The reality of how money is created | LARS P. SYLL

A great article backed up with a challenging image

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.

Source: The reality of how money is created | LARS P. SYLL

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A bit of Argie bashing

You might be forgiven for thinking this is someone in the UK complaining about MaradonaMaradona’s performance in a world cup.

But no, this is a US court apparently telling another sovereign government what to do with its money.  Or to be more precise, telling it that it cannot pay a legitimate debt until it has paid off a debt speculator.  As a result Argentina has again defaulted on a debt – but this time not because it wants or has to, but because a US court will not allow it not to.

Have a look at http://jubileedebt.org.uk/actions/support-argentinas-fight-against-vulture-funds for more details.

The “vulture fund” which bought Argentine debt in the hope of making a profit may not be a bank or be involved in the lending of money commercially, but it is making use of the system to try to make a substantial profit.  If it had accepted the debt write-down agreed by most of (93% of) Argentine’s lenders, it would have made a mere 300% profit, but it is holding out for more.

And the US court support for the speculator’s position is making debt forgiveness even more difficult to achieve for hard-pressed countries around the world.

So, I am campaigning for a moratorium on all commercial debt.  This would get rid of this sort of speculation at a stroke.

Of course there are other reasons for my proposal – have a look at the about page and other posts and let me know if you agree.

Steve Keen visits Solvent Land (2)

OK,  I cheated.  I did the easy bit in my post last week.  There is an issue around the ability for governments to run deficits, and this comes in two flavours –

  1. running a deficit to boost an ailing economy (something which is less likely to happen if we make finance simpler by stopping commercial debt) and
  2. running a permanent deficit because it is always good to boost the economy (which is true according to Steve Keen).

I deliberately ducked the much harder questions around what money is and whether we need banks and governments running deficits simply to exist. Continue reading

It’s all the bankers’ fault

It is really easy to blame the wicked bankers for everything.  So I will.

One of the causes of the 2008 economic collapse was down to bankers lending money to people who could not afford it and then passing the problem on to other bankers.  By passing the problem on the “risk” was supposedly lessened (if you have one debt you could be unlucky and have the one that goes really really bad; if you have lots, they are only averagely bad), but the problem was then shared with all the other bankers and when it did go wrong, all banks shared the problem and they all went wrong together!

And then governments got involved because they were worried (probably rightly) about the effects of a banking collapse, so we the people, ended up footing the bill the bankers should not have created in the first place.

But the problem is not so much with individual bankers, but that bankers keep on repeating the same old mistakes – lending too much money when the market is about to collapse.

It is not that bankers are bad at seeing when the market is about to collapse (although they may well be as there seem to be very few of us good at predicting the future), but that they are driven to lend (because that is how banks make money) and driven to lend to riskier and riskier customers because “experience” has shown them that this works. “Experience” in this case comes from what has happened over the last few years – looking back at the successful years, rather than looking forward to the possible consequences of high-risk lending or looking further back to the effects it has had in the past.

So we end up with the South Sea bubble, or the great depression or the UK property crash or the dotcom boom or  the economic collapse we have just had.

In each case we had a speculative bubble as people expected prices to just keep on going up and so many were tempted to borrow to speculate on the future profits they expected to make.  And then there was a “correction” in the market – a collapse in th price – and the expected boom turned into a catastrophic bust.

How can we avoid these sorts of problems in the future?  I would suggest that we get rid of bankers – or rather we get rid of bank lending.  Rather than trusting bankers to lend responsibly when history shows us that they are incapable of knowing when we have moved into a speculative bubble, we stop them lending altogether!

I will talk about why we want banks and bankers and their role in the future in a separate post.

What I want to say in this post is that we cannot trust lenders.  I am not saying that they are inherently evil, but that we all seem to be blind to the consequences of lending and that the world is therefore a safer place by removing this activity, so that we don’t get it wrong.

This is like putting a speed limit on our roads – it is not that speed is inherently wrong, just that when we get it wrong, the effects of going too fast can be catastrophic.  Or it is like building a shield around nuclear reactors – they are dangerous and we need to protect ourselves from using them wrongly.

Debt is a bad thing – personal debt

My grandfather was a milkman.  My mother (the milkman’s daughter) was very cautious about money and my father still is.  I remember when the bank sent us a credit card through the post and my father cut it up.  He had not asked for it and he did not want it.

I was taught that buying goods on hire purchase was buying on the “never never” and was something we should never do.

I now have 2 credit cards which I use regularly and have had for years.  When I bought my second car I took out a bank loan (please dont tell my father).  My first car was so cheap you couldnt borrow that little!

When I went to university I got a grant and came out debt free.  My children had to take out student loans.  Most students these days also end up with large overdrafts.

When I finished at university I chose what job I wanted.  I was chatting to a barman the other evening and he said that he had just finished his degree and that jobs were hard to come by.

Why am I saying all this?  Because it shows how the world has changed over a relatively short period of time – within my memory.

In particular attitudes to debt appear to have changed radically.  My mother’s background was to be careful with money.  Today’s attitudes seem to be “borrow now pay later” and TV adverts are now offering “payday” loans with interest rates measured in thousands of percent compared to a bank base rate of only ½%.

This must be a bad thing because politicians are talking about what they should do about it – should they introduce a limit on interest rates which can be charged.

If my idea of introducing a ban on commercial lending is brought in, then all payday loans, credit cards and other forms of debt will be outlawed.  This will remove the problem of high interest debt, but will it create other problems?

I can see that there are reasons why people may want to borrow – a crisis when the car breaks down perhaps.  So the big question is – can we come up with alternatives?  Or are there circumstances when only a commercial loan will do?

So please comment on the sorts of circumstances when money is needed (and might now be borrowed) and what alternatives you can think of to commercial lending.

Hello

As the first post on this new blog, I thought I would try and set out what I am trying to do.

I have been worrying about debt (personal debt problems and the global debt crisis) for a number of years and wanted to see if there was something that could be done about it.  I even tried reading a few economics texts.

As a result I started to think that debt was a bad idea.  Whilst I am not opposed to the idea of debt in principle, we just dont seem to be able to handle it.  And then it becomes a problem and the problem becomes a crisis.

So can we live without debt?

I have started writing  a paper which tries to address the issues that a debt-free society would face.  I am not clever enough to have all the answers and some of my answers may not be practical.

So that is why I am starting this blog – can you help by helping me look at the issue and whether we can change the world!