Furious Fridays

The centralisation of power and control of the economy

Last Friday we looked at the stock market crashes of 1907 and 2008

Difference between them was the crash of 1907 had no intervention by any central bank in the USA – because no central bank actually existed yet. But this crash lead to the creation of the US Central Bank (Federal Reserve). This made way for the intervention by central banks in 2008 to try to advert more of the crisis in the banking sector than what was experienced in the past.

So, today we will be talking about Central Banks, and more importantly, the interventions they take in the economy. Why? Some economists put banking crisis (estimated around 100) at the feet of Central Banks and not banks. Let’s look at if it is the case or not:

 

  1. Central banks – responsible for monetary policy
    • Monetary Policy: (Central Banks) Money supply, interest rates and inflation
    • Fiscal policy: (Government) Govt. spending and taxes
  2. Every country has one, but not many people know what they do! Almost like a brain, everyone has one, but few know how it actually works.
    • Continuing with analogies of human body parts – If an economy was a human body
      • Central bank – Heart – Pumps money into the economy to help it flow and stay healthy, and keep growing
      • Commercial banks – The veins – what spreads the money around
      • This is the circulation of money! And the role and function of the two!

 

Monetary policy – Why the Quantity of Money Matters

  1. The quantity of money circulating in an economy affects both micro and macroeconomic trends.
    • micro level – more personal spending – Individuals also have an easier time getting loans
    • macroeconomic level – affects GDP, interest rates, and unemployment rates.
    • Maintain price stability (Inflation of 2-3%), exchange rate, employment & Economic prosperity

 

What is involved with monetary policy

  1. Print More Money
    1. Money is no longer pegged to anything – Like in the gold standard – since 1971
      • USA: 1950s to 2008 – Hundreds of mil to $1trn, 2008 to now $4trn. It basically quadrupled in 10 years.
    2. Central banks can increase the amount of money in circulation by simply printing it.
      • More money printed = less valuable due to inflation
    3. Influence Interest Rates
      • cannot directly set interest rates for loans (mortgages, personal loans)
        • the central bank holds the key to the policy rate—this is the rate at which commercial banks get to borrow from the central bank
      • banks borrow from the central bank at a lower rate – pass savings on by reducing the cost of loans
        • Lower interest rates tend to increase borrowing – increase quantity of money in circulation
      • Engage in Open Market Operations (OMO)
        • The reserve bank affects the quantity of money in circulation by buying government securities from (or selling to) banks – called OMO
        • Increase quantity of money – purchases government securities from commercial banks and institutions.
        • frees up bank assets—they now have more cash to loan.
      • Set the Reserve Requirement
        • Sets how much banks can keep in reserve versus lend out
        • more money circulating – reduce the reserve requirement.
          • bank can lend out more money.

 

How this works – Very simple example

  1. Bank A – Suppose a person in another country sends $1,000 and they deposit it into the bank. This becomes a NEW deposit for the bank (a PRIMARY deposit).
  2. The bank will now
    • Keep their desired target reserve ratio (10.5%) – Covers consumers’ cash demands
    • Lend the rest out to borrowers – Bank A lends $895 (keeps $105)
  3. This $895 will hit another bank at some point
    • Spent on a mortgage off someone else, who puts that $895 in their bank
    • That bank can lend $801 of the $895 (retaining the 10.5%)
  4. The process goes on and on
    • Technically doesn’t create money out of thin air – The loans are assets for the banks

 

This is called the Deposit creation multiplier

  1. If nobody keeps cash under the mattress: 10.5% per $1,000 = $9,524 (approx.)
  2. Slippage or currency drain: 5% + 10.5% = $6,450 (approx.)

 

But is this the truth?

Professor Werner – Chair of International Banking at the University of Southampton – bring attention to the fact that banks loan money into existence

  1. Campaigns to get rid of cash – Indiaand Australia to get rid of cash are coordinated attempts by central bankers to monopolise money creation.
  2. Professor Werner: the death of cash and the rise of central bank – controlled digital currency.
  3. This will further centralise what he describes as the “already excessive and unaccountable powers” of centrals banks, which he argues has been responsible for the bulk of the more than 100 banking crises and boom-bust cycles in the past half-century.
  4. Werner says: “To appear active reformers, they will push the agenda to get rid of bank credit creation. This suits them anyway – the central banks want to be the sole issuers of money.”
  5. “This sudden global talk by the usual suspects about the ‘need to get rid of cash’, ostensibly to fight tax evasion etc, has been so coordinated that it cannot but be part of another plan by central bankers” he says.

 

Why does this change in policy matter?

Australian economists, Steve Keen and Bill Mitchell –

  1. The old theory, taught in high school economics classes and to university undergrads, is that banks receive deposits and loan out of a percentage of that money, while keeping some in reserve.
  2. According to Professor Werner (rough approximation) – closer to the following: A bank receives $100 from a depositor, keeps that $100 in reserve, and then creates $9900 worth of new loans and deposits. It may also create up to $15,000 in new deposits through its lending.
  3. the banks do not lend existing money – but add to deposits and the money supply when they ‘lend’.
    • And when those loans are repaid, money is removed from circulation.
  4. Estimates – the banks create upwards of 97 per cent of money, in the form of electronic funds stored in online accounts.
  5. Banknotes and coins? They are just tokens of value, printed to represent the money already created by banks.
    • M0 – Bank notes and coins – $107 bn
    • M3 – Money supply – $2,070 bn (about 95% which is electronic)

 

This theory is now widely accepted as fact. 2014 – the Bank of England published a bulletin confirming it is its official position.

  • They admitted – banks create money out of nothing. So now they want to take away control from the banks to protect the monopoly of money creation and increase their control

Mervyn King, former Bank of England governor, explains the process – and its dangers – in his 2016 book, The Alchemy of Money.

  • “During the 20th century, governments allowed the creation of money to become the by-product of the process of credit creation. Most money today is created by private sector institutions – banks. This is the most serious fault-line in the management of money in our societies today,”

 

Felix Martin – Money: The Unauthorised Biography (published in 2013) – Describes banking as Promises:

  1. a deposit at a bank is a promise to pay you, the customer,
  2. a home loan is a promise by you to pay the bank.
    • a fraction will ever be demanded in cash at any one time, but all of the debts can be used as money.
    • Balancing act of incoming and outgoing payments due on his assets and liabilities = RISK

This is likely a cause of the sudden calls for reformers – central banks will push the agenda to get rid of bank credit creation and  for the central banks to be the sole issuers of money

Orwellian dream (1984, RTWP, Animal Farm) – the increase in deposits needed reduced the amount banks could lend, reducing the amount of new money supply from the banks – Further centralising powers and control of the economy

The take away: We aren’t in a free market for money creation, slowing being monopolised – It is heavily controlled!

Is this a good or bad thing? Will look at this in the next Episode – Are interest rate control healthy!

Thanks for listening!

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