Monday, March 24, 2014

Money fraud ‘revealed’!

Almost everything in the discipline of ‘economics’ – which itself is a fraudulent concept cunningly abstracted from the wholeness of social relations – flows from self-serving theories presented as ‘empirically-tested science’. Hence a massive fraud. Here is an illustration.

The Bank of England has just let slip a 'secret' that shows that the 'educated' people across the world have been fooled and lied to.

The 'revelation' confirms that the discipline of 'economics' - which was probably taught to you and continues to be taught to your sons/daughters - has long been perpetuating a fraud.

Here is that secret.

Money is nothing more than a few strokes on the computer keyboard performed by a commercial bank - and not the hard-earned 'savings' of ordinary folks like you, nor the currency printed by the government.

Yes. Most of the money in circulation is created not by the savings of people like us, but by lending by the commercial banks, which is accomplished, literally, by keying in a few numbers.

It's the bank lending (on interest) that creates deposits of money in the economy, not the saving-deposits that make up the amounts lent.

This 'secret' has long been known to those who have been complicit in the fraud (including, of course, the so called 'economists') or those whose concerned voice could be drowned out by the fraudsters.

The implications of this 'revelation' are many and profound. What it implies, among other things, is that a sovereign government can never - never - be short of its own currency and the 'imperative' to 'balance' the government 'budget' is a load of non-sense.

Portraying government 'budget' as any household budget is pure fraud, a measure now used across the world, including India, by the plutocratic/kleptocratic governments to deny the needy citizens public funds for vital public services/projects and thus help their cronies operating in the so called 'market'.

We can really have funds for all public services without any limits! And the bogey about 'crowding out of private investment' and 'inflation' is, of course, all part of the worldwide propaganda and fraud.
To understand this fraud, read the article by David Graeber, pasted below and published recently in The Guardian.

Also pasted in this mail are links to articles published by New Economics Foundation (NEF) and by Positive Money, both of which organizations have plenty of other lucid material on money and money creation in today's world.

The Bank of England site can be checked for the material they've published. Two videos they have produced can be watched on the links pasted below.

The truth is out: money is just an IOU, and the banks are rolling in it
The Bank of England's dose of honesty throws the theoretical basis for austerity out the window

By David Graeber, The Guardian, Tuesday 18 March 2014

Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn't know how banking really works, because if they did, "there'd be a revolution before tomorrow morning".

Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called "Money Creation in the Modern Economy", co-authored by three economists from the Bank's Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.

To get a sense of how radical the Bank's new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don't suffice, private banks can seek to borrow more from the central bank.

The central bank can print as much money as it wishes. But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. 

Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, say, by buying treasury bonds, but instead fund private economic activity that the government merely taxes.

It's this understanding that allows us to continue to talk about money as if it were a limited resource like bauxite or petroleum, to say "there's just not enough money" to fund social programmes, to speak of the immorality of government debt or of public spending "crowding out" the private sector. 

What the Bank of England admitted this week is that none of this is really true. To quote from its own initial summary: "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits" … "In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money 'multiplied up' into more loans and deposits."

In other words, 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.

There's really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit.

What's more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with "quantitative easing" they've been effectively pumping as much money as they can into the banks, without producing any inflationary effects.

What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there's no question of public spending "crowding out" private investment. It's exactly the opposite.

Why did the Bank of England suddenly admit all this? Well, one reason is because it's obviously true. The Bank's job is to actually run the system, and of late, the system has not been running especially well. It's possible that it decided that maintaining the fantasy-land version of economics that has proved so convenient to the rich is simply a luxury it can no longer afford.

But politically, this is taking an enormous risk. Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.

Historically, the Bank of England has tended to be a bellwether, staking out seeming radical positions that ultimately become new orthodoxies. If that's what's happening here, we might soon be in a position to learn if Henry Ford was right.

Bank of England backs NEF on money creation

MARCH 14, 2014 // By Josh Ryan-Collins, New Economics Foundation

The Bank of England has just published probably the most accurate and clear accounts of how the modern monetary system works ever written by a major central bank. The two articles are published in the Bank’s prestigious 54 year-old Quarterly Bulletin series – the main channel it uses to communicate its thinking to the public.

The good news is that the Bank agrees with the key aspects of NEF’s book Where Does Money Come From? (first published 2011), which set out to dispel many of the myths surrounding the process of money creation.  Most importantly, their first article, on the nature of modern money, states that:

“Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves…  When a bank makes a loan to one of its customers it simply credits the customer’s account with a higher deposit balance. At that instant, new money is created…”

In the second article, on money creation and its limits, the Bank lays to rest two of the great ‘money myths’. First, it dismisses the commonly held view that when a bank makes a loan it is simply recycling someone else’s savings. In fact, it is the other way round: “rather than banks lending out deposits that are placed with them, the act of lending creates deposits — the reverse of the sequence typically described in textbooks.”

The Bank also dismisses the ‘money multiplier’ theory, whereby the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money:

“…the relationship between reserves and loans typically operates in the reverse way to that described in some economics textbooks. Banks first decide how much to lend depending on the profitable lending opportunities available to them…It is these lending decisions that determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Bank of England.”

The first article explains that “commercial banks can create new money because bank deposits are just IOUs of the bank; banks’ ability to create IOUs is no different to anyone else in the economy…” (page 8). But what makes bank IOUs different is that they are widely accepted as a medium of exchange. Why? Because the State guarantees every person holding a bank account the first £80,000 of these Bank IOUs. This “ensures that bank deposits are trusted to be easily convertible into currency and can act as a medium of exchange in its place.”

The Bank does not explain why private bank IOUs get this special treatment, however. To understand this you’ll need to delve in to the 19th Century and the Banking Act of 1844. At the time private banks were free to issue their own currency notes, a fact that was leading to repeated ‘bank runs’ and resulting instability.

The Bank legislated to outlaw the issuance of private banknotes and took up its monopoly position as the only agent able to issue legal tender. It did not, however, prevent banks from creating deposits in checking accounts, as described above. Since then, such IOUs have outgrown currency issuance and currently account for 97% of the money in circulation.

Modern money creation can thus be seen as something of an accident of history. As we point out in Where Does Money Come From?, there are serious questions as to whether a relatively unregulated system dominated by private money creation in the form of interest bearing debt is best suited to the challenges facing modern humanity. In a speech in 2010, Mervyn King suggested that “Of all the many ways of organising banking, the worst is the one we have today.”

Of course, money creation is not completely without constraints, as the Bank goes on to illustrate in the 2nd article. But the weakness of monetary policy focussed on short- or long-term interest rates has become clear in the last 5 years with lending to businesses remaining sluggish despite historically low interest rates and £375bn worth of QE.

Perhaps it is time for a return to the quantitative  controls on private money creation that were standard in the 1950s and 1960s; or perhaps it is time to consider whether the power to create money really should reside with private companies at all - the UK banks’ record since 2008 begs the question.

Whatever the future though, the Bank of England should be congratulated for setting the record straight on how the modern monetary system works. These articles will stand the test of time as a reference for anyone interested in both understanding and reforming our financial system.

They can be seen as a victory for those – like NEF, Positive Money, Michael Kumhof, Adair Turner, Richard Werner and many others – who have been working to educate policy makers and the general public about the realities of our monetary system. And let’s hope they lead to a few textbooks being ripped up.

Bank of England on Money and Money Creation in the Modern Economy
Written by Positive Money on March 12, 2014

Where does money come from?  In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood. The principal way in which they are created is through commercial banks making loans: whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby creating new money.  This description of how money is created differs from the story found in some economics textbooks.

Believe it or not, this is an extract from the News Release on new Quarterly Bulletin on Bank of England’s website!

We’ve been talking about the way money is created for the last 4 years. We’ve also argued that the textbooks used in universities were inaccurate. At last, there’s an official document and videos that we can send to all those economists, academics, politicians and everyone who still shake their head when we’re explaining this.


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