The Bank of England recently released plans to combat weakness in the economy following the UK’s vote to leave the European Union, more commonly known as Brexit.
Their plan was to lower interest rate to 0.25%, lend £100 billion to banks, buy back £60 billion in government bonds and buy £10 billion in corporate bonds. These are staggering numbers for the Average Joe in the street, and you may believe that this mass exchange of money will help the citizens of the UK in this uncertain economic time.
This ‘plan to help the economy’ is really only going to help a small % of the population. Allow me to explain…
The Bank of England, essentially on order from the British government gave the commercial UK banks, like HSBC, Lloyds TSB and Bank of Scotland, what amounts to a near interest free loan. Think how manageable your monthly mortgage payments on a 100K mortgage would be with 0.25% interest. Now think would you could do with the likes of the combined £100 billion that the government has just provided the banks.
This money is then put to work by the retail banks. They put into effect the old saying; ‘use money to make money’. They do so by a practice called fractional reserve banking. Fractional reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, and holds reserves that are equivalent to a fraction of its deposit liabilities. Reserves are held at the bank as currency, or as deposits in the bank’s accounts at the central bank.
So they then take the money we have deposited, and lend it back to other customers at far higher rates for things such as mortgages, personal loans and credit cards.
This newly generated money ensures that the rich elites in the banking industry are able to direct it into financial assets such as stocks, bonds and real estate, generating more income for themselves.
This newly created money then trickles down into the general economy, but the increase of money into the financial system means that the cost of living will go up, as there is more money chasing fewer foods. And so prices go up for commodities like energy (oil and gas) and household goods, particularly food.
In short, the banks make money regardless of the state of the economy thanks to their co-operative relationship with the government. And the average man and woman in the street will be paying more.
It’s a rigged system people!