As I have been saying for a while, e.g. here:
... what [quantitative easing] boils down to is commercial banks and government departments shuffling numbers on bits of paper (or on computer screens) around between themselves with little or no impact on the wider economy.
From today's FT*:
Key measures of money supply and bank lending both fell in October, raising further questions about the effectiveness of the Bank of England’s £200bn programme to pump cash into the economy.
Money supply as measured by M4 “broad” money excluding distortions from the financial sector fell 0.7 per cent in the month and by 5.3 per cent over the last three months annualised, figures from the Bank showed... The figures also showed that M4 lending excluding the effect of securitisations and financial sector distortions fell at a 3.4 per cent annualised pace in the three months to October compared with an average of about 10 per cent annual growth in the decade leading up to the crisis.
The weakness of money supply and credit is a sign that banks are reluctant to lend and consumers and businesses are holding off spending and borrowing, and underlies fears that deflationary pressures still haunt the UK economy...
Via HPC.
Monday 30 November 2009
Hurray! Another little pet theory borne out in practice.
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39 comments:
We need deflationary pressures, contrary to what the government says. Deflation is a correction in a money supply bubble. It is the pus in the wound.
This government's attempt to reinflate the housing market is simply putting off the correction that is needed - without which, we are probably headed for yet another bust in a few years' time.
If the government is sincere about wishing to fix the economy, it could do worse than permit a gentle deflation. I.e., let the air out of the bubble slowly.
F, exactly, but then the question is, how quickly? Should we just get it over with and start again, or should we go for a Japanese-style two-decade long deflationary period?
I might be wrong, but my understanding is that the banks are receiving the freshly minted notes (by way of a number on a screen) but are required to retain almost all of it as capital. In effect, lots of money is created but it is just kept in the safe rather than injected into the wider economy.
As I observed elsewhere recently, whether QE is inflationary, deflationary or neutral depends on what happens to the money. If it never gets into the spending-cycle it seems to me it can have no direct effect on inflation / deflation.
A relaxation or tightening of capital requirements is an entirely different matter, of course.
TFB, that is another good way of explaining it.
OT via Higham via etcs:
'whereas the economic decline is measured in years (23-26)'
Not quite your 18 year cycle but...
http://www.traders-talk.com/mb2/index.php?showtopic=100108
Sorry for the homework but if you guys continue to publish and I to read then you must expect this kind of stuff.
STB.
STB, I think Martin Armstrong hams it up a bit, even though some of that first comment make a lot of sense. He worries about credit bubbles but I worry just as much about asset price bubbles (hence enthusiasm for Land Value Tax).
Fausty, TFB, MW agreed.
Just been looking to restructure our modest borrowings (which we would have done before now but the manager person foisted upon us by HSBC was abso-fucking-useless and a liar) and they have quoted loan rates of base plus 7.5% (!) and o/d rates of base plus 6% (!!). There's going to be a bit of frank talking when we meet the new manager, I can tell you. What a bunch of userious shysters.
What I want to know is is where has all the money we and you have given them gone?
"In effect, lots of money is created but it is just kept in the safe rather than injected into the wider economy."
Why wouldnt that impact on lending? If I was given £1m but told it'd be kept in a safe until 2020, I'll still spend more on a day-to-day basis (other savings can fall).
L, "where has all the money we and you have given them gone?"
They lost it years ago, we're now helping sort out a pre-existing black hole, not giving them new money.
M, because the banks know that they are going to have to increase capital in future (and be forced to invest more in gilts - the govt has to issue them to somebody!) so why would they engage in risky lending now?
To continue the analogy, the money is being kept in a safe because the banks know the govt is going to raid them in future.
I think the answer to Mr Matthew's question is that the banks aren't in the business of saving they are in the business of lending. The additional cash stuffed into their safes does not replace other cash they would otherwise have stuffed in the safe, they are not forgoing other saving in order to save the new stuff.
In other words stuffing the safe with additional capital does not free-up cash for lending.
"If I [were] given £1m but told it'd be kept in a safe until 2020, I'll still spend more on a day to day basis (other savings can fall)."
But what would you spend? You can't spend any part of the £1m because it's in the safe. You say you would forgo other saving, that's fair enough as an individual but banks are not in the same position because lending is not the same as spending. They can't lend the new money.
"the money is being kept in a safe because the banks know the govt is going to raid them in future"
And we are still awaiting the crystallisation of losses from previous bad lending. Some has been written-off already but there is more to come.
Until bankrupt "Zombie" banks (well their bonds) are removed from the economy then nothing will change.
Underlying fears - that's a good one.
It's been a while since I took my economics O level but I still don't see the difference bewteen quantitative easing and printing money.
"where has all the money we and you have given them gone?"
Dubai ?
Yep. 'They've already lost it'. As in the infantryman's lament 'You're already dead, you just don't know it yet'.
I knew that MW. It was a bit of irony, I suppose.
What I find almost impossible to deal with is the persistent deceit practised by New Labour and the Banks about all this. Plus of course the BBC. And to only a slightly lesser extent the Tory front bench.
Cripes! We are fucked aren't we?
Banned, there is a huge difference between 'printing new money' (i.e. the government running up new debts, which it is merrily doing) and 'swapping one kind of govt debt for another' (which is what QE is).
L,, yes we are.
As far as I know, and I cannot be arsed to check it up,M4 includes all the money banks hold (in safes or wherever),so even if they were clinging on and not releasing it (until the City-friendly Tories get in?),it would still show up in the figures.
Other explanations could be: Dubai (not enough money lost there?);they are hiding it somewhere; Mark Wadsworth has been right all along.( A bit of a facer the last one since MW believes that banks act like old-fashioned building societies matching savers to borrowers and never ever have more money out on loan than they have reserves).But what other (than MW's) explanation is there?
DBC "MW believes that banks act like old-fashioned building societies matching savers to borrowers and never ever have more money out on loan than they have reserves"
Nope. What I said was "banks match savers with borrowers". In other words, the total amount of money that banks lend out is the same as the amount of money they borrow from depositors.
Banks, in theory, might manage perfectly well without any 'reserves' whatsoever, but remember that 'reserves' can mean two entirely opposite things anyway.
Do you mean 'reserves' as in (1) 'cash reserve' (an asset) or (2) 'profit and loss reserves' (part of shareholder's funds and hence, in accounting terms, a liability)?
Make up your mind which and then we can continue the discussion.
MW
Bear with me as I try to understand what you're saying: all this new money is just filling the hole caused by real losses at the banks. As such - although it is cash or near-cash - it is effectively (and permanently?) sterilised and can never be used to underpin substantial new lending. Substantial new lending can only occur once the banks' losses are made good (by debt-equity swaps and/or QE cash from the BoE and/or rights or other share issues) and banks can resume lending out depositors' money.
This analysis implies that (contrary to Liam Haligan for instance) there is no direct inflationary overhang due to QE. However, I can't see where QE would not be a contributory cause of a significant weakening of sterling which, in turn, would feed inflation. This weakening would be exacerbated by real borrowing (not gilt purchases financed with QE money) to bridge the budget deficit. Even if you're correct (ie QE is not, for now, inflationary or - better, in your terms - is warding off deflation) it seems we are, as you say, f***ed.
Umbongo, that is another way of explaining it. I'd have to agree with most of that.
oh Gawd a sense of Groundhog deja vu is in the air.
I say" MW believes ..banks..matching savers to borrowers"
You reply,"Nope.What I said was banks match savers with borrowers."
Rather than go through the usual rigmarole why don't you critique Wikipedia's totally orthodox entry on Fractional Reserve Banking, since this is my position ,however ill-explained?
DBC, it would help the debate if you could specify what you mean by "reserves".
Compare and contrast:
a) I could set up my own bank using entirely my own money, I take £100 of my own and lend it out to third party borrower. I have no third party liabilities whatsoever, I am the sole shareholder with an asset of £100. If the loan goes bad, then I lose out.
b) Or I could take a deposit from e.g. you of £100 and lend that out to third party borrower. I am the sole shareholder but have no assets whatsoever, because you (the depositor) have an asset of £100. if the loan goes bad, you lose out.
Either way, the loan to third party is matched savings. In example (a) it is matched with my savings and in example (b) it is matched with your savings.
Have a look at a real life bank balance sheet!
I am using reserves in the way Wikipedia does in its entry in Fractional Reserve Banking.
Please comment on Wikipedia's orthodox account as any personal spin by me does not seem helpful.
DBC, Wiki use "reserves" to refer to the assets side (for your info).
To extend my above example, I start off my bank with £100 cash (which is either my money or your money) and if I put £10 into a separate tin in cash (just for safety) and lend out £90, then that is a fractional reserve of 10% (which is the normal sort of rate).
So, if I have lent out £90 and have £10 in "cash reserves" it stands to reason that my loans exceed my "cash reserves". So your original statement is a statement of the blindingly obvious (unless a bank were so hyper-cautious as to lend out less than half what it could and keep £51 in a petty cash tin and only lend out £49).
I have never said anything else.
What interests me is where the original £100 comes from (either from you or from me, which by definition must be your or my savings) and where it goes to (i.e. somebody's borrowings).
You're the only bank in town so you lend ninety quid,keep 10 reserve,then eventually the ninety quid loan is spent and comes back to you and you lend eighty keep a reserve and so on through loans of seventy ,sixty to zero.
So real savings 100 borrowings 440
This is my own alleged reasoning: I will return to the orthodox Wikipedia explanation after the second half of football.
DBC "the ninety quid loan is spent and comes back to you ..."
Correct. But if borrower goes and spends the £90 and the shopkeeper (and his employees, suppliers etc) deposits the £90 back in the bank, that second lot of £90 represents the 'savings' of the shopkeeper, his employees and suppliers.
So the new loan of £80 (or whatever) is those new savings being lent out to new borrowers. And we might end up with £440 borrowings, but we also end up with £440 savings (being the first £100 deposited, plus the £90, plus the £80 and so on).
Whether or not this is a healthy state of affairs is another issue, but that is how it works in practice.
History has shown it to be a healthy state of affairs provided a sufficient proportion of borrowers earn enough to be able to service their loans.
It is wrong to differentiate between the initial £100 and the additional £340 "created" out of that £100. Why is the initial £100 different? Where did it come from? The obvious answer is that it was the result of previous transactions of the exactly the same kind.
Both the initial £100 and the further £340 comprise nothing other than promises to pay. The initial £100 was itself the creation of innumerable previous transactions, transactions which also involved promises to pay.
There is no magic in the initial £100 being put into the bank by way of 10 crisp tenners and the first loan of £90 being a figure on a computer screen. Nor does that sum of £90 change when it turns from a figure on a screen to nine dog-eared tenners.
TFB, agreed, that's another way of explaining it.
Two facts: the current reserve ratio is nearer 2% than 10% ( Northern Rock was criticised for tight lending just before the run).
Far from being "hyper cautious "
50% reserve ratios were the norm for centuries; modern critics of modern banking often call for a return to this ratio advocating what in my day was called "100% Banking" or is nowadays called Full Reserve Banking (see Wikipedia).
Returning to the set text (Wikipedia "Fractional Reserve Banking")this describes banks on-lending the original deposit up to the vanishing point "while maintaining the simultaneous obligation to redeem all these deposits upon demand." What do you make of that ?
Also what are your comments on "By its nature the practice of fractional reserve banking expands the money supply.."?
On a purely personal note ,I find the ready acceptance of the fact that privately capitalised banks can transform 100 quid of somebody else's money into 440 of loans, to
repaid to themselves, a bit odd.
DBC:
"Two facts: the current reserve ratio is nearer 2% than 10%"
Agreed this is far too low.
"50% reserve ratios were the norm for centuries"
Not true.
"critics of modern banking often call for a return to this ratio advocating what in my day was called "100% Banking" or is nowadays called Full Reserve Banking (see Wikipedia)."
Full reserve banking would either mean that banks just take cash deposits and lock them up in a safe, OR that banks have to be 100% funded by shareholder's capital and cannot take deposits.
"while maintaining the simultaneous obligation to redeem all these deposits upon demand." What do you make of that?
Even with your £440 example, the bank is still just a middleman. Borrowers owe the bank £440 and the bank owes its depositors £440.
"what are your comments on "By its nature the practice of fractional reserve banking expands the money supply."?"
If you look at one half of the equation, this does indeed expand the money supply. But all the savings and borrowings still net off to nothing.
Its a pity you will not engage with the orthodox theory e.g the Wikipedia entry on Full reserve banking says it was standard until 1800.You might also have speculated where banks get the money to maintain "the simultaneous obligation to redeem all these deposits on demand" when it has been noted all the deposits have been lent on to other borrowers,leaving banks in a difficult position when Mr 100 pound turns up and asks for his money.Does the bank say sorry chum we've lent it all out or does it
write a cheque (with absolutely nothing behind it) to get rid of him?
The national money supply and the land mass are both "commons" or should be and the monopolisation of land and money are very similar problems.
Besides your lack of interest in monetary or banking reform comes across as rather dull in a blog which is distinguished by not a little wit.
All the best
PS Boris has got hold of the LVT from Hell viz TIF (see over on Land cafe).
DBC, I do subscribe to the orthodox theory of banking. I have not in any way criticised Wiki's summary. Only I understand it better than most people.
"...leaving banks in a difficult position when Mr 100 pound turns up and asks for his money. Does the bank say sorry chum we've lent it all out..?"
In extreme cases, where the bank e.g. Northern Rock has lent it all out to people who can't repay, then yes, that is exactly what happens, and that is what we ought to try and avoid.
I have a great interest in banking reform, i.e. there will be stricter/higher Basel ratios and no bail-outs. If banks get into trouble they just have to do a debt-for-equity swap so small depositors not at risk. I've explained all this at length and it is perfectly simple.
On top of that, I'll have LVT to prevent asset price bubbles, there's not much more we can do.
It is simple really.As you are now (and ever have been)fully Wiki compatible ,you recognise that fractional reserve banking increases the money supply.How then
when you deny the orthodox explanation that they "create it by expanding their deposits"(Britannica) in "an ongoing process of credit creation" (Treasury)?
DBC; "How then when you deny the orthodox explanation that they "create [money supply] by expanding their deposits"(Britannica) in "an ongoing process of credit creation" (Treasury)?"
Er, that is exactly how I explain it as well. I've never denied something that is patently true.
For every £1 extra loan to a borrower that a bank 'creates', it must simultaneously 'create' £1 extra in deposits, it always nets off to nil. The upper limit on how much debits and credits they can create depends on Basel capital limits/fractional reserve rules etc.
Sure, those limits were set far too generously/recklessly, but that's Boom'n'bust for you.
When have I ever said anything else? See also TFB at 1.16 above.
In other words, the money supply increases but so does total debt.
There is no contradiction between: (i) the money supply increasing when banks, in effect, create new money and (ii) the figures on the banks' books balancing to zero. The latter is a necessary consequence of the former because the bank can only create new money by making loans, thereby inevitably creating a debt owed to the bank in the sum of the loan advanced.
Of course liabilities to pay interest (banks to depositor and borrower to bank) mean that banks can make profits and defaults mean banks can make losses, but at the date a new loan is created the position in terms of principal must always in balance.
TFB, ta for back-up, that's another good way of explaining it.
It may very well be the case that a bank can do a very convincing double entry book-keeping job with all the deposits on one side and all the "loans" on the other netting off to zero.Interest will be paid to one lot and extracted from the others, the two meeting in the middle ,as it were .
However most of the deposits are empty having been lent on long ago,an account carrying on a zombified existence until the depositor turns up and demands his money whereupon the bank issues him/her with a cheque backed by nothing.(I imagine thats what the queuers at Northern Rock got). In non-run situations everybody goes along with this charade, it being a matter of confidence [with the emphasis on con].
At least everybody here now agrees that banks control the money supply and create money.This is an improvement on the situation with Mark's theory where banks have no effectual role and are harmless middlemen or honest brokers intermediating between savers and borrowers.
Even this very minimal admission of the determining part played in the economy by banks is troubling though.
Why should such private businesses control and own the national money supply?
"Why should such private businesses control and own the national money supply?"
Because the "national money supply", as affected by banking activities, is merely a reflection of the business people choose to conduct. It expands as people borrow (whether for good reason or bad) and contracts as people pay-down debt. I would prefer to ask why government should have any part in this.
The economy does not belong to government, nor is it a construct of the State machine. It is a constantly shifting collection of countless millions of little transactions and is led by the little people at the bottom not the bigwigs at the top.
When Mr Enterprising has an idea and borrows the capital necessary to set up in business, the expansion in the money supply caused by the creation of that loan is absolutely nothing to do with government / the nation / the State. It is a private transaction reflecting the lender's assessment of the viability of Mr Enterprising's idea. So too when Mr Chilly borrows for new central heating and Mr Pedestrian borrows to buy a car.
The banks are simply the mechanism through which the little people have an opportunity to enter business or increase their comfort now rather than waiting and hoping to save enough cash to be able to do so later. In reality it is not the banks that create this new money, it is the desires of the borrowers. One could say that the little people are the nation, in which case the "national money supply" is controlled by precisely the right people.
Of course government can also increase or decrease the money supply. I know which group I would trust more.
When I was at school we were given a book with an illustration of people holding puppets under the heading" MP's they can do nothing without your direction!" At the time looking at photos of nude women seemed more educational.
TFB's similar version of the banking system "led by the little people at the bottom"seems to be predicated on the notion that the banks are doughty defenders of decentralised operations from the intrusions of an overbearing State. In fact the banks are the State (not all centralised states are socialist) and the banks have assumed a too powerful role in the economy as entities and actors in their own right.Even now when given public money the banks are powerful enough to do as they please, with patterns of conspicuous consumption that would offend the denizens of the Frank Capra/James Stewart community you describe.What's that story that the US went into the 1914-18 war to defend J.P. Morgan's investments?Such things never happen in this the best of all possible worlds.
The present situation where everybody has their own private bank account,mortgage etc and is engaged in weekend property speculation actually came about through state action.Ordinary working people (my version of the little people) used to be insulated from the banks ,being paid in cash and paying rent in cash to a rent-collector.It took major legislation to abolish the Truck Acts that insisted on cash payment and kept people out of the clutches of the banks.
Rather than a happy land where the little people control the banks we live in a country where "ignorant armies clash by night" as gigantic agglomerations vie for control.At the moment straight Socialist bank nationalisation is holding the line after organisations more powerful than governments crashed the world economy.
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