Martin Wolf gets it: credit creates deposits, and not vice versa. So we need more lending

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Martin Wolf's column in the FT should be essential reading today. At its core though is this comment:

As Claudio Borio of the Bank for International Settlements puts it in a recent paper, “The financial cycle and macroeconomics: what have we learnt?”, “deposits are not endowments that precede loan formation; it is loans that create deposits”. Thus, when banks cease to lend, deposits stagnate. In the UK, the lending counterpart of M4 was 17 per cent lower at the end of 2012 than in March 2009.

Precisely right. It is credit that creates deposits, and not vice versa. People think saving preceded loans. That's not true. Savings happens out of credit, not the other way round. If there is not enough cash then depsits won't happen. You may think that counter intuitive, but most macro-economics is. But it's also true.

Why are we in recession? There's not enough money. People are not borrowing. How do we get out of recession then? We create money.

Let's call it green quantitative easing shall we?

Whatever it's called, spending is the way out of this crisis. Nothing else will work.


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