Well, this is a way to increase the rate of inflation, certainly

0
9

I think your analysis is completely wrong. But let us consider for a moment one consequence of this. That’s in the cost of what are called central bank reserve accounts (CBRAs).

These are bank accounts held by commercial banks and some other financial institutions in the UK with the Bank of England that have two functions.

One use is to allow banks to pay each other, which they do through these accounts, which means we can in turn pay people who have money in other banks. This makes them essential to the functioning of the banking system.

The other use is to help the flow of money to and from the government. For the past 13 years, that flow has largely been from the government to the economy. Quantitative easing created nearly £900bn of new money. That money is transmitted to the banking system through these accounts. As a result, their balance is close enough to that figure right now. The banks hold this money that the government created on deposit with the Bank of England. This is because all money is debt, and when the Bank of England created this money, it created a liability owed to commercial banks which they consider to be bank deposit accounts.

By convention, the Bank pays interest on these deposits. Until very recently, it was paid at the base rate of 0.1%. The cost was less than £1bn a year at the time: it was of no consequence.

However, if the bank’s base rate rises to 4% or even 5%, this cost will skyrocket. The cost could approach or even exceed £40bn a year.

So let’s not raise the interest rate and leave it at 0.1% when the standard rate goes up to 4%.

Well, okay, but what’s the effect of that? Those central bank reserves are part of M0, or is it M1? But they are tight money. If the banks rush in and lend them, then they become broad money and not in the same step. The speed of its circulation is a thing of time. Thus, the ample money supply would increase by the amount banks used plus the number of times they used it in a year.

A larger broad money supply is just what increases inflation.

Now, if a bank can earn 4% by lending it and 0.1% by leaving it in the central bank account, what is it going to do? Lend it, increase the ample money supply and create inflation.

oops!

Now of course we can prevent that from happening as well. We do that by reducing the amount of that money in existence. That is, we invest QE.

So we really have a choice. Pay a different and lower interest rate on the reserves and have QT, quantitative adjustment, or pay the market interest rate on the reserves.

Funny that Spud doesn’t realize this, isn’t it?

LEAVE A REPLY

Please enter your comment!
Please enter your name here