Ending the money scam once and for all (Dialect Radio)

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In this interview on Dialect Radio we hear what’s wrong with our money system and how to fix it from Mark Kerridge of Bristol Positive Money local group. The power to create money over the years has been privatised so it serves private, not public interests and quite self-evidently this has to change.

Listen here (25 min)

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Please note the information about the referendum in Switzerland in the interview is not entirely correct. The 100,000 signatures were collected and submitted already, the referendum will happen, but it is not going to happen this year yet. More info on this here.

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  • RJ

    The amount of money created is a joint effort. The lender and bank work together to create this new money. And determine where its spent.

    And don’t forget the UK Govt can (and do today) create money via the banks whenever they wish. As well as the amount they need. Using BoE reserves as an asset to support this.

    • PJM

      RJ, seeing as you’re such a monetary expert, please tell us whether or not it is true that it would be very much cheaper for the government to:

      1. borrow direct from the Bank of England, which it owns outright, or
      2. borrow from a commercial bank?

      RJ, please tell us what it would cost in interest, net, for the government to borrow 100 million pounds from the Bank of England, to spend on infrastructure, and whether or not the government would have to repay the 100 million pound principal.

      • RJ

        Many are still focused on the irrelevant bond interest expense or liability and completely forget about the critically important bond asset or (interest) revenue.

        Monetary sovereign governments can create all the money and interest they ever need by the simple process of doing a journal entry. Go overboard = inflation or currency depreciation so this is not advisable but using deficit spending to fund needed housing etc definitely is. But let’s not do this and find excuses not too. Let’s instead turn the whole system on its head (that will take forever) and pretend that banks have all the power and not as is the case the UK Govt. And also pretend that all new money is created by the banks by lending and completely ignore new money created by UK Govt spending.

        It’s a strange world we live in.

        • solutrean

          Here we go again. The British government is NOT monetary sovereign RJ. Positive Money have set up shop to rectify the situation and to establish the genuine monetary sovereignty that we on this site all wish to see.

          UK government spending does NOT create new money, it merely recycles existing bank money.

          Only when the reforms advocated by PM (or very similar measures) are a fixture in our economy will it be possible to build all those houses that you speak of and much more besides.

          If governments were indeed currently equipped with the powers of money creation that you suggest, then I put it to you that they would be quite mad not to use those powers. Perhaps they do not share MMT’s complacent attitude regarding debt?

          It does seem that MMT may be a vehicle to sidetrack genuine and full monetary reform and shunt it into the sidings. We must be ever vigilant.

          • RJ

            “UK government spending does NOT create new money”

            It does. And I have explained very clearly why it does in other posts. But it takes time for some to let go of cherished but flawed (destructive) beliefs. Even if the truth is a door to freedom.

          • solutrean

            I’m afraid it is you who has the flawed beliefs RJ. On a very recent post on this site you wrote the following critique of Positive Money‘s proposals.:

            “But changing now would be a massive change. Costing a fortune and taking many years (10 years minimum) And it wouldn’t achieve much. Banks would still recycle money as Lord Turner pointed out. So if Crash invested £100,000 of reserves. This could be invested in Lloyds who loans to RJ who invests back in Barclays etc. £100,000 could recycle 100 times. So £100,000 would create 10 million of reserves = new money. Just like at present.”

            Lord Turner actually said the very opposite of what you claim RJ. He said (slightly paraphrased):

            “In full reserve banking all deposits are matched by reserves at the central bank so you do not need a money multiplier because the monetary supply IS the monetary base.”

            This can easily be checked on the recent video “Making Money Work” See 16 minutes into the video.

          • RJ

            “In full reserve banking all deposits are matched by reserves at the
            central bank so you do not need a money multiplier because the monetary
            supply IS the monetary base.”

            ??? This has nothing to do with the point I made.

            My example shows very clearly that money can recycle. So if I’m a very hard worker and earn £1000 (reserves). I invest with HSBC and they loan the money to SS who pays me £1000 for work done. Then I invest again with HSBC. The £1000 reserves recycle 10 time. HSBC shows
            DEBIT Loans to SS and others £10,000
            CREDIT Reserve Investments RJ £10,000

            How does this differ in any way to what happens now? Reserves of £1000 only still exist. But the recycling impact (that Lord Turner has mentioned) is the same as what happens today. But reserve investments replace bank credit.

          • solutrean

            Where exactly does Adair Turner say this RJ? It would be useful if you gave references to back up your statements as I do.

            I am of the opinion that post reform the only entity that is permitted to create new money is the monetary creation committee of the Bank of England.

          • RJ

            It was an article or speech on PM where he mentioned the recycling aspect of PM’s proposal. But its very very clear that this will happen in good times. You can see this from the example above. Its not difficult to see this. or just take a family of children with £10 with one hard worker that earns money and then loans it back to the other children. Debt can very quickly climb with the not willing to work children owing hundreds to the hard working, keen to loan to the other children. PM proposal would have the same impact UNLESS restrictions were imposed. It would create a situation no different to what we have today. All this upheaval and cost. It will achieve nothing unless we conquer our fear of debt / journal entries. And accept debt as necessary for savings and profits. And to achieve a fairer, less polluted, world.

          • solutrean

            Thanks for all the help RJ in tracing the Turner article or quote or whatever, if it even exists. Sounds like a load of baloney to me.

          • RJ

            Pleased to help. If you need to know anything more don’t hesitate to ask.

          • solutrean

            It is very evident what you have done RJ. You have misread the Turner passage from the video that I quoted earlier (quite accidentally of course) and you have completely inverted what he said to suit your own flawed beliefs.

            Just for once it would be nice if you admitted that you are wrong.

        • PJM

          RJ, you did not answer my question!

          To rephrase it: The government wants to borrow 100 million pounds and spend it on some infrastructure. Would it be more inflationary for the government to borrow newly created money from the Bank of England, than it would be for the government to borrow newly created money from a commercial bank, or would it make no difference to inflation, whether the government borrowed from the Bank of England or from a commercial bank?

          • RJ

            I would say (guess) the inflationary impact of not issuing bonds would be greater.

            Option 1. Issuing bonds. It creates more bond asset interest income. But interest rates are low at present. On the other hand it drains bank credit. So less bank credit mean less investment money to push up share prices / property prices etc.

            Option 2. Not issuing bonds = more money. So we hold more bank credit / money. And the banks hold more reserves that they earn interest on.

            But these are the question economists should look at. Based on facts not fiction and ignorance as is mostly done at present.

          • PJM
            SOLUTREAN
            MARCO SABA
            SHANE
            SUMAL RAJ

            Please ignore RJ.

            He has been peddling his barely understandable nonsense on these pages for at least four years.

            He never backs up what he states with any links.

            He does not agree with PM and delights arrogantly in confusing genuine readers and posters.

            He really should be banned from these pages as a troll.

          • solutrean

            I agree with you regarding RJ’s motives James but I don’t think banning him is the answer- he may come back as JR. Anyway I quite like the banter.

          • RJ

            James does go on. Even though he doesn’t really understand this topic that well. He could be a little more humble and learn from what I post.

          • That’ll be the day.

  • Marco Saba

    About the role of central banking in looting the host nation: http://www.washingtonsblog.com/2016/02/central-banks-trojan-horses-looting-host-nations.html

  • What is the mechanism by which central bank creates the base money(M1?). Is base money created out of thin air? Is their any maths for the volume of base money?

    • RJ

      Its created by journal entries. Just like the banks create bank credit
      BoE
      DEBIT say the UK treasury when they pay an entity
      CREDIT Banks reserves account

      the bank then
      DEBIT BoE reserves
      CREDIT Our account = NEW MONEY

      we (the recipient)
      DEBIT Money at bank = NEW MONEY
      CREDIT say revenue

      So Govt deficit spending = non Govt profits

      • confusing didn’t really understand….

        • Shane

          It’s different in different countries. The USA method might be easier to understand.

          Are you familiar with double entry accounting? Or equity = assets – liabilities?

          In the US, base money is expanded when a group called the “Federal Open Market Committee” authorizes the central bank to accept government debt as an asset. The Central bank then enters, for example, a 100 federal bond as an asset, and $100 cash as a liability. The government, for its part, registers the BOND as the liability and the CASH as the asset.

          In this way, cash is created and given to the government to spend. Meanwhile, the bank can use the bond as an asset against which it can lend money privately.

          The cash given to the government here is essentially brand new money. It is not required to “Come from” anywhere. It is simply brought into existence by the fact that since the bank got an asset (a government bond) it owes the government credit in exchange.

          This power become completely unloosed from any objective limit in the USA when Nixon closed the gold window in the 70’s, and had been substantially freed of MOST objective limits in the 1930’s when the gold standard was abandoned.

          To make a long story short, this is a complex way of allowing government tax credits to be used as money. The idea was that putting part of the system in the hands of the bankers would balance it against the government’s tendency to just want to inflate currency. This turned out to be wrong on a whole multitude of levels.

          In the US, the government now plays the role of limiting inflation by using restrictive monetary policy. Sadly, our problems now are that the well to do are more or less just sitting on their assets, and no one has any power to make them lend or spend. Thus the term “pushing on a string” as it pertains to regulation intended to jump start the economies of the west over the last decade or more.

          The solution, sadly, is to go back to gold, solver, copper and the like as money. NOT gold BACKED money mind you. That is the system that crashed and caused us to begin using government debt as the foundation for our money.

          We need to go back to using ACTUAL MONEY.

          But there is really no one talking about doing that, because the bureaucrats in charge of the government and the investors in charge of corporations have one thing in common. Neither like to be held accountable to an objective standard.

          • RJ

            “The solution, sadly, is to go back to gold, silver, copper and the like as money. ”

            You were doing very well up until this point. Gold has never been money. It’s a myth. Maybe in a period we have no records about thousands of years back but certainly not in the UK, US, NZ, Aust etc. Its funny how these tall stories come about and then are just blindly accepted. Real money is bank credit. It’s a financial asset always backed by debt. If gold is used its a barter exchange. Coins as money never equal the value of the metal in the coins. They are no more than a token to represent credit.

          • Shane

            “Gold has never been money. It’s a myth.”

            It’s amazing to me how someone can just bald faced lie and think it is going to float. Real money is a commodity, and “official” money is a commodity closely regulated. A stamped gold coin is money.

            Credit is something you extend to someone you trust.

            Bank credit is credit the bank extends to someone they trust. They have a lot of reason to trust folks these days since we are required by law to use their credit AS money.

            People like you are the heart and soul of the problem. You think credit is the same thing as having a commodity safely in hand. They are diametrically opposed concepts.

          • Shane,
            See my comments above about RJ.

          • Shane

            Well, your post was why I chimed in. It is possible to explain these things. And I, too, disagree with PM’s solution. The current system balances the interests of banks against the interests of government agents in order to keep a reasonably consistent money supply. It lacks a method for pushing more money out when needed. The PM “solution” goes right back to methods we have used before – government sovereignty – that always run into problems when the government decides to just expand the money supply and assign itself money when it gets into trouble.

            Time after time government agents TELL us they will have an inviolable wall between spending and some sort of savings account that is under their control. And, time after time, those bureaucrats or some that come after them violate those oaths.

            The solution is to go back to commodity money. If you don’t have it sitting there, you don’t have it. THE END.

            I have my doubts as to whether or not people will understand and accept this reality. RJ is also right about the fact that we have been under an at least PARTIAL fiat currency for hundreds of years, as partial credit is another way of looking at partial reserves. A partial reserve monetary system is made up MOSTLY of credit. A fiat system is all credit.

            A commodity money is money. We use it when we do not have trust, and thus do not want to extend credit.

            It has to be there. And, in point of fact, even in a fully credit system like the ones we use today, it IS there, hidden in the network of investments people make. But that causes the localized inflation of specific goods and services we see. That’s why gold, real estate, and medical care are so god awful expensive, for example. People invest their fake, dangerously unstable credit based money in COMMODITIES or put it as a stake in an organization so as to preserve value.

            PM’s solution IS dangerous, and I have had opportunity to but heads with PM reps on these posts, and I find them nigh as unreliable as RJ.

            Bank bureaucrats and government bureaucrats have one thing in common – they do not like to be held accountable to an objective standard. But that is what we need if we want to stop these boom and bust cycles that are the inevitable result of over-extending credit and these slow growth plateaus and recessions that are the inevitable result of artificially trying to steady the market with external regulation.

            In short, people need to be able to spend when they want to spend, and save when they want to save. Real, commodity money provides the instrument for this to occur. We need to get that tool back in our arsenal of economic mechanisms.

          • Crash

            Very interesting insights Shane.

            We have to understand that there are basically two types of capitalism. A barter economy (that neoclassicals are actually modelling) and a credit economy (which is what we are actually having). One isn’t inherently better than the other, both have their pros and cons. A barter economy tends to be more self regulating but is less flexible and more susceptible to the power abuses by creditors (they could hoard money until the interest rates are forced up, causing entrepreneurs more difficulty to get credit)
            A credit economy has the other problem, without any kind of limit every insane idea will find funding and over time bad debts just keep piling up without get cleared out of the system.

            The biggest problem that we are facing at the moment, however, is that our policies are designed as if we had a barter economy when in fact we have a credit economy. This lets financial instability (see Minsky) to naturally arise from within the system without any meaningful checks and balances in place.

            Sovereign money creation hasn’t really been around that much for us to say “governments always find a way to abuse it”. There has always been (and will likely continue to be) a constant battle over the power to create money between proponents of either banking or currency theory.

            PM’s proposal, despite being technically fiat money, acts and feels like actual commodity money, as it is being created by the state “out of nothing”, but once the conversion is complete after 10-20 years, all money in existence will have a “real” backing behind it – the work done by the debtors to repay their loans and the work done by government workers who were initially paid with the government’s newly created money. The backing behind sovereign money is a nation’s produced wealth.

            There are of course caveats with SMC, but they are about how to keep the government from excessive money creation. However, even if they were to do that, they would at least have a democratic mandate and are therefore at least somewhat under democratic control. Private banks do not have that. But neither do gold mines.

            I am not opposed to a commodity money per se but we have to think about which commodity is best suited as its base. Gold and silver markets have been cornered before, mines can be controlled by private conglomerates and mining gold puts a toll on the environment.

            If we use a commodity we would have to decide on one that actually incorporates the laws of thermodynamics. Energy (kWh) would probably be the ideal global currency, but here we’d have the problem that currently drilling for oil would be the most lucrative form of money creation. Once we have decentralised renewable energy production in place all over the world, that would probably be the most sustainable currency, as everyone could produce money on the roof of their house.

          • Shane

            Thanks Crash,

            Yours is perhaps the most complete response I have seen, but I wonder why you speak on the one hand about the difference between a barter and a credit economy, and then turn around and speak of creditors hoarding until interest rates go up in a barter economy? This is, of course, a partially credit based economy at the very least.

            Credit is trust. Money is a commodity. If you use money, you are merely bartering. Money is just a handy intermediate trade good that one trades knowing that it will hold value over time. Credit is doing business with someone despite the fact that they can not yet provide the good or service you want, feeling in your heart that they will eventually come through.

            People tend to think that giving someone money on the stipulation that they will give you that money plus some more at a later date is uniquely “credit”. But that is simply one kind of credit. Futures trading is another kind of credit. “Investing” in an organization expecting some future portion of profits is yet another form of credit. Trust is credit. Trust is credit. Trust is credit.

            That’s all credit is, and the sooner folks realize it, the sooner we can stop playing these odd games. Pegging a commodity to a fiat unit of credit does not work. Pegging one commodity to another in an attempt to somehow lend consistency to trade values does not work. There is no handy way to take trust out of the system. And some people are going to break their word. And that is just how things have to be. When they do, you pick up the pieces and you move on. But nothing is ever going to create trust as an actual, physical, reliable thing. Any and all attempts to centrally control the process of trading things in order to do away with the risk of doing business on trust will never, ever work except under the most onerous of all conceivable totalitarian regimes, and in case anyone has missed it, this is exactly where all the powers that be are heading by various means, and in fact where they have always had a tendency to want to head since time immemorial.

            A slave is very trustworthy…..

            If folks do not wise up soon, that is exactly where we are going to end up.

            You cannot magically create trust as an objective thing except by shooting anyone who refuses to accept your IOU. And that’s not really trust…..

          • Crash

            There is a distinct difference in credit between a barter economy and a credit economy, and that has to do with where credit comes from.
            You can (and to my mind also should be able to) have credit and debt in a functional barter economy. There is nothing inherently wrong with foregoing rights to ownership in exchange for a predetermined but more stable profit (aka interest). The question is simply if the loan comes out of existing assets (barter economy) or if it is, as in a credit economy, backed by the expectation (or promise) that the credit financed endeavour will generate enough value in the future.

            In a barter economy credit is just a redistribution of existing money – from a patient saver to an impatient borrower. There is no real effect on aggregate demand (This is the mainstream loanable funds model of banks as intermediaries). Such a system is much more stable than the dynamic nature of endogenous money creation, but it could lead to problems of savers holding on to their money until the interest rate rises, causing a shortage of credit and thus somewhat limiting an economy’s growth potential.
            Endogenous money creation via the issue of debt on the other hand finances as much potential as possible, but starts getting into trouble as bad debts pile up over time and become a drag on the system. Without bankruptcies or debt relief to clear those bad debts the system risks a debt deflation and ultimately breakdown down the line (the first signs of which is what we’ve been experiencing since 2008).

            There is nothing wrong with having credit. And the problem isn’t even that some people might break their word. We cannot know the future and we often predict it incorrectly and businesses fail because of that. Regardless of which monetary system one adopts, the most important question is how to limit second order effects for uninvolved parties (think a credit crunch causing a domino effect of failing banks) and how to keep risk and responsibility from decoupling. Once we get that done, we should really take time to think of a monetary system that takes into account the environment and derives its value from within it. And to my mind, the only surplus value in nature comes from the sun’s energy. Energy already is nature’s currency and if we want a sustainable economy I think ultimately it is also going to be the only logical commodity to be used as money.

          • Shane

            Hehe.

            Ok. I’ll try again.

            There is no such thing as a non-credit economy. Credit is trust. All economies operate on some level of trust.

            One of the keys in discussing anything is agreeing on terms. If we cannot agree on the difference between trading actual things (barter) and trading on trust in the expectation of future payment (credit), we’re not going to get any further than that.

            Credit is trust. There is no such thing as commodity credit.

            There are some very good arguments against interest bearing debt as an acceptable form of credit, but if we cannot even agree as to what credit really is, there’s no way to discuss that issue. I personally don’t see an easy way forward to forbid interest bearing debt, but the way to avoid it piling up and affecting third parties is to simply refuse to allow debt collection efforts in the courts.

            You loaned money trusting someone to pay you back with interest. They did not live up to your trust. You bet poorly. You lost money. That ought to be end of the law as far as lending is concerned.

          • RJ

            “we cannot even agree as to what credit really is”

            It is very clear.

            Credit is no more than a financial asset to the asset holding party and a financial liability to the liability holder. Both the asset and liability are created by journal entries. Money is credit today and almost always has been.

            “You loaned money trusting someone to pay you back with interest.” Not trusting. It’s often backed by a legal contract that can be enforced by legal means. This can mean for example someone being kicked out of their home. Or having money forcible taken from their bank accounts etc.

          • Why government debt when government itself can create money? and the central bank itself is Government entity?

        • Sumal,
          You are not meant to understand.

          RJ is famous for such posts as above that are full of unexplained double entry bookkeeping acronyms.
          He pounces on any visitor who asks a question only to confuse them.

          And he has been doing this for the past four years or more.

          Oh yes, occasionally, he pretends to agree with the blog and may make some seemingly, reasonable remarks, but then it becomes clear that, in fact, he has fundamental objections to PM proposals.
          It is then he peddles his talk about BoE reserves, Journal Entries, etc which almost, but not quite, make sense.
          He never supplies links to evidence what he asserts.
          And he ignores any who disagree with him by showing where he has gone wrong even if they also use basic accounting principles that he cannot avoid.

          It is my opinion, and that of others, that he is a troll who is connected with the private banking industry.
          The bankers are terrified that any of the PM proposals ever see the light of day as it will uproot their private money tree.

          Thus, RJ is in the business of scuppering PM by the weird, unsupported assertions that he purveys – in a quite arrogantly manner, in my opinion.

  • WIll Son

    Hi,

    Can someone explain to me the laws surrounding collateral that banks use to back loans.

    So if the bank creates credit and it based on underlying collateral, do they have the rights to the asset in loan failure?

    If I receive a home loan from a bank, and cannot make repayments, do the banks receive the full amount from sale of the house? Is it their property?

    I don’t understand how this works if banks create credit and operate under a fractional reserve.

    Sorry to ask but I can’t find anything on net.

    Cheers Wil

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