Whatever anybody says or writes about economics, always remember the simple rule that money and credit are the same thing.
Credit is easier to understand, actually. If you decide to buy a nice 40" LCD TV (with 2 scarts and inbuilt Freeview box) for £519*, for example and you don't have the 'money' to hand you could stick in on a credit card, or sign up to repay the loan over three years, or hand over a scribbled IOU and promise to come back and pay next week. Subject to checking your status, this is all pretty much the same thing.
If you are like me and have actually saved up, you use your debit card. So money goes out of my account and into Curry's. But the money in their account is merely a 'Promise to pay' made by some government department. If you do it the old fashioned way and pay with coins and notes, again, the retailer is merely giving the government credit. Coins and notes are an interest-free loan to the government, don't forget.
When we sold our house last year, we could have agreed with the purchaser that we'll leave the price outstanding as a loan, and that he pays us monthly instalments with interest. But as I have no experience with this sort of thing, we took cash of course, which we deposited back with the bank which the bank (or some other bank which borrowed from the bank where we put our 'money') in turn lent back to him. The bank is just a middleman in this transaction.
A lot of people reckon that the government - or indeed banks** - can create money. In a physical sense, the government can, and in a slightly more abstract way banks can create credit. But if you ignore 'money' and think about credit, no institution on its own can create credit, i.e. the faith that your counterparty will actually pay up at some stage in the future.
So however much money the government prints, and however low the political appointees at central banks cut interest rates (aka 'pushing a piece of string') and however much money the government forces nationalised banks to lend, it is all for nought.
Because it is that faith that your counterparty will be able to pay in future that has been shattered by the credit crunch, and that is what will have to be restored before the economy picks up again.
* As we did today. Hallujah, we are chavs!
** Anybody who says that banks can create money is way off piste - what they actually do is facilitate credit, which may of course be a credit bubble, not real credit.
A grim document
7 hours ago
19 comments:
Nope, You're 100% wrong on this one.
Credit is only turned into money when it is paid back to the Fractional Reserve lender at a profit.
Government printing money causes inflation.
I suggest you read "A Brief History of Interest"[1]
1. http://www.monetary.org/interest.htm
AC1 - how can I be wrong when you just said the same thing? If 'credit' is 'turned into money' that just means that money is another form of credit. Credit clearly came first, 'money' came along a lot later.
And I do not understand why people get so worked up about Fractional Reserve Banking. All it means is that the bank doesn't just invest its own shareholders fund (long term capital) but it can take deposits and savings (short or medium term capital) as well and invest them profitably. If there were no FRB then banks would not be able to pay interest on deposits and savings (in fact, they would charge for the privilege).
"If you are like me and have actually saved up, you use your debit card." It's still better to pay with a credit card and pay off the full balance next month. You can earn nectar points, airmiles on your spending as well as being able to recover your payment should the retailer go bust before the goods / services are delivered.
PS Many credit card companies also include insurance / price protection on any such purchases. The only reason you should ever pay by debit card is to save the retailer some transaction costs and you wish to forego the above benefits!
Under fiat currency and fractional reserve banking you are right, but with one proviso - whoever is capable of printing (literally or electronically) is able to use that freshly minted money in order to compete with those who PRODUCED in order to get THEIR money. Thus there is an inherent theft in the creation of money.
Second, the current system is only one type of monetary system. Under a hard money standard, money is simply the most tradeable commodity and that can't simply be created and yet is all that is accepted as final payment for goods and services.
Nick von Mises
I'm saying that the money supply is changed when lent credit is paid back. It's expanded through economic growth created by the credit, and contracted by bad lending.
I think FRB is an excellent system.
I think that because Credit and Money were deemed interchangeable we got into the credit Crunch far far deeper than we should have.
You're only a chav if you spend 12 hours a day sat in front of it.
Happy New Year Mr W.
NVM, printing money obviously devalues existing money, which you might look at as theft, or transfer from savers to borrowers, but that wasn't my point. All I am saying is that 'money' is a small and specific subset of 'credit'. And 'credit' ultimately means 'faith that your borrower will be able to repay you', and once that faith is lost it cannot be restored by the government flailing its arms and printing money.
AC1, was this a 'credit crunch' or a 'money crunch'? If I am a saver, do I have 'money' or have I granted 'credit'? Is it not more or less the same thing?
Encyclopaedia Britannica Vol 12 p357 15th ed
" In the course of issuing money the commercial banks actually create it by expanding their deposits but they are not at liberty to create all they may wish,whenever they wish, for the total is limited by the volume of bank reserves and the prevailing ratio between these reserves and bank deposits, a ratio that is set by law,regulation or custom."
Under fiat currency, there is no such thing as "money", your currency has no value and is nothing more than credit. Pound Sterling is a fiat currency.
Real money is a higher order over credit and has a store value, is a means of payment and can not be created.
Commerical bank and central bank are a cartel via fiat currency and Fractional Reserve Banking.
All credit in fiat currency orignates from a central bank in a form of a compound interest loan and everyone is effectively put under a debt-bondage including the government.
I suggest reading "The Case Against the Fed"[1] for more detailed explaination.
1. http://mises.org/books/fed.pdf
Anon, "there is no such thing as "money", your currency has no value and is nothing more than credit."
That's just another way of saying what I said. Money IS credit, or a particular form thereof. What people refer to as 'fiat money' is also a form of credit.
But in that case, what is "real money"? All money is a form of credit.
Even gold only has value because a) it is scarce and b) it has a lot of useful uses like conducting electricity and jewellery. So gold only has value because you are gambling on a) geologists not discovering vast new easily extractable reserves and b) scientists not finding something cheaper and better to conduct electricty and gold jewellery not going out of fashion
I think we definitely reached what I term "Peak Credit".
AC1, which is another way of saying that the credit bubble burst.
Mark wrote:
"All money is a form of credit"
Factual Incorrect! There is a type of monetary system were this is not the case but this will be research exercise for you.
Anon "There is a type of monetary system were this is not the case but this will be research exercise for you."
I know the whole history of money and banking all the way from pre-historic barter to today (early 2009), and I must have missed that bit. Even in the most basic barter system, if you swap your camel for the promise to receive three goats the week after next (rather than payment on exchange), that is 'credit' and hence a generic form of 'money'.
By the way, it's "where" and not "were" in that context.
Really, do you about the Austrian theory of money, banking, and credit cycles?
Yes.
It's a fraud, the Bak=nk of England is a Private co, they lower interest rates to get us hooked on thin air credit, then raise them again, those who have overstretched themselves get their assets hauledin, sold off for cash, then this cash is swapped for real money, IE Gold, silver and Hard assets.
Unplug yourself from the Bankster Created Matrix matrix
http://adrianpeirson.spaces.live.com/blog/cns!CB609AA4E892F479!121.entry
Post a Comment