Thursday, 20 March 2014

Bank of England on top form (Quarterly Bulletin Q1 2014)

Dinero referred to this, I don't know why, so I skim read. This bit is rather good:

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 is through commercial banks making loans.

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.

The reality of how money is created today differs from the description found in some economics textbooks:

• 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.

... And the households and companies who receive the money created by new lending may take actions that affect the stock of money — they could quickly ‘destroy’ money by using it to repay their existing debt, for instance.

Apart from the lies and waffle about "prudential regulation" in the middle, you can't argue with any of that.


Dinero said...

Yes that section is the reason I refered to it . It chimes with a lot of the posts and dicussion on the Blog here.

Mark Wadsworth said...

Din, ta, this explanation is nothing new or radical, DBC often reminds us that some American Fed banker said it in the 1930s, because the explanation is quite simply true.

What BoE don't mention is that 80% of the 'money' created (i.e. matching pluses and minuses) is based on land speculation.

Anonymous said...

Thanks for this. Will be a useful document from a "reputable" source when I need to explain things to ignoramuses.

(Unfortunately the KAALVTN blog is not regarded by these ignoramuses as a "reputable" source, otherwise you would be getting far more hits)

Dinero said...

> Mark

I think you are being a bit harsh there , most people plan to pay their mortgage not from the procedes of selling their house but from their salary.

Mark Wadsworth said...

D105, ta.

Din, it's still land speculation regardless of the source of funds.

If you buy a banana out of taxed income you own a banana. If you inherit money and buy a banana, it's a banana. If you steal a banana or grow it yourself, it's still a banana.

A banana is a banana, and land speculation is land specuation.

DBC Reed said...

@MW yeah lets hear it for DBC who drew attention to the bank's amazing outburst of honesty in its bulletin "Money creation in the Modern Economy" in the comments here on "Commission etc" on 18th March.This bulletin is a game changer for troublemakers like me who have had in the past to cross reference to some obscure old and unofficial texts.
I still can't understand why the BoE has done it.Its actually quite cruel to the simple-minded souls who cluster round Tim Wastrel etc
and believe the banks on-lend savers' money myth.You would n't tell such trusting people there's no Father Christmas would you?They must be very lost especially as the Red Menace myth has also been shown up the same week when quite clearly the West has been encroaching on Russia and not the other way round as they've been led to believe for seventy years.
What if Enoch Powell was right all along and the USA was the UK's enemy post-war?Fair makes the head spin.

Mark Wadsworth said...

DBC, yes, indeed you did, but in such a roundabout and obscure way so I did not pursue the matter further.

The presentation matters as much as the message you know, that's why they invented "paragraphs" and so on.

DBC Reed said...

@MW I'm being patronised for my paragraphing now. I have to remind you that in June 2010 you were talking down to me with such classics as "DBC, banks are just middlemen."

Mark Wadsworth said...

DBC, I did say that banks are just middlemen and that is still perfectly true. That was not and is not "talking down".

Banks have no assets of their own, they just tap into the general flow of rents sloshing around by splitting the zero into a mortgage and a deposit and charging more on the former than they pay out on the latter.

It's like estate agents make money from the land market without owning any land themselves.

They are all "middlemen". The own nothing, create nothing and just cream off as much as they can. That is how I define "middlemen" (in the derogatory sense).

Further, although I have been guilty on occasions of saying "taking deposits and making loans" I have never seriously disputed that loans create deposits and not the other way round.

I give you due credit for having banged on at me about this and coming up with the pithy formulation "loans create deposits".