If banks create enough new money and pump it into the economy through personal loans and credit cards it can cause a ‘boom’ that creates jobs and encourages businesses to expand. But because these booms are fuelled by increasing personal debt rather than increase in income, sooner or later they have to end, and when they do a recession occurs that makes businesses bankrupt and people lose their jobs. The current money system is bad for business and jobs.
1. Money creation by the banks creates an artificial boom
Economic booms can be fuelled by people spending money that they have borrowed, with every extra loan creating brand new money. By creating money in this way, banks doubled the amount of money in the 10 years running up to the financial crisis. When so much new money is being created and put into the economy, it feels like everyone is getting richer – house prices increase, leading to feelings of increased wealth (and therefore spending) amongst home owners. Meanwhile easy access to credit encourages people to spend money they don’t have. Consequently businesses sell more, take on more staff, and can borrow more in order to expand.
2. Eventually the debt becomes too much and the boom turns into bust
All of this newly created money has to be repaid. Spending in the economy goes down as more and more of people’s incomes are swallowed up by repayments on debt. But worse still, because this money was created by banks, when it is repaid it disappears. It is not re-circulated or reinvested: it literally disappears. If the banks don’t make new loans to replace this money, the money supply shrinks. Lower amounts of money circulating tends to lead to lower demand for goods and services, and we go in to recession.
“During any business cycle, whether ending in a financial crisis recession or just a normal recession, there is a very strong relationship between the growth of credit (relative to GDP) on the upswing, and the depth of the subsequent collapse in GDP on the downswing.”
Taylor, A. M. (2012). “The Great Leveraging”. National Bureau of Economic Research.
3. Instability is bad for businesses
It’s difficult to run a business well when recessions are caused by the banking system every few years. Businesses that are well run may go bust simply because of a financial crisis or recession caused by the banking system. Most businesses need a stable economy so that they can grow steadily, rather than debt-fuelled booms followed by busts.