Central banks steal from the poor to give to the rich…

 Simon Caufield in London writes:

“If you’re a Monty Python fan, you may remember the Dennis Moore sketch from 1970. He was a kind-of mixed up Dick Turpin character who stole from the poor to give to the rich. And that’s exactly what Mervyn King, Ben Bernanke and Mario Draghi [of the European Central Bank] are doing today.

“Each has his own version of quantitative easing (QE). Mervyn prints money to buy gilts from bond investors. Ben prints money to buy government bonds directly from banks. Mario prints money to allow banks to buy government bonds. And the banks must post them as collateral with their National Central Banks (NCBs). But the sovereigns can’t repay. And the banks are undercapitalised. So, in effect, the NCBs own the bonds just like the Bank of England and the Fed.

“In all three variations of QE, the central banks are buying government bonds that are worth way less than the price they’re paying. And they’re buying them from financial institutions. In effect, they’re subsidising anyone who sells their overvalued bonds back to the central banks. That means banks, insurers, pension funds and wealthy investors.

“Who pays the subsidy? Well, the central banks would bear the losses initially. But ordinary tax payers provide capital to the central banks. You don’t hear much about this today, but you will. If the economy recovers, the central banks will have to sell their bonds to manage inflation. By then, bond yields will be higher. So they’ll take a loss on every bond they sell. If they have to sell a lot of bonds, and the losses are large, they’ll need to raise more capital. That can only come via government from taxpayers.

“If the central banks don’t sell enough bonds, inflation could get out of control. So everyone will bear the cost of central banks’ subsidising the rich in the form of higher prices.

“The TV news is full of stories about social unrest on the streets of Athens. I’m surprised there’s no revolt by savers and tax payers in London, Berlin and Washington…”


*** Buy gold and buy sound currencies …

Simon is recommending readers of his True Value letter buy sound currencies and gold to protect themselves the inflation he sees coming. In his latest issue, he writes:

“Gold is the soundest currency of them all. It can’t be printed. It’s not controlled by a heavily-indebted government. Owning gold does not expose you to counterparty risk. And right now, it’s a good substitute for stocks. They’re rising, despite being overvalued, because the central banks are printing money. Well, gold gives us a similar exposure – but it’s not overvalued.”