Tuesday, January 08, 2008

It's the Bankers stupid pt427

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'?


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'.



Shutter said...

The Fed simply stopped publishing M3 figures last year see ...


..... M3 does not appear to convey any additional information about economic activity that is not already embodied in M2 and has not played a role in the monetary policy process for many years. Consequently, the Board judged that the costs of collecting the underlying data and publishing M3 outweigh the benefits."

M3 is for the US the broadest measure of money supply

Anyway you can still see the figure carefully contructed M3 here

which demonstrates the increase in money supply and consequently inflation.

All this led Lord P to say at the time ( 12 months ago) "If you live in the US ... the only thing you will buy cheaper in a year's time is your house.'

Ho Ho Ho

Northern Wreck Emergency GM coming up.... get Newcastle A & E Dept ready. Blood will be spilt methinks.

Anonymous said...

I find Mish has been very informative throughout this ongoing disaster.

Anonymous said...

"It is you they want to discourage from withdrawing your own cash"

This is simply wrong. Dangerously so. When you deposit money into a bank the money belongs to the bank. In return you get a chose in action ie a right to take the bankster to court if he doesn't pay up. Anyone who believes that they have money in the bank is a fool; anyone who peddles the lie that depositing money into the bank means that the depositor has money in the bank is shilling (perhaps unwittingly) for the banksters.

""... If I pay money into my bank account, either by paying cash or a cheque, the money at once becomes the money of the banker. The relationship between banker and customer and is that of debtor and creditor. ... I have a chose in action, ..." according to Lord Goddard CJ in R v Davenport [1954]. This is still the law today.

Anonymous said...

" The government has little time to sort this problem out before we hit a real and very severe recession."

The government cannot sort this problem out.

Here's what Mish is sez, "No Helicopter Drop For Failed Banks

The question at hand is: Can the Fed provide capital to GSEs or failed banks? Anyone who thinks so is wrong."

Stef said...

You are, of course, correct though I think matey was trying to keep things simple rather than knowingly shilling

Anyone who opens a bank account and roots around deep enough into the associated T&Cs will discover than the banks almost invariably retain the right to refuse people their money if the bank judges that to be an expedient thing to do

Stef said...

IMHO government can sort this mess out but any solutions would be both painful and radical. Its bosses wouldn't permit it, even if the will were there in the first place

Stef said...

The Mish link is interesting, thx

Stef said...

NB I've edited the post slightly to point towards the above criticism

lwtc247 said...

Shutter you beat me too it.

And of course the reason why M3 was binned is 'cos they've put the printing presses into maximum overdrive.

Not only were we using a essentially valueless bit of bogroll to exchange for goods and services, but now we dont even have the PRETENCE (albeit the thickness of a angles hair noodle) that it has at least some merit as a thing of 'discreet/finite' based value.

I think we've discovered what should be termied 'the printing press bubble'

Merkin said...

So, Stef, where should I stash my ill gotten gains, long term?

PS I stole one of your photos.
Ta verreeeee moooooch.

Stef said...

So, Stef, where should I stash my ill gotten gains, long term?

My standard answer to this question is to buy shotgun ammunition and tinned food ... and matches, lots of matches...

100 items that disappear first

Some hardcore Conspiraloons are putting their meagre savings into gold coins but, tbh, if things really do go South they'd be confiscated anyway - that's what usually happens

One thing I have suggested to people is to bank with a mutual/ building society rather than privately owned banks - even if there is no guarantee that your money is safer mutuals are less revolting, in theory anyway

Merkin said...

Thanks for the advice which is totally useless as I don't have 2 beans to rub together anyway.

I re-read my Papillon for instructions about hiding my prized possessions in my 'charger' and realised I am on a loser.
Could I really walk through customs with a Gibson Les Paul and a Marshall stack stuck in my anus?.

I know they say practice makes perfect, but..........


Still, you will like this one from The Graun about Goldman Sachs looking to cash-rich middle eastern countries to bail out Northern Wreck.

You might say 'irony' or you might say 'expected, part of the game'

Anonymous said...

A couple of interesting mindhacks, here and here.

Apologies for lack of précise but I'm lazy sometimes.

digitaleconomy said...

I am one of the "crazy people" that know that bankers cannot control their own greed or lust for power and control. Because of the wonders of the Federal Reserve Banking System, money is simply a figment of the imagination used to control everyone outside of the Society of Bankers. "Crazy, but true."


Stef said...

Apologies for lack of précise but I'm lazy sometimes.

there must be hack for that, surely?

the links are new to me, I'm off for a graze now, thx

Stef said...

I am one of the "crazy people" that know that bankers cannot control their own greed or lust for power and control

There are more of us around these days

though still nowhere near enough to make a difference

so far...

Stef said...

Thanks for the advice which is totally useless as I don't have 2 beans to rub together anyway.

I'd still recommend a mutual, even for a single bean or a debt. The chances of you waking up one morning and finding that your bean/debt has been sold onto someone else without your say so are less


As for Goldmans, methinks we'll be hearing this expression used a lot more in the months ahead...

Sovereign wealth fund

Anonymous said...

Deep Debt Impact. The author makes some interesting points (well, one) but should consider the effect of epistemeology rather than information (if anyone is interested).

lwtc247 said...

"if things really do go South they'd be confiscated anyway"

It didn't work completely Stef. I'll post on it later.

P.S. Word verification is gwgvfgaa. Is the code-monkey of Blogger Hungarian or summut?

Stef said...

Deep Debt Impact. The author makes some interesting points (well, one) but should consider the effect of epistemeology rather than information (if anyone is interested).

That link doesn't work

This one does

thx, again