THE GULF BETWEEN RICH AND POOR

well into the protest season. The long run-up to the election period has

We are

been characterised one protest after another

-no-deal Brexit, climate change,

arms sales, Tommy Robinson, police brutality, capitalism, Trump's visit, fracking,

Catalan, Hong Kong and Eritrean sympathisers, and so on... and on. I'm not

knocking the protesters, but neither am participating. Some of them have

understandable grouses; others are off the scale of any sanity test.

One regular target today, of course, is society's tolerance of billionaires in the

midst of poverty. This theme looms ever-larger in the current pre-election

debates. It is proving immensely popular amongst rabble-rousing populists

mainly because such a handy weapon is accessible to any TV debater feigning

faux-outrage at the very notion of someone having a billion pounds. After all, the

injustice of it is both implicit and obvious. No further elaboration is needed.

By now I am quite accustomed to grappling with this one since it is so

triumphantly wheeled out by my own children and grandchildren in our

domestic debates: "No one should be allowed to earn a billion pounds -in fact no

one should be allowed even to have a billion pounds.

Yes, but kindly think about it

The emotional force of these assertions is usually tempered when I ask who is

the villain doing all this "allowing"? Why, in the face of such manifest iniquity, is

this "allowing" tolerated? And ifit is all so obvious, why don't the protests seem

to have any effect - beyond allowing the protesters to feel better about

themselves?

The usual knee-jerk response is invariably to declare that it's all the fault of

government", which simply shouldn't allow it. When I ask what would happen

to all the money that has been disallowed and cannot therefore be paid, the

response is that the government should keep it for the benefit of everyone. In the

course of further judicious dialogue they come to understand, and agree, that

what they are proposing is potentially indiscriminate in its incidence and

confiscatory by its nature - and therefore objectionable. But this circular debate

is without true resolution for one reason: the argument is focussing on a state of

affairs simply considered hateful by protesters, while no attempt is made by

them to understand its causes.

So here we are again

I agree with the protesters - paying out billions, to anyone, is obscene. But how

did all that money come into being in the first place? The idea that any legitimate

commercial enterprise can generate funds in such stratospheric volumes is

improbable if you are talking about real money, But please remember that when

governments are contemplating what to do about systemic financial failure that

their own policies have caused, they move into panic-mode and behave

irrationally, repeating the very mistakes that led to the present mess. At such times the most readily accessible remedial lever is that of the printing

"t o te printng press or,

more accurately, the computer key.

Let the magic commence

So government, through the agency ofits Treasury, instructs the central bank to

"buy" large swathes of first-class securities from other financial institutions

bonds issued by government itself (treasury bills) and bonds issued by insurance

companies, pension funds and commercial banks. The sellers of these

instruments are paid in new money, conjured up by the central bank

electronically.

The economic case for this curious process is that the entry of large quantities of

new money will cause interest rates to fall, thereby reducing the cost of

government's own borrowings while encouraging businesses and individuals to

enter into more debt, at the same time stimulating aggregate demand - which

has always been the Keynesian mantra for economic growth, and which I hope I

managed to debunk in my last essay.

But whether this monetary expansion actually achieves any of these things and

if so, at what cost, is not germane to our protest about billionaires. There can be

no doubt, however, that what it has undoubtedly achieved is the injection of a

huge amount of money, conjured out of thin air, into the money supply. It is also

plain that while this new stuff can't possibly be real money, logic tells you that

deliberately inflating the money supply will cause prices to rise - relatively

speaking and not necessarily all at once, but it must happen, as night follows

day.

How relative price rises are triggered

Those changes in relative prices occur because the change in money supply has a

specific injection point in time, and therefore has a specific flow path through the

economy. The first recipients of the new supply of money are in the privileged

position of being able to spend extra pounds or dollars before prices have

increased. But whoever is last in line receives their share of new

pounds after prices have increased.

I'm sure you followed that, but I'1 say it again: once created, the new money's

primary beneficiaries are those able to access it most easily - major companies

and banks that can tap into it in the form of loans with which they can in turn

make investments, and all the while the new money is filtering down through the

economy.

If the currency is suspect, buy assets

But it's obvious that recipients of fake money willinstinctively wish to get rid of

it by converting it into assets, mainly property, equities and luxury goods such as

cars, planes, jewellery and precious metals. Yet as the new money filters through

the system, relative prices will start to rise, for everyone, including poorer

sections of the community that the new money has not yet reached. Because the new money was never real, this process of relative price rises

effectively amounts to a transfer of wealth from the underprivileged last

receivers to the wealthy first receivers. This is why inflation is referred to as a

non-legislated tax: government has seized purchasing power (rather than

physical bills) from its citizens without legal approval. My preferred term is

daylight robbery!

How it ends up

So think about it, but keep it simple: on the one hand we have the privileged few

who now find themselves in blessedly close range to newly created tranches of

undreamed of wealth; on the other hand are the residual classes of society who,

despite deliberately confected statistics designed by government to confound us,

find that their money's purchasing power is relentlessly diminishing.

To revert to Frederic Bastiat's theory of the seen and the unseen - this deeply

polarized society is what our protesters see; the process by which it comes about

is the unseen, and that alone is where remedy lies.

Next time electioneers knock on your door bleating about the widening disparity

between rich and poor, tell them to mount a protest - about printing money! See

whether they can connect the dots.

Footnotes:

(i) The filtering down process described above is known as the Cantillon effect, first clearly

explained by the Irish-French economist Richard Cantillon.

(i) The money-creating trick described above is called 'quantitative easing' and it is truly as

terrible as it sounds. I shall not mention who first thought of it because, in its various guises, it

has been destroying wealth for a couple of thousand years, at least!