets the workers. Thus, the private sector has to bid these workers away by offering wages at least as high as the government’s. So the public sector’s wage levels filter their way right through the economy.

What’s more, when the government creates new money, the civil servants get that money first. This means that prices in the economy haven’t yet adjusted to the higher amount of money in the economy. Civil servants capture some of the seigniorage – the benefit of spending newly created money before it makes prices go up.

And prices do go up.

So, if you want to stop inflation, you’ve got to stop civil servants’ pay increases. Even if this makes them poorer during a period when inflation has gathered its own momentum. (Been allowed to gather its own momentum.)

That’s what Schacht did. And it caused chaos in the civil service, of course. But inflation soon stopped too.

You can read about it all here, in a Fortune & Freedom article from two years ago.

Now, let’s ponder what’s going on over at the Bank of England by comparison…

Hypocrisy doesn’t quite cover the Bank of England’s inflationary ploy

Like Schacht, the Bank of England is supposedly trying to stop inflation. And a few months ago the governor, Andrew Bailey, caused a ruckus by demanding that private sector employees stop asking for wage hikes because they’d fuel inflation.

The irony was of course that people were demanding wage hikes because of inflation in the first place. Inflation that the Bank of England had unleashed with a flood of money and absurdly low interest rates for a frighteningly long time.

But let’s forgive and forget because something far more important is going on now. While urging the public to take wage cuts in real terms (adjusted for inflation), the Bank of England has been busy dishing out wage increases inside the public sector.

Did I mention the hypocrisy?

First it was the bosses who got their pay increases. According to openDemocracy, by an average of £4,300 each. And it wasn’t just a bonus for their abysmal performance in sticking to the inflation target either. It was a proper salary increase.

Now it’s the Bank of England’s staff’s turn. The Telegraph’s coverage says it all, really:

Andrew Bailey has been accused of double standards after handing out inflation-busting bonuses to Bank of England staff despite telling British workers to settle for lower pay rises.

Threadneedle Street gave 4,460 staff “performance awards” in the financial year ending in 2023 – the most bonuses paid out in four years, according to a request made under the Freedom of Information Act.

The highest single bonus paid was worth £22,590 and more than 400 staff were given awards of more than £10,000.

The Bank of England also plans to hand staff a 4pc pay rise on top of a 1pc salary top-up in an inflation-matching deal for 2024 to 2025 as it seeks to retain staff in a competitive jobs market.

It comes after Mr Bailey repeatedly stressed the need for workers across the economy not to take home bumper pay rises to keep a lid on inflation, which rose to a high of 11.1pc in October 2022.

Did you notice the explanation for why the Bank of England had to raise wages? In order to attract labour in a competitive jobs market – precisely the link Schacht warned about.

But you probably didn’t notice it. Because you’re furious about what the article revealed.

We are being taken for fools. And I don’t know whether the emphasis should be on “taken” or “fools”.

The Bank of England is urging the private sector stop raising wages because it’ll fuel inflation, while raising wages for the Bank’s workers causing the inflation.

But I’m not finished yet. Because the irony gets even better… or worse.

Whose money is the Bank of England dishing out?

It’d be bad enough if this was money coming from the Bank of England’s own coffers. But that’s not quite the case…

One programme that unleashed the UK’s inflation was quantitative easing (QE). By creating new money out of thin air, the Bank of England funded the government during its time of need.

Except, of course, when Liz Truss was in office. Then bonds were allowed to hit an air pocket for a suspiciously long period of time. Long enough to cause enough turbulence to get her kicked out of the pilot’s seat.

Anyway, the new money flowing out of the Bank of England and into the economy under QE sent consumer prices in the UK sky high.

The Bank of England denied this would happen. Said it wasn’t happening. Said it was only temporary. Said it wouldn’t get too bad. And then panicked by hiking interest rates faster than an Austrian can hike the Alps.

This created an interesting problem. What if the value of the bonds purchased under QE fell? What if the Bank of England had to sell those bonds at a whopping loss? Could the Bank of England go bust?

Out of the kindness of their hearts, or just believing it could never happen, the UK government promised to indemnify the Bank of England on any losses it might incur as a result of QE. If the government bonds the Bank of England held lost value, and then had to be sold, the government would infuse the Bank with money to keep it solvent.

Now, nobody really knows what it means if a central bank has negative equity – it owes more than it owns. It’d send a normal bank bust.

But we do know that the government has been infusing rather a lot of cash into the Bank of England under the indemnity. Enough that “UK Refuses to Publish QE Indemnity Due to ‘Market Sensitivities’,” Bloomberg reported this year. And you laugh at China for not publishing its economic statistics when they go sour…

The bill in July of 2023 was £14.3 billion and £30 billion combined in the 11 months before that. It was also vastly more than forecast.

So, the Bank of England could be getting drip fed such a dangerously high rescue package that it would spook the market! Then recycling the money into its own wages! Which is fuelling higher inflation. While demanding the rest of us don’t ask for higher wages to account for that inflation.

It’s not fit for the circus. Unless…

They’re doing it on purpose

If you’re wondering how on earth the government budget has room for tax cuts in a year of miserable economic growth and terrible inflation, you’ve missed what’s really going on.

Inflation bails out governments. In a variety of ways. After the pandemic’s spending policies, central banks around the world knew their governments were wobbling on the edge of the fiscal cliff. A dose of inflation is precisely what they needed to get things back under control.

Shoving people into higher tax brackets and collecting a higher percentage of any wage increases they might get because of inflation is just one example of how governments benefit financially from inflation.

What’s known as seigniorage is another, as mentioned earlier. Inflating away past government debt is the classic one. It all added up to rescuing governments from their precarious financial position. Right up to the point that they are cutting taxes while inflation is still high!

The fact that central banks keep interest rates low for suspiciously long as inflation roared was the give-away that this was a deliberate policy. And it seems to have worked.

No matter how badly the British public is being treated by its central bank, the public just don’t seem to respond.

That’s why you need to take action yourself during times like these. Don’t wait for democracy to install a German Bundesbanker as governor of the Bank of England. (There are plenty who have been elbowed out of the European Central Bank, which has even more dodgy monetary policy, after all.)

Instead, learn how you could profit from central bank machinations and manipulations. It’s what we specialise in.

Until next time,

Nick Hubble
Editor, Fortune & Freedom