It’s difficult to know just how much money was created to bail out the system after the global financial crisis (GFC) of 2008, because the money takes so many different forms.
During the Conservative leadership contest last year – remember that? It sure seems a long time ago – the figure doing the rounds was £1trn. We hear the words “billion” and “trillion” bandied about so readily these days, that we forget what large sums of money they really are.
There are 12 zeros in a trillion. A trillion looks like this: £1,000,000,000,000. If you had spent a million pounds every day since anno domini, you would still not have spent a trillion pounds.
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In short, it’s a lot of money.
Money is a political tool – that’s clearer than ever
So one trillion would have been a lot of cash to spend on the 2008 bailout. However, Full Fact, the fact checking charity, says the cost to the government was only (!) £137bn – or £137,000,000,000.
This is a number more or less confirmed by the Office for Budget Responsibility, which says that the cash outlays by the UK state on financial sector interventions during the crisis was £136bn. Note the use of the word “cash”. Not a single note changed hands.
But there was the quantitative easing too. £375bn, about 20% of GDP, was created by the Bank of England to buy assets. Post Brexit – remember that? – the figure rose to £435bn.
Don’t forget that money is created by borrowing, and the Bank of England also cut borrowing costs to the lowest level in its 324 years of existence.
And, says the Bank of England, post GFC, all that money creation had little or no effect on wealth inequality. Of course not.
And now, amid the coronavirus crisis, the Bank of England’s QE target has gone up from £435bn to £645bn. So that’s roughly 50% of the post-financial crisis plus Brexit QE combined, all being thrown at coronavirus.
Something similar is going on across the pond. Between 2008 and 2016 the US Federal Reserve’s balance sheet expanded by $3.6trn. But just last month another $2trn of stimulus was announced.
The figures are extraordinary, the definitions obfuscatory. And every central bank is at it.
Markets are manic
If it wasn’t clear before, then it certainly should be now. Money is a political tool. Governments (and, independent or not, a central bank is merely an arm of the government) use it to engineer outcomes.
In malevolent or incompetent hands you get Zimbabwe or Venezuela. In the more benevolent administrations such as the UK, Europe or the US the outcomes are nothing like as tragic, but the unintended consequences are still manifold and far from positive. (I’ve written about them enough times already that I don’t need to reiterate the point here).
But the point is that with every pound, euro or dollar that gets printed, the state grows. And the global reserve currency, the US dollar, is not just a political tool at home but internationally too.
As for how all this intervention affects markets – I don’t think I’m alone in saying my head is hurting trying to second guess coronavirus. This week the markets appear to have decided it’s not as bad as all that and the worst is over. Tell that to somebody working in a hospital, or who’s lost their livelihood. It does not feel like that on the ground.
But markets are always ahead of the game, runs the theory. Every bit of news, every development, every opinion, every conceivable outcome is priced in.
Will markets decide something different next week?
Rallies such as we have seen this week – with 5% up days in major indices – are not typical of bull markets. They’re the sort of things you see in bear markets. But an extraordinary rally is an extraordinary rally and it’s not the sort of thing you want to miss out on, particularly when the alternative is to hold cash which is so patently being debased.
Then again, the panic buying in stocks isn’t exactly tempting either. “Quick, quick buy these companies which so obviously aren’t going to be able to pay a dividend this year! Buy this company whose business model has been so obviously annihilated! Or maybe buy this company which is about to get all that yummy bailout money!”
And of course there’s the government bond market at all-time highs. What could possibly go wrong there?
Why you should own gold – and bitcoin
Wouldn’t it be nice to have a safe haven from all of this? Somewhere you could put your money and know you won’t lose it? It doesn’t have to make you rich, you just want to protect what you’ve got.
Fortunately, Mother Nature has provided. Stone Age man used it to store wealth, and display it – and you can do the same (though I would recommend more of the storing and less of the displaying).
If you’re a regular reader of this column you will already own gold, perhaps from as far back as the noughties, or even before. That 2013-2015 period was horrible, but cripes it helps you sleep a lot better today, knowing you’ve got some locked away with the pasta and loo paper.
And just as Mother Nature has provided, so has Mother Technology. Bitcoin is apolitical money, immune to the political weaponry and debasement of government currencies. The digital currency can’t be printed and it doesn’t have any central bank backing or debasing it.
We have two forms of money then that you can’t “quantitatively ease”, two forms of money outside the system, two stores of wealth. The case for gold and bitcoin currently looks extremely strong.
As the consequences of Covid-19 and all the associated money-manipulation start to make themselves felt in the years ahead, I rather think that gold and bitcoin are going to have an important role to play in immunising you from the fallout. For more on buying gold, have a look here. And for more on getting to grips with bitcoin, here’s my beginner’s guide.
Daylight Robbery – How Tax Shaped The Past And Will Change The Future is available at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere. If you want a signed copy, you can order one here
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
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