essentially, we're living through a period of enforced austerity.
This is a neo-liberal plan, probably from the Bilder meetings,
for the rich to feed off the rest of society, like vultures,
because they are aware that their rapacious system will
collapse soon.
So, in this system, banks cannot go bankrupt, but banks
can bankrupt countries. They can't even do this honestly.
The banks are allowed to play derivative games on the
insurance market with government debt.
It's all designed to erase 5000 years of debt history.
It will fail. that is all
checkit: and the letters from Chris Cook at the end
theguardian
The truth is out: money is just an IOU, and the banks are rolling in it
The Bank of England's dose of honesty throws the theoretical basis for austerity out the window
David Graeber
Tuesday 18 March 2014 10.47 GMT
Jump to comments (490)
Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn't know how banking really works, because if they did, "there'd be a revolution before tomorrow morning".
Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called "Money Creation in the Modern Economy", co-authored by three economists from the Bank's Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.
To get a sense of how radical the Bank's new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don't suffice, private banks can seek to borrow more from the central bank.
The central bank can print as much money as it wishes. But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, say, by buying treasury bonds, but instead fund private economic activity that the government merely taxes.
It's this understanding that allows us to continue to talk about money as if it were a limited resource like bauxite or petroleum, to say "there's just not enough money" to fund social programmes, to speak of the immorality of government debt or of public spending "crowding out" the private sector. What the Bank of England admitted this week is that none of this is really true. To quote from its own initial summary: "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits" … "In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money 'multiplied up' into more loans and deposits."
In other words, everything we know is not just wrong – it's backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There's really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What's more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with "quantitative easing" they've been effectively pumping as much money as they can into the banks, without producing any inflationary effects.
What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there's no question of public spending "crowding out" private investment. It's exactly the opposite.
Why did the Bank of England suddenly admit all this? Well, one reason is because it's obviously true. The Bank's job is to actually run the system, and of late, the system has not been running especially well. It's possible that it decided that maintaining the fantasy-land version of economics that has proved so convenient to the rich is simply a luxury it can no longer afford.
But politically, this is taking an enormous risk. Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.
Historically, the Bank of England has tended to be a bellwether, staking out seeming radical positions that ultimately become new orthodoxies. If that's what's happening here, we might soon be in a position to learn if Henry Ford was right.
LETTERS
Chris Cook
18 March 2014 11:20am
Rubbish. It's NEVER been Economics 101, and that is the point.
Orthodox Economics has completely ignored money, credit and debt for purely ideological reasons.
Two myths have been peddled to justify the unjustifiable: the first is that banks take deposits which they THEN lend, and the second is that tax is collected and THEN spent - the tax and spend myth.
No-one, and I mean no-one, was published on this 'bleeding obvious' subject, and if you claim you did, then let's see the proof.
The BoE is now publishing the financial pornography which was completely and deliberately obscured prior to the financial crisis.
The entire system is founded on misrepresentations. distortions and downright lies, and its refreshing to see - at last - some clarity.
But even the Bank of England still misrepresents the true relationship between itself and the Treasury: that reality has yet to emerge.
davidgraeber
18 March 2014 11:27am
Recommend 42
Funny, since the Bank of England economists' text, which I summarize, repeatedly noted that their description was the exact opposite of that which you typically get in economics textbooks. But perhaps they, too, are ignoramuses who never took an introductory course.
So tell me, can you actually name one single introductory economics textbook actually used in courses that contains this account of money-creation?
Chris Cook
18 March 2014 12:07pm
Recommend 20
Pray tell me what proportion of the population you think has - or wishes to have - any knowledge of banking?
I would say it's well below 5%.
You just happen to be among the elite. Lucky you.
Most people - following the politicians and publishers who articulate the myths - believe the monetary (deposit then lend) and fiscal (tax and spend) myths - and then swallow the sociopathic policies justified by these myths.
Chris Cook
18 March 2014 11:10am
Recommend 32
The system died five years ago, and what we have is a zombie economy crippled by terminal inequality of wealth and purchasing power, being made worse as automation eats away at the middle classes.
At the 'zero bound' of interest rates the truth is that central banks are as much use as a chocolate teapot and the only solution is fiscal. Unfortunately the Coalition and Labour seem to agree that barking mad austerity - which serves only to reduce purchasing power further - is the way forward.
Time for a system re-set, I think, and the good news is that direct instantaneous connections, and consensual agreements to a common purpose combine to enable reinvention in modern form of decentralised structures and credit instruments which pre-date our time-expired centralised system.
So we may have had 4,000 years of debt, but going forward I think we'll see 4,000 years of credit, which is the polar opposite.
Chris Cook
18 March 2014 11:55am
Recommend 4
It already IS happening, bottom up.
Anyone can issue an IOU and anyone else can accept it. What's needed is an accounting system (trivial); a unit of account, (ie a standard unit of measure for value); a messaging system (probably mobile) and a framework of trust (which is simply an agreement, probably a managed agreement).
