2007 - 2022

Mark Carney and Magic Money


WHAT is the Bank of England up to? Governor Mark Carney has never been one to follow fashion – he prefers to make it. So it is not any surprise he is bucking the trend among global central banks to slash interest rates to near zero and pump vast amounts of new money into the system. What is Carney waiting for?

First some background. The world manufacturing and trading economy is grinding to a halt. Basically, there was an investment boom in 2016-17 – fuelled largely by Trump’s tax cuts – that resulted in a bog-standard over-production crisis. We are now at the top of the wave. US, German, Japanese and Chinese manufacturing giants aren’t able to shift the product of their new capacity. So, profits are waning, and fresh investment is drying up. Result: global trade flows are slowing.

One response is Trump’s trade wars with the rest of the world, but especially with China and the EU. The Donald has an election to fight next year and wants the US economy to keep growing. One solution is to impose tariff on imports, to boost local America demand. The fly in the ointment is that these tariffs (import taxes) are paid by American consumers, hurting their effective spending power. So, we need another solution to keep the economic fires stoked.

This is where central banks come in. Trump has been pressuring the (supposedly independent) Federal Reserve to cut interest rates and make it cheaper to borrow. He hopes that will stimulate both consumer spending and business investment. The Fed has duly obliged. It is pumping $75bn into the so-called overnight money market, which is jargon for making it cheap for banks to lend to each other. The official Federal Reserve interest rate – that sets the trend for all US interest rates – has been cut twice this year and will probably be cut again soon.

Where the Fed treads, other follow. Central banks in Japan, India, Turkey, Brazil, Australia and New Zealand have cut interest rates. So far, these actions have not reversed the decline in manufacturing – but they have prevented a deeper slump. This is especially true in Europe where the German economy is tanking because of the loss of Chinese markets.

The European Central Bank (ECB) is keeping its official short interest rate at zero. It is also printing euros to buy 20bn a month of government bonds. Result: it has driven the yield on these bonds into negative territory. In other words – and daft as it seems – investors are now paying the German government to lend to it. And not just Germany. Governments lending at negative rates include France, Italy, Spain, Ireland, Portugal, Poland, Romania, Bulgaria and even Greece.


Why pay somebody to lend them money? Because pension funds and the like need a guaranteed stream of income into the future. If company profits are falling (that global downturn we mentioned) then all you can do is lend to sovereign governments. True, the capital invested in those state bonds is losing value over time. But investors have to hope that sometime in the future, things will right themselves when manufacturers make profits again.

The trick in all this is that if governments can borrow at negative rates, they should be borrowing like there’s no tomorrow – either to invest in infrastructure, or cut taxes, to restart growth. That is what Trump intends to do in the run-up to the 2020 presidential election. But things are not so simple in the EU.

The German government and the German central bank (the Bundesbank) are dead set against more borrowing and spending – even if investors want to pay for the privilege. Why? In part, there is the historic memory of the inflation of the 1920s that ushered in Hitlerism. But I am not keen on this as the true explanation. After all, German bankers made a fortune out of the Nazis. Those that didn’t ended up in the gas chambers.

A better explanation is that the Bundesbank is well aware that the likely lenders to Angela Merkel’s government are private banks in Germany, France, Italy and Spain – which are as ropey as anything. A German government borrowing spree would likely add to the pending insolvency of continental Europe’s banking system, invite oodles of dubious cash from Putin’s Russia, and put the country in debt to China. Better then to sit on Germany’s cash mountain and let the rest of the EU shudder to a halt.

As you might imagine, such German isolationism is not going down well in the rest of Europe. Mario Draghi, the soon-to-retire boss of the ECB, has been calling on Germany to spend more, to get the European economy going. His successor, the ubiquitous Christine Lagarde fresh from running the IMF, will certainly ramp up the pressure on Merkel and co. to start spending more.


Which brings us back to the Bank of England and Mark Carney. The Bank not only refuses to join in the global move to boost manufacturing, it is even considering a further restriction on car loans at a time when the UK vehicle manufacturing sector is tanking because of Brexit fears. Carney’s insouciance has provoked the ire of uber Brexiteers such as Tory MP (and rich investment advisor) John Redwood.

What is Carney’s game plan? Partly, I think, he is keeping his financial powder dry to act if there is a hard Brexit. If so, this is risky. Why not boost the economy now to reduce business uncertainty? Partly, Carney is showing the Brexiteers they will have to come to him. Theoretically, Carney is about to retire. But Boris seems in no hurry to let him go, given the crisis. If it all goes pear-shaped, Boris can then blame Carney.

My best guess is that manufacturing in the UK – unlike in America, Japan, China and Germany – is of trivial concern to the City banks that Carney represents. Mr Carney is much more concerned with defending the stability of the banking system than boosting economic growth. After all, he needs a new banking job when he finally quits Threadneedle Street.

Comments (16)

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  1. Derek Henry says:

    A much better article George. More factual than previous ones.

    However, this nails it.


    Do not forget about the interest income channels. When you cut rates you strip interest income out of the economy via the interest income channels. Why both Japan and EU struggle to inflate.

  2. Derek Henry says:

    More fun in the Japanese bond markets helps to explain what is happening in Japan.


  3. Derek Henry says:

    Carney is a liar and a fraud a neoliberal globalist.

    MMT’rs knew this in 2009 a decade ago. Scott explains it here.


    In Canada at the time yes Canada when Carney was there, reserve balances had been effectively zero for over a decade, and bank lending continued as it did anywhere else. Canada’s inflation also had been similar to that of the U. S.

    In Japan, under the so-called quantitative easing regime of 2001-2005, reserve balances reached around 15% of GDP, and the monetary base (reserve balances plus currency in circulation . . . often termed “high powered money”) reached 23% of GDP. But Japan has, if anything, experienced deflation during and since this period, which is not surprising, since—again—the rising quantity of reserve balances did not enhance Japanese banks’ abilities to create loans.

    In the U. S., by comparison, reserve balances had reached about 6% of GDP, with the monetary base rising from about 6% to about 12% of GDP since September 2008. Those fearing rising Fed reserve balances apparently haven’t noticed that an increase in reserve balances about three times the size in terms of GDP already happened in Japan, with none of the effects that have been predicted for the U. S.

    In short, don’t fear the rise in the Fed’s reserve balances. It is not inflationary because the money multiplier view, found in the textbooks, doesn’t apply to the flexible exchange rate monetary system of the U. S. The U. S. may indeed experience rising inflation in the future (or it may not), but it won’t have anything to do with the quantity of reserve balances banks are holding.The

    Carney lied when he injected reserves into the system after the crash to help bank lending and he knew it.

  4. Derek Henry says:

    Fifteen Fatal Fallacies of Financial Fundamentalism A Disquisition on Demand Side Economics

    William Vickrey

    October 5, 1996

    All myths that we are told every day are truths by the neoliberal globalists.


  5. Derek Henry says:

    If you want to know what is happening in the US.

    Mike Norman and Matt Franko are the only two people on the planet who get it. All to do with leverage ratios.
    They both warned what would happen 2 years ago.


    Every video nails it !

    1. florian albert says:

      You must have noticed Derek that nobody is engaging with you here. It is just possible that they are studying the links you provide and have been converted.
      My hunch is that they are – like me – somewhat put off by the amount of detail in your links.

      Most people know nothing about MMT; they do not even know what the letters stand for. (The fact that you have failed to convince Paul Krugman makes me wary.)
      I think you should keep that in mind in your posts on Bella Caledonia.
      Telling us that there are ‘only two people in the planet who get it’ is more likely to convince people that it is unimportant than otherwise.

      P.S. I am far from clear what leverage ratios are and I am fairly confident that this lack of understanding is widespread.

      1. George S Gordon says:

        Hi florian,

        You should pay more attention to Paul Krugman’s tweets. Here is a thread of interest – https://twitter.com/paulkrugman/status/1182612916496949248?s=20

        In the thread he says “So maybe the first thing to say is that Olivier Blanchard, who tells us with great authority that debt risks are exaggerated, is not a millennial. Neither, of course, are Larry Summers or yours truly. All of us have concluded based on data and hard thinking that debt isn’t the kind of existential threat a lot of Beltway types claim that it is. It’s not just that with interest rates below growth rates, debt won’t snowball. Also, public debt is NOT borrowing from the future.”

        1. florian albert says:

          Thanks for the link. I do not find Twitter a good medium for detailed discussions.

          It is clear that interest rates have remained at rock bottom for over a decade. Not many people anticipated that. Keynesians, like Krugman, have concluded that debt

          is less of a threat than it might have been previously. My hunch is that interest rates will over time return to ‘normal’ levels.

          Also, it depends on what you use the newly run up debt for. If, as in the recent past, it is used for property speculation it will end badly once more.

          Further, the USA can afford to indulge in debt creation in the way that most countries, including the UK, can not.

          1. George S Gordon says:

            On debt, Krugman is (very) grudgingly falling into line with so-called unconventional economists of the MMT school, one or two of whom predicted the GFC.

            The debt being talked about is actually government spend, which should be directed at things like social policy and the Green New Deal. Not at property speculation, and certainly not the QE (~£450bn in the UK) which has inflated the assets of the financial crooks.

  6. florian albert says:

    George Kerevan notes that Mario Draghi – head of the European Central Bank – has been unable to get the German government to spend more as a means of helping out other countries.
    This highlights the limits of European integration. The ECB is impotent in the face of Germany opposition. Germany and the Bundesbank act in German national interest, not in the interests of the EU, let alone the world economy.
    German self-interest coincides with that of a number of near neighbours whose economies are in sync with Germany’s. For many other economies especially in southern Europe, this is seriously harmful.
    If an independent Scotland were to be part of the EU, it is more likely that it would be one of the strugglers.

    1. Me Bungo Pony says:

      “If an independent Scotland were to be part of the EU, it is more likely that it would be one of the strugglers”.


      1. florian albert says:

        For similar reasons that Greece, Italy and – to a certain extent – France struggle.
        Scotland’s specific problem is that it remains, to a depressing degree, a low skills-low wage economy.
        There are healthy sectors, tourism, whisky and areas of high tech, particularly around the old universities.
        The huge drag is the post industrial areas in Central Scotland.
        (Ireland has surged ahead because it lacked this drag factor.)

        It is now well over a generation since the Industrial Economy collapsed and large areas have failed to replace the high skill-high wage jobs which had been created.
        Much of the problem has been a lack of imagination, though the huge expansion in Higher Education has been a serious error.
        According to George Kerevan, Edinburgh has 80,000 Higher Education students in a population far below half a million.

  7. Derek Henry says:

    Of course when you join the Eurozone because the way it is set up bond vigilantes are real. That is how the neoliberals control your fiscal policies.

    So the ECB control your monetary policies and the bond vigilantes control your fiscal policies. Making the Common Weal library and job guarantee redundant.

    Neither of which is true of you have your own Central bank and currency.


    Of course as we all seen with Italy recently. If you get any progressive ideas the bond vigilantes will get you as the ECB threatens not to help you.


  8. Derek Henry says:

    When the SNP produced the Growth Commission it was all about being part of this


    A nonsense, a complete fraud all built on the back of neoliberal myths. That governments are like households.

    What the SNP did not say in the report was how they were going to destroy the household savings many of us enjoy. Reducing the government budget deficit to some magic number that means nothing that only destroys the surplus households have.

    Scottish household savings and pensions would be decimated just so the SNP could join the neoliberal globalist club and hand all the power to Brussels.

    Of course Japan over the last 40 years has shown quite clearly how outrageous these myths are that flowed through the Growth Commission like Blackpool rock. Seep through every crevice of the EU rules.


    Analysing what the EU commission told Italy. Gone would be the common weal library, Gone would be the Green new deal, Gone would be anything that threatens to push the Scottish government deficit and thus the private sector surplus above 3%. Scottish households and business are not allowed to share a surplus more than 3%.


  9. florian albert says:

    George S Gordon

    In reality, in Scottish society, money spent on ‘social policy’ may help lead to property speculation. I annoyed my friends, who were teachers in January 2001, by telling them that the recent 23% pay increase for teachers would have a bigger impact on house prices than on educational attainment.
    Looking back, I think I called that right.

    Social policy tends to mean employing middle class people to sort out the problems of non-middle class people. It is well intentioned but has a poor track record of success. When Charles Gordon was asked why his period as Labour Leader on Glasgow Council had achieved so little he blamed the ‘poverty industry’; people who had a vested interest in the economic and social status quo. It is hardly a surprize that Gordon absolved himself but the group at which he pointed the finger is telling.

  10. SleepingDog says:

    Did the European Investment Bank just chicken out of divesting from fossil fuels?
    Not that I have heard of them, nor am I sure that this relates to the main points of the article, but it seems relevant to how there may be conflicts between how some see the EU project’s economy progressing, or not, and how powerful lobbyists for corporate interests, even logically-waning ones, are.

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