Monday 23 February 2015

Money - the untold story

I have blogged about money before but to me the way money works today is the most amazing confidence trick played out on the unsuspecting public and it bears repeating endlessly until we all decide enough is enough and we do something about it.

So first let me dispel some myths. Which of these statements is true?

1.       Banks lend money from customer’s deposits

2.       The Bank of England directly controls the supply of money into the economy and guarantees the currency (the pound sterling)

3.       If everyone repaid all their debts the economy would be stronger

4.       When governments spend, they are spending money that has been raised in taxes i.e. Taxpayers Money

5.       Governments cannot create money, there is no money tree.

6.       When I deposit money in a bank it is belongs to me but I let the bank use it as long as they give it back when I ask

In fact all the above statements are false.

The true situation is:

1.       Banks create money when they make loans and destroy money when the loan is repaid. However they keep the interest charged. Therefore banks make profits by creating money they don’t have getting you to earn that money to pay back to them so that they then destroy it and charge a you fee for doing so.

2.       The Bank of England issues and controls the amount of cash in the UK economy, but this is only 3% of the total money supply. Banks create money when they lend and can create as much as they like. The Bank of England can take indirect action to try to control the money supply through interest rate policy but this is not always effective.  The Pound Sterling (like all fiat currencies) has value only in so far as people have confidence in it as way of exchanging it for goods and services. It is not tied to a particular value of gold or any other store of value. As anyone knows who travels abroad the pound’s value against other currencies can move up or down quickly and therefore you can never know from one day to the next what it can buy you, therefore there is no guarantee as to its value.

3.       As stated above banks create money when they make loans, and 97% of all money in the world is created in this way. Therefore, effectively, all money is debt. Therefore without debt there would be no growth and the economy would be depressed (i.e. a depression).

4.       Governments spend money that they have borrowed by issuing bonds (taking out loans). All governments do this, taxes are money they recover in order to service the loans (pay the interest) –unlike bank loans Bonds are interest only payments until maturity when the original amount is repaid. Governments tend to roll over (reissue bonds) loans at maturity.

5.       This is a tricky one, governments do not create money in the accepted sense because as we have seen banks create money. However the central banks (which are banks after all) do create money as in Quantitative Easing. The Bank of England, as part of their response to the global financial crisis, created £375 billion under quantitative easing, this money was used to buy government bonds NB these could not be bought directly from the government as international agreements say central banks cannot create money to pay off its own governments debt, so the BOE bought these bonds from the open market but mainly from UK banks. So the Bank of England in theory (as all banks) has to destroy this £375 billion once the bonds mature BUT as has been seen they have continued to create more money as each bond matures so that the level of government debt they hold is roughly constant at £375 billion. This has the effect of cancelling the debt, as the Government never has to repay it. Also the government has agreed with the Bank of England that all interest payments paid to the bank for the bonds it owns will be repaid back to the government thereby creating a magic money tree (the interest on money created from nothing being used to pay down government debt and the QE rollover cancelling debt).

6.       In fact when you deposit money in a bank it belongs to the bank, as a perusal of their terms and conditions will tell you. They do promise to repay on demand BUT as seen in the Cyprus “bail in” when a bank is in trouble deposits can be confiscated to pay “senior” debtors, e.g. shareholders, bondholders and corporate debtors before account holders.

So, we have seen that Banks (including Central Banks) create all money by making loans and without loans there would be no money and no economic growth.

This gives banks an amazing commercial advantage over all of us in that they can choose were the money they create goes. It is no surprise that they use this power to enrich themselves and prefer, on a basis of 70/30, to gives loans (money) to the financial sector (including themselves) over productive industry and individuals. This is why there is so much money (over $700 trillion) tied up in financial derivatives.

It is also why the gap between rich and poor has widened so much, because banks enrich the already rich by granting them loans (creating money for them) which the lenders use to invest in assets that return a profit for them over the medium to long term like property, hedge funds, bonds and other financial derivatives.

QE also benefits those who have the most assets: This can be seen here:
But the salient points are on page 10:
·         “The overall impact of QE on household wealth is likely to have been substantial.”
·         “In practice, the benefits from these wealth effects will accrue to those households holding most financial assets.”
Points 22 and 23 of  “The Distributional Effects of Asset Purchases Bank of England, 12 July 2012”

If you believe like I do that there must be a better way or you think what I have written is not true then I urge you to have a look at this:


I look forward to the day we can change the money system to something that serves the interest of us all not a privileged few. This is a revolution we can achieve that will truly change the world for the better. 

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