Respectfully, Lord Keynes and J K Galbraith would not agree with you regarding the cost of money.

Maybe you need to open your mind to the reality of money.

Richard

Once the Government underwrote the depositors then nationalisation was inevitable. That it took so long to secure the related assets may well demonstrate similar incompetence that you see when Governments print money, but is not the same thing at all.

And the suggestion that money has no cost is the most ludicrous half-witted theory I have heard in a long time. If you really believe that then please explain why most people do not have enough of it? After all if it is free then surely there would be no shortage!

Money in fact has no cost. We have been bamboozled into thinking that it does because our current money is created and issued as Debt.

Credit has a cost, consisting of system costs and default costs.

Capital has a price, consisting of the return investors are prepared to pay commensurate with risk. Which is as low as 1.5% for 50 year index-linked gilts and 3% for (non index-linked) US Treasuries.

Neither the Cost of Credit nor the Cost of Capital bears any relationship to a Central Bank set rate of Interest unless Money is issued as Debt, and even then, as we see, the relationship may break down.

Currently our banking system manufactures credit - in the case of private banks, this is interest-bearing credit - based upon an amount of Capital set by the Bank of International Settlement.

But it can be manufactured - as the Bank of England is doing - equally well by a central Bank directly, as non interest-bearing credit, backed by an implicit government guarantee.

We see in Zimbabwe the problems that can arise if money is minted ad lib and goes into circulation. An inflation tax, as you say.

It is the deficit basis of our money that causes asset price inflation.

However, where such credit is created as interest-bearing loans (as it customarily is) it is obviously more costly, and hence more inflationary, than if it is issued directly to “capital users” under the supervision of (say) a monetary authority, or with banks as managers of credit creation.

The money created by the Bank of England in the Northern Rock case is not going into circulation, and nor is it being used to “bid up” asset prices.

It is simply extinguishing existing bank-created interest-bearing debt and remains “tied up” in land and buildings.

Very few people truly understand the banking system, and newspapers will not (with rare slips of the mask) print anything about the truth of the system, since it appears to be regarded as form of financial pornography: an Indecent Truth, perhaps.

True

I’ll correct it

Richard

Tim Congdon let the cat out of the bag here

http://www.ft.com/cms/s/0/ddf4c35e-88e5-11dc-84c9-0000779fd2ac.html

Particularly this

“The explanation is that the Bank of England can create money “by a stroke of the pen”.

Parliament has made it the UK’s only issuer of legal-tender notes, and it can expand the note issue or credit a balance convertible into notes at virtually nil cost.

Because of these special powers, the Bank does not need to borrow in the interbank market at a positive interest rate.”

What this means is that the Bank of England may create credit, either in the form of Bank Notes, or alternatively, in the form of account balances exchangeable for Bank Notes, and this is exactly what the Bank of England has been doing to the tune of £23 billion, created “by a stroke of a pen” and thereupon loaned to Northern Rock.

This freshly minted money does not derive from the “tax-payer” at all: it is simply interest-free credit – so-called “Fiat Money” - that any Central Bank may create at any time to oil the wheels of commerce, but conventionally will only do so as cash.

The Bank of England is charging Northern Rock a “penal” rate of 7% pa for the use of this credit, of which 5.75% - the current Bank “base rate” - is actually collected while the “penalty” of 1.25% on top of this is not in fact being paid to the Bank of England but is being “rolled up” as a Debt from Northern Rock to the UK Treasury – a “subordinated loan” which ranks after all other creditors but before the shareholders.

In other words the Bank of England is gifting this “investment” to the Treasury on behalf of “tax-payers”.

Suppose everything goes wrong and Northern Rock suffers catastrophic losses from its secured lending. The first to lose are the Northern Rock shareholders: then it’s the Treasury’s turn in relation to their “Subordinated Loan”. But this is hardly a “loss” to the UK tax-payer since they would be losing an asset which they have been gifted by the Bank of England to the Treasury on their behalf.

What about the tens of billions of tax-payers’ money exercising the UK politicians and the press so heavily?

Well actually, no. This money has been created by a stroke of a pen, or more likely, a click of a mouse and it never was our hard earned “tax-payer’s money” in the first place.

The effect is exactly as though the Bank of England were to take back a few more skip-loads of time-expired bank notes and burn them in the usual way.

In summary, the UK tax payer can lose NOTHING in the event of a default. It is rare indeed that the mask slips in relation to the truly surreal nature of the vacuum at the heart of Central Banking.

The truth is that the longer that the Northern Rock fiasco goes on, the better off the tax-payer will be.

That’s right, this isn’t a disaster for the long-suffering “tax-payer”, it’s a potential goldmine.