London Daily

Focus on the big picture.
Thursday, Oct 01, 2026

The ruling bank

The ruling bank

Banking rests upon public confidence. And central banks are the platform that sits beneath the world economy. Without the Central Bank, there would be no modern economy as we know it. Central banks drive the financial world, and finance is the software of the global economy.
Now the idea that the Federal Reserve can print cash at will is not accurate. Whether it is the European Central bank, the Bundesbank, or the Bank of England- three of Europe’s most powerful central banks- there remains a limit to the power of the Central bank.

Central Bank power resides in two crucial intangibles: business and consumer confidence. Economics is social science and the economy is a product of human behavior.

Central Bank power derives from the public confidence that these banks have the power to underwrite global finance and with that every other aspect of the global economy.

Confidence is indeed a mystery. But the power of public confidence remains a crucial reality of economics. ‘’It is what it is because Jack and Jill believe that it is.’’ The minute public confidence collapses so does the economy. Investors flee for the hills, Jack shuts his business for good, and Jill postpones that vacation to the Algarve.

When there is a banking collapse, behind that collapse is the collapse in public confidence. That collapse may be triggered by events. However, it is the fear of consumers and investors that drives that collapse.

When consumers are fearful the economy is going south and that their assets – both in cash and in investment- are threatened, there is the threat of a run on the banks where consumers withdraw their cash from the bank for fear of losing their hard-earned money.

Now, consumers in the Virgin Islands and residents of the wider Caribbean may not be aware that the stability of the Eastern Caribbean Dollar and any other currency in the region that is legal tender is due to the Federal Reserve acting as the global reserve bank. In other words, the stability of the Caribbean economy is determined by men and women in New York and Washington DC, and the confidence investors and governments have in The Federal Reserve.

A sound monetary system depends upon economic and political stability which in turn depends upon consumer and business confidence that the economy is sustainable and stable.

Investors who drive the global economy look for countries that have economic and political stability to place their cash for sustainable returns.

Sustainability – a much-used term today- is measured in a country having a diverse economy, sustainable national debt, low inflation, resilient public institutions, and stable local banks. These are the ingredients that must be in place before investing in a country’s economy. Countries that possess the preceding have a lower risk of Jack the Investor’s investment going belly up.

Central bankers are a special breed. They live in a semi-isolated world in quiet offices in New York, Washington DC, London, Berlin, and Brussels. However, these men and women exercise huge power and literally have the burden of the global economy on their backs.

The Great Recession of 2008 drove home the critical importance of the Central Bank in stewarding the financial world, and therefore the world economy. Three leading Central Banks-The Federal Reserve, The Bank of England, and The European Central Bank - implemented the well-used term Quantitative Easing.

QE is simply a method of buying back securities from capital markets as a means of injecting liquidity into economies under the threat of depression. This cash comes mainly from investors and investment funds, or governments with excess cash such as China.

The cash finds its way into the monetary system as cheap loans from these central banks to retail banks, or stimulus checks to businesses and consumers: the USA Covid 19 model.

That cash in turn enters the economy from government and these retail banks, allowing businesses to borrow cash at sustainable rates, and entering the pockets of businesses and consumers directly, so, therefore, generating consumer demand.

Consumer confidence and consumer demand drives economic growth. There is a symbiotic relationship between consumer confidence and business confidence. The rise of the former heralds a rise in the latter.

In recent times flooding the markets with cheap money has not been inflationary. The reason for that is not simple to determine. But it has a lot to do with consumer behavior such as caution and a consumer orientation towards frugality and savings post-2008.

Low inflation has been the justification for QE. QE has driven up consumer demand by making purchases on everything from washers, cars and homes, sustainable. QE in turn has fueled economic growth or in the very least, prevented severe economic recession, and even economic collapse.

For now Central banks and QE are here to stay. And the preceding is all about consumer and business faith that these banks are getting it right.
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