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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This begs the question, what creates credit then?
The Bank of England can now
Banks do in normal times
Out of thin air
As I have explained many times
It’s just a confidence trick
Are we speaking of the magic money tree school?
No
We are talking economic reality
Which most don’t get and Wolf does
What we need is to credit money creation for what it is and stop calling it lending.
And when the bank of England creates money they shouldn’t give it to the bankers who wil only hoard it as cushion against yet-to-be-revealed bad debts. It should instead be distributed to taxpayers – so much per head – with the proviso that it MUST first be used to pay down any debts. This would at the same time restore many families’ balance sheets and shrink the banks’ balance sheets.
Better by far to use it for creating needed infrastructure or science projects, whatever. The principle is don’t just give it away to people, create wealth with it instead. That way it gets into the economy and there’s no inflationary aspects, bar, technically if you will, initially in the time between money creation and the realisation of the proposed outcome, say, a new hospital is built, a new and better telescope, warm homes, whatever. You can do what you want with it like that so long as there’s a generally agreed idea of what wealth is. Give it to people to go to the pub with and the result is inflationary. Give it to people to build a chain of pubs with and the result is wealth in the form of the new pubs is created and people have got money in their pockets to go to them with. Win-win. A new paradigm’s needed here as the old one was always a cloak to conceal from the masses what money was really being used for, the enrichment of the bankers.
Conversly paying off debt, both private and public, removes money from the economy so making matters worse. The trouble is that the whole Tory stratergy is based on fear of debt and they can not change. Worst is that Labour has swalowed this hook line and sinker.
Krugman calls it debt deflation.
It is
“In the UK, the lending counterpart of M4 was 17 per cent lower at the end of 2012 than in March 2009.” But M4 was actually up 4% over that same period. So much for lending being necessary to create deposits, M4 seems to have grown fine without lending growth.
While people love to trot out the theory of how banks can create deposits through lending, the reality is always true, in fact most countries deposits significantly exceed loans, which is totally impossible if loans create the deposits. In fact it is quite possible to make a loan without creating a deposit at all. If I borrow £1m from bank A and use it to buy bonds issued by bank B, loans in the banking system go up £1m but no deposits are created.
Every bank needs to have the funding in place to make a loan, not the other way round. Making the loan increases the banking systems deposits, which is very different from a banks making it own deposits.
Nonsense
Economics from the school of Thatcher and Osborne
You might even read the paper that the article is commenting on.
http://www.guardian.co.uk/society/2013/feb/14/child-poverty-ministers-downplaying-importance-income
Or Ann Pettifor’s review “The power to create money out of thin air”
http://www.opendemocracy.net/ourkingdom/ann-pettifor/power-to-create-money-out-of-thin-air
There are many sources which will explain this, and there is not much doubt that it is true, so far as I can see
Oops, sorry. The first link above is wrong
http://www.bis.org/publ/work395.pdf
Have you got any good links which give basic explanation of credit creating deposits?
Thanks
My blog on all money is a confidence trick is a starter
This calls for more emphasis on bartering at the local level.
More bartering, local farms, local currencies.
Bill, some think this can all be accomplished by using the existing banking system.
Profits from private banks go to their directors and shareholders. If we have a local bank and we all use it, the profits made can go to us as a community. Socially speaking it’s folly to have it go to a tiny group of shareholders in preference to the broader community.
@Tom, for a good explanation of how credits create deposits, see Positive Money:
http://www.positivemoney.org/how-banks-create-money/
They have quite a few good short videos (eg 2-5mins) covering all of this stuff.