It's the Bankers stupid pt427

US Currency in Circulation 1984-2007

I bang on a lot about money supply and its impact on everybody's lives. On the face of it it is a very dry, technical subject but I believe that it is important because it is one of the principal instruments used to control us all and, when it suits, fuck large numbers of ordinary people up

So, I'm always on the look-out for decent explanations of how the money supply system works. I've just come across this comment on Guido Fawkes' blog which I think is worth (though not perfect) flagging up in its own post...

Real Schadenfreude said...

"The number 1 cause of general cost rises in the economy is not the BoE it's the Government anti-productivity policies."

No. Rising prices can only be caused by more money in the system. If it was a closed system where the amount of money was fixed, then prices could not rise - price of product A could only rise at the expense of product B, but in general prices could not rise. Over the past ten years we have seen prices of houses soar at perhaps three times their starting value. But we have not seen any decrease in the price of food, or fuel or other products. In fact the prices of such things have also risen - by about 4% per annum over the last ten years.

It follows that this can only happen as a result of money NOT being in a closed system, i.e. there is more money in the system now than 10 years ago. A lot more. This is possible primarily because banks are permitted to loan more "money" than they have in deposits. In fact they don't loan "money" in reality - because your bank statement is just a bank IOU - it only gets converted to real money when you go to an ATM and withdraw some cash (notice that you have to provide all sorts of ID to withdraw your own cash but only a credit card number if you want to pay for something over the phone using debt. Debt is something the bank likes to encourage. Withdrawing cash is something it doesn't want to encourage. It is you they want to discourage from withdrawing your own cash - not the crooks).

The bank IOUs are tradeable between banks so we can pretend they are real money. That is what M4 money supply measures - the amount of ALL tradeable money as cash and bank debts taken together. It is a better measure of inflation than the RPI since it measures all impact on prices including housing. The M4 money supply has trebled in the last ten years. A lot has been absorbed in property prices as the banks have compensated for the low profit they can make when interest rates are low by pushing more loans and causing house price inflation - thus the capital value of the mortgage increases. Note that whilst the bank may have given you a tradeable IOU to pay for your house - you need to repay the bank with real money. Oh, and you also need to pay the interest with real money too, of course.

In theory the banks are limited in what they can lend as digital IOUs - they have to remain within a certain ratio with respect to the deposits on their books. However, with interest rates being low the banks have been keen to find new ways around these rules and have turned to credit derivatives. What they do is package all their debt up in bundles and call it a credit derivative which they sell on to other parties. Thus they no longer have the debt on their books and can carry on lending digital IOUs willy nilly. Or they could until the market for credit derivatives suddenly dried up as people realised the risks involved in buying them.

So now the banks can't flog the credit derivatives. In fact they have had to take back some of the derivatives they had hoped to sell. Thus they are in breach of the reserve rules or close to being in breach so now they are refusing to loan out any more money. This can be seen in the M4 money supply figures which are collapsing at present as the banks refuse to offer further loans. The central banks are trying to cure this problem by lowering base rates but it is very unlikely to help - the problem is not that debt is too expensive to take on, the problem is that we are now maxed out on the debt that banks are allowed to sell. This is the source of the real credit-crunch and it is only tangentially related to the "US sub-prime" fiasco - that was merely the trigger of an inevitable maxing out of the credit boom.

Unfortunately very many companies need big bank loans just to operate - perhaps to start big new construction projects or to provide short-term finance to cover losses. With the banks failing to provide loans to these companies cash-flow problems and insolvencies will be the result. Many people will get made redundant, and many of those will get little redundancy pay.

The government has little time to sort this problem out before we hit a real and very severe recession. At the moment the government is doing the wrong things to sort it out. They are the cause of the problem and thus they are wedded to the concept of continued credit growth to drive the economy. They are wedded to an idea that has broken the economy and their shared ego will not allow them to admit this and take the necessary steps to cure it. A change of government will be required, but by then it will be far too late.


Of course, the really interesting question arising from this is are you one of those crazy Conspiraloons who believes that this insanity is at least partly deliberate, with intentional consequences, or are you one of those crazy Coincidence Theorists who believes that shit like this 'just happens'?

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edit: and thanks to G. for sending me a link to an article from last year on the incredible rags to riches (?!) story of Nat Rothschild.

It's difficult to pick out any one highlight from this mass of chunder-inducing sycophancy but this euphemism-laden quote is ominously special...

"What he needs is one of those historic opportunities like the ones seized by his ancestors. If he gets that golden moment, he could be the richest one of his generation."

Yes, very funny

Anyone with even a passing knowledge of the history of the Rothschilds and their banking dynasty chums will not be betting against such an historic opportunity presenting itself in the not too distant future, though they might question the use of the word 'seized' instead of something more appropriate like 'engineered' or 'created'.

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