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The Spaniard

Tim Congdon On Creditism And Money Creation

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Over the 50 years to summer 2007, new lending to the private sector had been the dominant form of money creation. Banks added identical sums to both sides of their balance sheets – new loans on the assets side and new deposits on the liabilities side – and the extra deposits were money. Given that the banking system was profitable and dynamic, the main problem for policymakers for most of the 50-year period was to restrain the growth of money and the inflation which accompanied it.

Good to see it stated explicitly by a main stream economist!

http://www.telegraph.co.uk/finance/comment...ney-growth.html

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Mervyn King accompanied Wednesday's Inflation Report with a pessimistic forecast, saying that the Bank of England expected a slow and difficult recovery. King has underestimated the power of the weapons in the state's macroeconomic armoury. The recession could be brought to an end – quickly and easily – if either quantitative easing were on a big enough scale or the government deliberately borrowed on a massive scale from the banks.

He wants more printing.

Or more state borrowing.

Of course, with QE, he can have both. Huzzah!

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He learnt it from HPC and was so excited he just hhhhhhhad to tell someone.

Many a true word .... :blink:

Now, can he think on to understand some of the systemic consequences of his apparently new found insight?

(Though even if he can, he'll probably keep quiet!)

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Many a true word .... :blink:

Now, can he think on to understand some of the systemic consequences of his apparently new found insight?

(Though even if he can, he'll probably keep quiet!)

Sure.

1) No one will repay their "debts"

2) The system will have to change

3 cups and a pea doesn't work if the audience is full of magicians.

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Sure.

1) No one will repay their "debts"

2) The system will have to change

3 cups and a pea doesn't work if the audience is full of magicians.

Aren't you the one saying credit isn't money, so then what's wrong with the system, why should we want it to change? If credit isn't money, there's not a problem, right?

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He wants more printing.

Or more state borrowing.

Of course, with QE, he can have both. Huzzah!

If the State has no intention of paying back the borrowed money, why not just print it? Both are inflationary, but borrowing from the private sector adds interest to the mix too. It's nuts.

I think the penny is starting to drop that we don't need to borrow money for government spending at all. If a currency is to remain credible, the amount to be created is important, but where it comes from is not.

Of course, we wouldn't be in this mess if the private banks hadn't created so much bloody inflation in the first place. Inflating asset prices by giving credit to anyone with a pulse was always going to create a deflation backlash at some point.

Make the supply steady (flexing with population growth) and you remove the boom/bust cycle. While ever fractional reserve banking exists, especially in the unrestricted form it currently holds, we will have big boom/bust credit cycles. Remove their ability to create credit and make them responsible for only where existing money goes and most of the problems are resolved.

There is always the chance of a bubble inflating, but with essentially unlimited credit creating potential, it can grow into a monster. If only so much money exists, the bubble can only inflate so large.

The other key is risk assessment - the central banks are screwing this up, as is the public belief that banking is risk free (reaffirmed by the presence of the former). Risk needs to be, imo, reflected right down to the saver - banks which make foolish bets wouldn't have customers for long.

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Aren't you the one saying credit isn't money, so then what's wrong with the system, why should we want it to change? If credit isn't money, there's not a problem, right?

Not if the banks stop asking for "repayment", no.

As it is, the banks asking any of their alleged "borrowers" to "repay" is a fraud.

The whole lot should be netted off, the bankers put inside for fraud, the savers told they've been a victim of fraud and they actually have nothing and the debtors the same.

Then we can do something that isn't completely insane instead. Maybe actual lending? Who can say.

Edited by Injin

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Money supply in the form of credit is a function of demand. i.e. YOU print this money when you borrow it.

If l stopped there you could easily argue that demand for credit and therefore its supply is infinite. However that demand is tempered by your ability to repay it. Normally this self-regulation becomes the lenders responsibility, because the lender doesn't want to lose money it lends out in aggregate. The profit margin and risk premium takes the form of interest payments which along with capital repayments throttle the demand.

The reason that "everything went wrong" is that the lender underpriced risk, primarily because it stopped holding loans to maturity and conned third parties into buying them in the form of CDO's etc.. In underpricing risk the lender created a demand higher than the borrowers real ability to repay which has led us to the saturation of credit and speculative bubbles where the glut of credit has been misallocated to unproductive assets*. This was exacerbated by the delinking of the brokers and the loan originators to those who ultimately held the loan til maturity.

I propose that the West also lacks the opportunity for future growth and investment which is why so much of the available credit had no productive use. Once the bubble was underway, credit was speculatively attracted to housing in what appeared to be a one way bet. Wh take a risk trying to invest and grow a business or activity that might not pay off, and if it did it would only return interest payments as profit, when you could leverage and repeatedly use whatever capital you had by originating and selling on loan after loan taking a slice of immediate profit from each?

*One way a borrower can borrow more than their ability to repay at the point of taking a loan is where that credit goes into generating increased future productive gains. This is called investment! Because this has an element of uncertainty or risk lenders would still make such a loan but would expect various additional concessions from the borrower such as securing the loan against personal assets, pound for pound investment by the borrower, crazy things like a business plan and so on. Additionally the lender would charge a higher interest rate reflecting the higher risk premia involved.

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I've added my comment....

I feel sorry for young people. They can expect to be taxed heavily for 'keeping asset prices high'.

So not only will they have less to spend, they won't be able to buy homes. Asymmetric outcomes where the older and profligate win.

Yep, the richest generation is human history is eating it's young.

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Many a true word .... :blink:

Now, can he think on to understand some of the systemic consequences of his apparently new found insight?

(Though even if he can, he'll probably keep quiet!)

He has been churning out books on the subject for years.

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Mervyn King accompanied Wednesday's Inflation Report with a pessimistic forecast, saying that the Bank of England expected a slow and difficult recovery. King has underestimated the power of the weapons in the state's macroeconomic armoury. The recession could be brought to an end – quickly and easily – if either quantitative easing were on a big enough scale or the government deliberately borrowed on a massive scale from the banks.

He wants more printing.

Or more state borrowing.

Of course, with QE, he can have both. Huzzah!

Jesus, that's what happened in the Weimar republic. Everything seemed to be working out just fine. In fact the bankers of the day heralded printing money as essential to the free flow and recovery of the economy and announced that they dare not stop as the system would seize up immediately. Hell they even had a year or two of price deflation before the wave hit.

:ph34r:

edited for word wrongitude.

Edited by DabHand

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Many a true word .... :blink:

Now, can he think on to understand some of the systemic consequences of his apparently new found insight?

(Though even if he can, he'll probably keep quiet!)

Is Congdon not a monetarist and former adviser / cheeleader to Thatcher? So how would this be any surprise to a

monetarist economist, or any economist I would hope.

Those who have recently learned tro say "Fractional reserve banking" think you are really onto something. You are not.

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Not if the banks stop asking for "repayment", no.

As it is, the banks asking any of their alleged "borrowers" to "repay" is a fraud.

The whole lot should be netted off, the bankers put inside for fraud, the savers told they've been a victim of fraud and they actually have nothing and the debtors the same.

Then we can do something that isn't completely insane instead. Maybe actual lending? Who can say.

But the problem here, at least from a rhetorical point of view is that we can't say for certain that they won't print to make good on the Government promise. Since this must be an unknown, whatever our assumptions on how a Government behaves, to make the claim that deposits are imaginary is shaky..?

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But the problem here, at least from a rhetorical point of view is that we can't say for certain that they won't print to make good on the Government promise. Since this must be an unknown, whatever our assumptions on how a Government behaves, to make the claim that deposits are imaginary is shaky..?

That the government will make something that is currently imagined doesn't stop it being imaginary now.

Or invalid.

It's also what is happening.

The basic idea of the current system is to make people feel obliged in some cosmis sense by lying to them that they have been lent to, and then put them to work to pay those who have been told they have savings.

I suspect it's ended as much because it's run out of people who can be made to feel indebted like it means anything and/or suckers who fall for it - and this means the end for all such ponzi schemes.

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That the government will make something that is currently imagined doesn't stop it being imaginary now.

Or invalid.

It's also what is happening.

The basic idea of the current system is to make people feel obliged in some cosmis sense by lying to them that they have been lent to, and then put them to work to pay those who have been told they have savings.

I suspect it's ended as much because it's run out of people who can be made to feel indebted like it means anything and/or suckers who fall for it - and this means the end for all such ponzi schemes.

I agree that it's invalid and I agree that there was no loan etc. etc. but... going back to whether the deposits are real, of course they are backed by nothing but air, or paper so they are not real in a material sense but neither is cash.

If someone assumes cash is real, then they must only think that credit is unreal due to it not being printed yet. What they actually want to know is if it is valuable. If we don't know that the Govt won't print, can we say for certain that credit has less substance than cash?

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I agree that it's invalid and I agree that there was no loan etc. etc. but... going back to whether the deposits are real, of course they are backed by nothing but air, or paper so they are not real in a material sense but neither is cash.

If someone assumes cash is real, then they must only think that credit is unreal due to it not being printed yet. What they actually want to know is if it is valuable. If we don't know that the Govt won't print, can we say for certain that credit has less substance than cash?

No idea!

I can't value things for others easily.

What I do know is that people have been told they have had cash. They haven't. Finding this out changes everything.

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No idea!

I can't value things for others easily.

What I do know is that people have been told they have had cash. They haven't. Finding this out changes everything.

My experience is that people aren't too fussed by this fact, perhaps I hang with thick people. If you told them that the banks are printing money they would be looking for grandad's shotgun.

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My experience is that people aren't too fussed by this fact, perhaps I hang with thick people. If you told them that the banks are printing money they would be looking for grandad's shotgun.

Really?

If you told someone that they hadn't ever been loaned money in their mortgage and therefore they didn't owe anything - they wouldn't care?

:huh:

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Is Congdon not a monetarist and former adviser / cheeleader to Thatcher? So how would this be any surprise to a

monetarist economist, or any economist I would hope.

Those who have recently learned tro say "Fractional reserve banking" think you are really onto something. You are not.

What we money reformers bang on about are the emergent systemic properties of the prevailing money system:

1) The non-banking sector must remain perpetually in net debt to the commercial money-issuing banking sector. Exponential economic growth becomes all-important, and this is a driver for the accelerating resource depletion of the planet.

2) Society pays heavily and unnecessarily for the provision of its means of exchange to a privileged but essentially unproductive minority - this is systemically inefficient and wastes talent on both sides of the money issuer/non-issuer divide.

3) National debt is unnecessary (see Bill Still's threads/posts)

So I must disagree, I think we are most definitely "onto something", something of great importance at that.

There have been money reformers around for as long as there have been bankers - it is an ongoing long-term struggle, not a new fad, as this potted history of the US system shows:

http://www.financialsense.com/fsu/editoria.../2007/1020.html

My point was that Congdon has publicly and explicitly stated the cornerstone of the debt-based, commercially issued money system, which leads me to wonder whether he will now run with it and discuss openly the above consequent properties of the system built upon that cornerstone. Please note my use of the word "apparently" in the earlier post.

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Really?

If you told someone that they hadn't ever been loaned money in their mortgage and therefore they didn't owe anything - they wouldn't care?

:huh:

It's too esoteric. People will always agree to something if it is sufficiently outlandish, if it is more sombre they will get interested. Genuinely, I have spoken to people about the banks being "empty" (not specifically about the loans coming from nowhere) and they fall into two camps: Statists will chuckle a knowing smile and tap their fingers to their nose, anti-Statists will say they kind of assumed as much.

It's not offensive enough.

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It's too esoteric. People will always agree to something if it is sufficiently outlandish, if it is more sombre they will get interested. Genuinely, I have spoken to people about the banks being "empty" (not specifically about the loans coming from nowhere) and they fall into two camps: Statists will chuckle a knowing smile and tap their fingers to their nose, anti-Statists will say they kind of assumed as much.

It's not offensive enough.

And then they stop paying the mortgage, right?

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Over the 50 years to summer 2007, new lending to the private sector had been the dominant form of money creation. Banks added identical sums to both sides of their balance sheets – new loans on the assets side and new deposits on the liabilities side – and the extra deposits were money. Given that the banking system was profitable and dynamic, the main problem for policymakers for most of the 50-year period was to restrain the growth of money and the inflation which accompanied it.

Good to see it stated explicitly by a main stream economist!

http://www.telegraph.co.uk/finance/comment...ney-growth.html

The information in that article probably came as a revelation to the author, late in his career :rolleyes:

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