Monday, 29 April 2019
RBNZ Review of Capital Adequacy submission of Iain Parker May 2019
RBNZ Review of Capital Adequacy submission of Iain Parker
1) In opening, I refer the committee to Former Vice President of the World Bank and Nobel prize-winning economist Joseph Stiglitz who published this document January of 2018;
MACRO-ECONOMIC MANAGEMENT IN AN ELECTRONIC CREDIT/FINANCIAL SYSTEM
https://www8.gsb.columbia.edu/faculty/jstiglitz/sites/jstiglitz/files/Macro-Economic%20Management%20NBER.pdf?fbclid=IwAR2R-B9teE59jy1IFq1c0kLxlN_XXvLRO3qk8BzqcdHEcIAab5d22wDqbpQ
in which he said;
“In a modern economy, banks don’t intermediate between “savers” and “investors,” as claimed in the standard textbook models. Banks effectively create credit out of thin air, backed by general confidence in government, including its ability and willingness to bail out the banks, which is based in part on its power to tax and borrow.”
“While the modern financial system based on fiat money doesn’t suffer from the vagaries of gold discoveries, it has sometimes suffered from something else: volatility in the creation of money and credit by the banking system, giving rise to the booms and busts that have characterized the capitalist system.”
“Much macro-economic instability is associated with instability in credit creation and in the fraction allocated to newly produced goods and services. The paper also explains how, in an open economy, in a system of electronic money, credit auctions combined with trade chits might enable the control of net exports, again enhancing macro-stability. Finally, we explain how under a system of electronic money, the rents that are currently associated with credit creation and that arise from bank franchises—that constitute a form of appropriation of the returns from trust in the government and its ability and willingness to bail-out banks in the event of a crisis or bank run— could be appropriated by the government to a greater degree than at present.”
End quote
This document by Joseph Stiglitz is a very recent paper that supports my long-held well-documented views on the cause and fix of money system funding structure instability.
2) My submission questions the efficacy of this RBNZ capital adequacy review, along with that of the Open Bank Resolution bail-in plan already on the law books, as a guard against the societal chaos of an old fashioned run on a bank, due to its lack of acknowledgment that the present credit liquidity facilities of New Zealand financial infrastructure is far from old fashioned.
This process has ignored the model that has come to dominate banking in the money system funding structures of the Western world in modern times.
Which has evolved into a hierarchal chain of institutions who refinance with each other at a cheaper rate of interest than that which they then on-lend.
With those at the top bestowed with the extraordinary privilege of credit creation with only those lower down, normally at the domestic rather than cross border or government lending level, actually intermediating loans of customers savings of currency originated by the higher up credit creation.
The basis of the model is no longer one of what was referred to as a fractional reserve anchor model but has evolved into one of prudential reserve accrual accounting given the official name of Dynamic Stochastic General Equilibrium, in which all potential physical and human resource capital is valued by actuarial accountants (Valuers) then used as the collateral for the base credit of money.
If more base credit is issued than the sustainable natural resource collateral to redeem the base credit (Long-term Equilibrium) physically exists, inflation, asset bubbles, and societal wealth inequality follow.
The base credit becomes counterfeit beyond the fundamentals of money as a system to the advantage of those doing the counterfeiting and the detriment of humanity and the biosphere upon which it depends.
The more members a money system has the more complex becomes the accountancy of the senior most balance sheet of currency originating base credit versus long-term sustainable natural resource equilibrium and currency stability.
The monitoring of Equilibrium of the present system that has become interconnected throughout the Western world has been appointed to a small group of accountancy firms and financial rating agencies.
This balance is even primary to another long-running debate of the ethics of interest being charged upon all base credit no matter if it is being used by a government to develop the resources it has at hand for the greater common good of its citizenship, such as the bare, non-consumer choice, essentials of life or large strategic infrastructure of the economy.
I believe most people, including most academics, would be surprised to know it is presently large privately owned institutions that have been bestowed the extraordinary privilege of computer entry base credit, that sit one layer above most Western governments in the discount interest chain, including New Zealand, as evidenced in this document from the RBNZ Nov 2015 Financial Stability Report;
Implications of global liquidity developments for New Zealand
http://www.rbnz.govt.nz/financial-stability/financial-stability-report/fsr2015-11/implications-of-global-liquidity-developments-for-new-zealand
"There are three key channels through which New Zealand could be affected by declining market liquidity: the impact on New Zealand banks’ funding markets; the impact on short-term interest rates and monetary policy implementation; and the impact on the New Zealand government bond market.
New Zealand banks fund a significant proportion of their balance sheets by accessing offshore wholesale debt markets. They do this by borrowing in foreign currency, then ‘swapping’ this back into NZD. Conditions in global financial markets are therefore an important determinant of New Zealand bank funding. New Zealand banks tend to focus on the primary market (new issues) rather than the secondary market for debt. Hence, funding liquidity is of more immediate importance than market liquidity. Funding liquidity refers to the ability of the banks to raise debt as required at a reasonable cost. Reserve Bank discussions with bank treasurers suggest that funding liquidity conditions have deteriorated somewhat in 2015, owing largely to greater market volatility caused by events such as the Greek crisis mid-year and recent turbulence tied to China.
New Zealand banks typically use market makers to help facilitate the foreign currency swap leg involved in borrowing from offshore. Market makers take the other side of the transaction with New Zealand banks (providing NZD in exchange for foreign currency that the banks have raised), while charging a spread. This spread has widened as costs have increased for the institutions providing these market making services for the reasons described above. Overall, the cost increases have been manageable thus far, but this highlights the flow-on effects of changes in market liquidity to New Zealand entities seeking offshore funding."
end
The privately owned institutions are touted as receiving fair remuneration for their expertise in keeping the money system in long-term equilibrium and cover their business costs.
The private bank owners claim governments cannot be trusted to administer the base credit of money.
New Zealand predominately borrows the base credit of our money from Western institutions for ease of convertibility into Western currencies that some companies stipulate they will only accept as payment for goods and services along with assurances of the protection of wider Western financial regulatory protection agencies.
This is represented in a contract between governments and the privately owned financial institutions referred to in New Zealand as the Policy Target Agreement, promising that they as their part of the deal will deliver stable inflation and price stability.
In New Zealand, it amounts to a public-private partnership of which the major intersections of that partnership happen within the State Services Commission and the New Zealand Debt Management Office, a private institution that operates under the umbrella of New Zealand Treasury.
I contend the average farm or residential property price versus average income from the normal course of business ratio has made it clear the private banking sector has not delivered its part of the contract.
Assisted by the fact that the land portion of property was removed from the consumer price index in 1999.
Which has, in turn, made a mockery of the Interest Rate Inflation Targeting regime as admitted by many such as former IMF Cheif Economist Olivier Blanchard when referring to the failure of the great moderation.
3) Most of the foreign institutions from which the base credit of New Zealand money is borrowed have been fined hundreds of billions of dollars for counterfeit credit based frauds they committed causing the 2008 global financial crisis, with barely any of the perpetrators being jailed.
Most of the major accountancy houses and rating agencies were heavily fined for having been taking bribes in return for giving covering legitimacy to what former FBI forensic accountant William B Black termed Accountancy Control Frauds.
Which is when the owners and executives of market listed companies use fraud to falsify profits to gain from stock price related remuneration packages. Selling out and departing with their proceeds of crime before the fraud becomes obvious leaving the accountability with the nonhuman entity company shell.
In this regard, the massive increase in corporate debt bonds within New Zealand then being used for share buybacks rather than productive investment just screams out with very concerning residual current account balance problems with accountancy control fraud tendencies?
Back in the 1980s William B Black prosecuted and jailed many hundreds within the private banking sector for committing the same crimes many essentially got away with 2008.
William B Black says the 2008 GFC related fines amounted to a pittance of the proceeds of crime the perpetrators gained and the chances of it happening again is more 'when than if' as the necessary meaningful reform of the system has not happened.
With that in mind I contend this investigation of safeguards needs to extend far beyond capital adequacy requirements, tenure of share ownership or concerns of old fashioned runs on banks, into an examination of the creditworthiness of credit entering our economy and the origins of the purchasing power of private equity funds now roaming the globe seeking rent seeking hard assets, to ensure they have not been criminally gained.
The latest review of this process released by the RBNZ making mention of contingency credit lines being used as collateral for loans and preference share deals, along with a recent decision to not go ahead with the full privatisation of our nations electronic settlement system in the national interest, gives me hope the RBNZ has already begun to broaden its thinking on these matters;
Capital Review Paper 4: How much capital is enough?
https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Policy-development/Banks/Review-capital-adequacy-framework-for-registered-banks/Capital-Review-Consultation-How-much-capital-is-enough.pdf?revision=2d386b12-1159-483e-9b53-34ecfebed91a&la=en
4) In recent decades I contend there has been a terrible level of odious, destabilising, wealth inequality inducing, predatory lending of counterfeit credit within the money system funding structures of the world, of which the victims deserve compensatory debt relief that has not been forthcoming and the measures being mentioned in this review will not deliver, let alone protect them from into the future.
I refer the committee back to the January 2018 published Joseph Stiglitz document in full with which I opened and suggest they investigate thoroughly the recent money system funding structure reforms implemented by Japan, with which we still trade and accept their currency, as written about often by the impeccably credentialed Adair Turner, in a hope they may continue to broaden their thinking even further in the face of empirical evidence of the highest credibility.
Yours sincerely
Iain Parker
Concerned citizen
Saturday, 2 February 2019
Reserve Bank Act Review Submission of Iain Parker
Reserve Bank Act Review Submission of Iain Parker
The opening terms of reference prior to the phase 1 government external expert panel consultations;
Scope of the Review
To ensure the Act continues to support the operation of the Reserve Bank, the Review will consider the following:
- The institutional arrangements for prudential regulation and supervision
- Objectives, objective setting processes, and alignment with government policy and risk appetite
- Statutory functions and powers
- Role clarity for the Minister of Finance, the Board, and the Governor, including the allocation and coordination of powers, functions and tools
- Accountabilities
- The strengths of current legislation, including its flexibility
- The balance between primary, secondary, and tertiary legislation, including in respect of setting policy
- Coordination across government, including pre-existing forums such as the Council of Financial Regulators
- Alignment with the domestic regulatory management system - Procedural approaches, fairness, and safeguards - International experience and best practice.
A successful regulatory regime is one that has the following characteristics
- The Act’s purpose and the Reserve Bank’s objectives are clear
- The roles and responsibilities of key participants, including the Minister, the Board, and the Governor, are defined in statute and are clear and coherent
- The regime engenders trust and confidence in New Zealand financial markets
- The regime is enduring
- The regime provides sufficient flexibility to adapt and evolve in response to market developments
- The regime engenders trust and confidence in decision-making processes
- Powers available to the Reserve Bank are sufficient to achieve its objectives
- There is clarity as to how the regime interacts with other regulatory regimes and government policy as whole
- The regime is clear about the role of government and the scope of the Reserve Bank’s operational independence.
End
By the end of phase 1 the all-encompassing terms of reference had been reduced to this;
The key decisions that have been made by Cabinet under phase 1 are:
- To include supporting maximum sustainable employment alongside price stability as an objective of monetary policy in the Act.
- To require that monetary policy decisions be made by a Monetary Policy Committee (MPC) of 5-7 members that includes a minority of external members.
- The MPC will take decisions by consensus where possible, but publish records of meetings that outline differences when they exist and the balance of votes where consensus is not reached
- Members of the MPC will be appointed by the Minister of Finance following a nomination of the Reserve Bank Board, with the Reserve Bank Governor and Deputy Chief Executive being members by virtue of their positions in the Bank. The Governor will be the chair of the MPC.
- The Reserve Bank will retain operational independence.
End
1 - This review was promoted as an exercise investigating if the present checks and balances in regards to the stability, soundness and fiscal responsibility of our nations financial infrastructure are sufficient.
2 - For over a decade I have had a passionate interest in the fundamentals of money as a system and the history of money systems.
I have spent thousands of hours reading thousands of on the record official documents from many governments and global regulatory institutions in regards of credit liquidity facilities at the wholesale level, financial system infrastructure and the outcomes for their citizenships.
3 - I have taken the time to read every submission and the internal government department/expert panel communications of phase 1 & 2 of the Reserve Bank Act Review process set up essentially to investigate if the checks & balances of the financial infrastructure of New Zealand ensure equitable stable outcomes for its citizenship, need reforming or remain status quo.
4 – I contend that this process is a very expensive facile exercise for the reasons detailed here on in;
5 – The review is investigating the worthiness of expanding the consultation group that announces the Official Cash Rate (OCR)
This to me is an exercise in futility given it is on the record common knowledge among both state and private financial infrastructure executives, that as it stands within our entirely foreign borrowed base credit, decentralised central banking money system, the OCR follows the Overseas Funding Cost Rate rather than in any way truly influencing it.
I include below several quotes from prominent institutions and people that make this absolutely clear;
This RBNZ paper:
http://www.rbnz.govt.nz/financial-stability/financial-stability-report/fsr2015-11/implications-of-global-liquidity-developments-for-new-zealand
Titled - Implications of global liquidity developments for New Zealand - from the Nov 2015 Financial Stability Report;
"There are three key channels through which New Zealand could be affected by declining market liquidity: the impact on New Zealand banks’ funding markets; the impact on short-term interest rates and monetary policy implementation; and the impact on the New Zealand government bond market.
New Zealand banks fund a significant proportion of their balance sheets by accessing offshore wholesale debt markets. They do this by borrowing in foreign currency, then ‘swapping’ this back into NZD. Conditions in global financial markets are therefore an important determinant of New Zealand bank funding. New Zealand banks tend to focus on the primary market (new issues) rather than the secondary market for debt. Hence, funding liquidity is of more immediate importance than market liquidity. Funding liquidity refers to the ability of the banks to raise debt as required at a reasonable cost. Reserve Bank discussions with bank treasurers suggest that funding liquidity conditions have deteriorated somewhat in 2015, owing largely to greater market volatility caused by events such as the Greek crisis mid-year and recent turbulence tied to China.
New Zealand banks typically use market makers to help facilitate the foreign currency swap leg involved in borrowing from offshore. Market makers take the other side of the transaction with New Zealand banks (providing NZD in exchange for foreign currency that the banks have raised), while charging a spread. This spread has widened as costs have increased for the institutions providing these market making services for the reasons described above. Overall, the cost increases have been manageable thus far, but this highlights the flow-on effects of changes in market liquidity to New Zealand entities seeking offshore funding."
end
Former New Zealand Prime Minister and former international investment banker John Key said 17 November 2012;
https://www.youtube.com/watch?v=5Nc6aoQGmLk
“Our (Govt) debt to GDP levels by then will top at just under 30 percent. In other words we'll be relatively lowly indebted compared to countries like America and Europe, but I put it to you we are a small open economy, we have high levels of private sector debt, We, Mum and Dad, have borrowed that debt effectively from foreigners because their local bank has sourced that from foreigners.”
end quote
Bernard Hickey(BH) - Grant Robertson(GR) interview 23 March 2016
https://www.youtube.com/watch?v=253QChyCREI
GR - "There are problems in our monetary policy and we do need to look at it"
BH - "What would a policy targets agreement under a Labour Government, you would be, if you were Finance Minister you would be the one signing the agreement."
GR - " Yeah, and look we have got to sit down and talk that through with the Reserve Bank Governor. I am still a supporter of an independent monetary policy. I think, I think that the Government can help create the settings, but in the end we are, we are well served by the independence of the Reserve Bank, so it will be a genuine conversation.
I have said often before that it is possible for the Reserve Bank to have a mandate beyond just controlling inflation.
I think if it had, had a mandate around employment we wouldn't have seen the rates go up when they did, we might have seen them come down a little bit quicker.
I have been clear before that I would like to see something like an employment based or an overall health of the economy based target included within the PTA.
On inflation itself, this is where we have to sit down and have a genuine conversation with a range of experts involved about what s the future of inflation.
Its a big topic and I know the Reserve Bank Governor is concerned about it himself.
So, you know, there will be some change. I could see a broadening of the criteria and we do have to look at how we, how inflation is measured and what it means in the economy."
BH - " So the Reserve Bank could cut interest rates, do what it wants and then the banks might not pass it on, so, what,"
GR - " Yeah well"
BH - "what do you think the banks should do about it. Because they haven't passed on, they haven't passed on all the official cash rate cut. "
GR - "No they have not. Although they were very quick to cut savings rates. So clearly on that side of the ledger they responded quickly. Look that is, you know, it was the Reserve Bank Governor who said very clearly at the Parliamentary Select Committee I was at, that he expected the rate to be passed on, it wasn't.
I understand that there has been an increase in the cost of borrowing overseas for banks, but I also don't think that increase legitimises not passing on the cut and it does start to neuter the value of monetary policy.
That's a conversation for me as Finance Minister to have with the Reserve Bank Governor as well, is does he have the tools in his tool box that makes him comfortable that, that the value of him setting an official cash rate is still there and we will have that conversation.
That's not, that's not to say that we would determine those rates, but it is to say that we need some pretty serious conversations with the banks about what they are doing."
BH - "Would Labour go as far as to looking to regulate retail interest rates."
GR - " Agh I am reluctant to say that. I think that what we would do is to talk to the bank, the Reserve Bank Governor about the tools that he has. I mean the, the overall relationship between the trading banks and the Reserve Bank is one that's, you know, has a number of different levers within it and I think that's probably the place to go looking for whether or not, you know, you can assure New Zealander's they should, they'll get the value that they should from an OCR cut, but that is the primary relationship, the Governor to the trading banks.
The government is there to set the rules, not be involved in the middle of that."
End of interview.
6 – So lets now move onto the musings of including for improvement the maximising of employment as a dual mandate alongside the present primary mandate of price stability;
It is also on the record common knowledge among state and private financial infrastructure executives that the methodology presently being used for official statistics to judge a person employed or not employed is seriously flawed.
The flaw is that a person in the survey period need only have been employed for one hour of paid employment or have swapped a minuscule amount of work for a minuscule amount of barter goods to be deemed employed. Despite it being very clear and evident this amount of employment would in no way ensure a person of dignified access to the bare essentials of life.
It is very questionable what improvement in regards the greater common good this measure would bring as long as this flawed methodology remains in place.
Labour force categories used in the Household Labour Force Survey
http://archive.stats.govt.nz/browse_for_stats/income-and-work/employment_and_unemployment/Labour-force-categories-in-HLFS.aspx
People employed
Definition
All people in the working-age population who, during the reference week:
- worked for one hour or more for pay or profit in the context of an employee/employer relationship or self-employment
- worked without pay for one hour or more in work that contributed directly to a farm, business, or professional practice operation owned or operated by a relative
- had a job but were not at work due to: their own illness or injury, personal or family responsibilities, bad weather or mechanical breakdown, direct involvement in an industrial dispute, or leave or holiday.
7 - This is an opportune time to also examine the soundness of the present primary mandate of price stability as determined by what is known as the Consumer Price Index (CPI) within an overarching Interest Rate Inflation Targeting model. The CPI is a list of various goods and services of which the cost of them is monitored and the averaged change of cost up or down is said to represent the changing cost of living.
It is on the record common knowledge among state and private financial infrastructure executives that this measure is presently seriously flawed due to the cost of housing not be accurately represented due to the land portion of property being removed from the CPI list back in 1999;
Joseph Stiglitz, Ex Vice President of the World Bank and Nobel Price winner for economics wrote of the shortcomings of Interest Rate Inflation Tageting in a 2008 article;
The answer came in the form of “inflation targeting,” which says that whenever price growth exceeds a target level, interest rates should be raised. This crude recipe is based on little economic theory or empirical evidence; there is no reason to expect that regardless of the source of inflation, the best response is to increase interest rates. One hopes that most countries will have the good sense not to implement inflation targeting; my sympathies go to the unfortunate citizens of those that do. (Among the list of those who have officially adopted inflation targeting in one form or another are: Israel, the Czech Republic, Poland, Brazil, Chile, Colombia, South Africa, Thailand, Korea, Mexico, Hungary, Peru, the Philippines, Slovakia, Indonesia, Romania, New Zealand, Canada, the United Kingdom, Sweden, Australia, Iceland, and Norway.)
End
20 February 2012 Deirdre Kent put this Official Information Act question to the New Zealand Minister of Statistics;
Despite the fact that section prices tripled in fifteen years to 2007, land is not now included in the Consumer Price Index. This means that the official measure of inflation is unreliable as it is far lower than the actual figure.
and received this reply;
Today I received a letter back from the Minister of Statistics, Hon Maurice Williamson. I had heard that land went out of the CPI but couldn’t remember when or why so I sent in an Official Information request. The Minister dates the letter 14 Mar 2012 and says
Dear Ms Kent
Thank you for your letter of 20 February regarding the exclusion of the price of land from the Consumers Price Index (CPI) basket of goods.
I am advised by Statistics New Zealand that land (i.e. residential section) was included in the CPI until the June 1999 quarter. Following a review of the CPI in 1997 land was excluded, taking effect from the September 1999 quarter.
The 1997 review by an external advisory committee confirmed the CPI’s main purpose as being informing monetary policy setting, and that the CPI should be focussed on the concept of acquisition. The reason given for excluding land from the CPI from 1999 was that it was considered to represent the investment component of home ownership (with dwellings representing the shelter component).
The September 1999 quarter CPI information release explained it as follows: A dwelling provides shelter over a long period of time. Over time land is not consumed and so can be considered to represent the investment component of home ownership. As investment expenses are outside the scope of the CPI the rebased CPI excludes expenditure on residential sections.
Information on the sale of land is available from QV (www.qv.co.nz) and the Real Estate Insititute of New Zealand (www.reinz.co.nz).
I trust this information meets your needs and thank you again for taking the time to write.
Yours sincerely
Hon Maurice Williamson
Minister of Statistics.
End
A speech by Governor Reserve Bank Of New Zealand Dr Alan Bollard and Enzo Cassino, delivered by Dr John McDermott to the Sim Kee Boon Institute Conference on Financial Economics Singapore, 5 May 2011
http://www.rbnz.govt.nz/speeches/4389919.pdf
Overall, there has also been a recognition that credit growth over the past decade was excessive and a potential risk to financial stability given the build-up in leverage and rising asset prices that accompanied it. We are continuing to build our understanding of money and credit at the RBNZ, and its inter-relationship with both sectoral financial decision making and potential risks for the banking sector.
End
Signs suggest inflation cycle is bottoming out 19 October 2016
https://www.odt.co.nz/business/signs-suggest-inflation-cycle-bottoming-out
Labour finance spokesman Grant Robertson said low inflation piled pressure on the Reserve Bank and the Government.
Low inflation would be welcomed by many but the data painted a troubling picture of the New Zealand economy.
The CPI only counted new builds in terms of housing costs. Those rose 2% annually and 6.2% for the quarter. Factoring in rises in rents and the spiraling cost of purchasing existing homes, the cost of housing for most New Zealanders was rising far in excess of inflation, he said.
''This is a huge problem for most New Zealanders who have seen their wages barely rise in recent years,'' he said.
End
8 – Now I would like to turn to the question of fiscal responsibility and fuduciary duty.
Given the unsoundness of much of the methodology used to measure the success of the present money system funding structures that I contend already render the proposed changes an exercise of futility, of great concern is the refusal to take a closer look at the fact that we belong to a club of nations whose base credit supply of their money systems is presently entirely borrowed from external of state institutions who type the credit they lend out into their account at the time of lending rather than relending anyone's savings that have been deposited with them and how it impacts our society.
The motives for this have to be questioned given that these surely most interesting of facts are documented in many of the reference sources from which the government expert advisory panel have included information but never mentioned the primary base credit creation issue and again it is common knowledge among the executives of state and private financial institutions;
Mr. Alan R Holmes was Senior Vice President, Federal Reserve Bank of New York. Worked for 33 years at the Federal Reserve Bank of New York, where from 1965 to 1979 he was manager of the Federal Reserve System Open Market Account. In that position, he was responsible for the creation of money in the United States and nations to which they made loans.
1969 speech – Operational Constraints On Stabilization of Money Supply
http://bostonfed.org/economic/conf/conf1/conf1i.pdf
"The idea of a regular injection of reserves-in some approaches at least-also suffers from a naive assumption that the banking system only expands loans after the System (or market factors) have put reserves in the banking system.In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand; over time, its influence can obviously be felt. In any given statement week, the reserves required to be maintained by the banking system are predetermined by the level of deposits existing two weeks earlier."
End
What should the future form of our money be?
Speech by Deputy Governor Jon Nicolaisen at the Norwegian Academy of Science and Letters, 25 April 2017.
https://www.norges-bank.no/en/Published/Speeches/2017/2017-04-25-dnva/
How is money created?
So how do banks create money? The answer to that question comes as quite a surprise to most people.
When you borrow from a bank, the bank credits your bank account. The deposit – the money – is created by the bank the moment it issues the loan. The bank does not transfer the money from someone else’s bank account or from a vault full of money. The money lent to you by the bank has been created by the bank itself – out of nothing: fiat – let it become.
The money created by the bank does not disappear when it leaves your account. If you use it to make a payment, it is just transferred to the recipient’s account. The money is only removed from circulation when someone uses their deposits to repay a bank, as when we make a loan repayment.The money supply is therefore only reduced when banks’ claims on the rest of the economy decrease.
Banks also fund lending by raising loans themselves instead of creating money in the form of deposits. In order to reduce risk, banks also use other forms of investment in addition to lending. Nevertheless, the money supply is growing at almost at the same pace as total bank credit.
To sum up: banks create money out of nothing and withdraw it when loans are repaid. Growth in total bank credit is normally matched by growth in the money supply.
End
Money – Born of Credit?
Christopher Kent
Assistant Governor (Financial Markets) Reserve Bank Australia 19 September 2018
https://www.rba.gov.au/speeches/2018/sp-ag-2018-09-19.html
How Is Money ‘Created’?
In summary, changes in the stock of broad money are the result of a myriad of decisions, including those of banks, their borrowers, creditors and shareholders. And these decisions take place within the framework of a range of regulatory and institutional arrangements. It is worth noting that the Reserve Bank does not target a particular level or growth rate of money (although it has done so under a previous monetary policy regime). Instead, the Reserve Bank has some influence on the money stock via the effect of its interest rate target for the overnight cash rate on other interest rates in the economy. These in turn affect the cost of borrowing and economic conditions more generally. Ultimately, borrowing and lending decisions – and thus the creation of money – are constrained by the need for prudent banking behaviour, the budget constraints of borrowers and the profitability of lenders.
One final word on the creation of money is that as fun as it is to teach students about traditional money multipliers, I don't find them to be a very helpful way of thinking about the process. In Australia, simple regulatory regimes – which had earlier required banks to hold a minimum share of their deposits as reserves with the Reserve Bank – have been replaced with modern prudential regulation and market discipline. Again, the demand for and supply of credit is the real driver of money. That point can be reinforced by examining the behaviour of credit and money over time.
End
Banking in New Zealand Fourth Edition - published by the New Zealand Bankers Association in 2006
Chapter 4 - The Creation of Money and Credit
https://issuu.com/iainparkerpubliccreditorbust/docs/nzba_banking_in_new_zealand_fourth_?fbclid=IwAR1UxdCgMQgo5AIRjbMb7aTg_EXND2Zw4exHRWw8CXtM3j9OdgAsAa3TrpM
THE CREATION OF MONEY AND CREDIT
what Actually Happens in reality, although the process outlined in the previous sections could occur, cash balances in bank vaults no longer act as a constraint on bank lending in the way that they might have up until the latter part of the 20th century.......
in such an environment, there is still scope for a bank to expand its lending and create credit, but it is dependent on there being net inflows of funds into the banking system as a whole. These inflows of funds may come from depositors from outside New Zealand (and we have seen significant inflows of funds from such sources in recent years), or from the government making net deposits of funds into the banking system (through its fiscal policy, as outlined below).
We also have a situation where, since 1985, New Zealand banks have not had any specific reserve requirements applied to their deposit liabilities. This means that, in theory, banks could keep on creating credit and expanding their loan portfolios indefinitely. in such an environment, it is the cost of credit, based upon the costs that banks have to pay to raise the deposits, that becomes the constraint on the quantity of credit that is created.
end
Excerpts from book - CRISIS - by New Zealand Reserve Bank Governor - Alan Bollard - published September 2010.
Preface - I have also tried to be scrupulous to ensure that I have written nothing on New Zealand that could not have been made public under the Official Information Act; indeed, much of the official policy is already in the public arena. This means at times the book is less revealing than it might otherwise be. We hope its no less insightful and interesting.
*Pg 19-20 - “Banking practices differ around the world, but we ensure ours meet international standards. These are set by a somewhat shadowy group called the Basel Committee on Banking Supervision. Comprised of representatives of large countries( not including New Zealand ), the group meets in Switzerland at the Bank of International Settlements (BIS).”
*pg 157 - Another governance worry related to the power and competence, or lack thereof, on the part of banks chief risk officers and risk committees. These officers assess the possible outcomes from any deal and decide whether the risks are acceptable under the banks mandated policies. We were now hearing about cases where risks had been miscalculated, procedures bypassed and officers overruled, all in the race for higher earnings.
*pg 183 - “In self-interest, banks may encourage New Zealander’s to take on more debt than is good for them individually or deliver more external liability than is good for the country.”
End
Iain Rennie government external consultant to this process;
Between 15 and 24 March 2017 discussions were held with representatives from the Bank for International Settlements and various overseas central banks to obtain their views on, and experiences with, different central bank decision-making models and governance. The representatives were: • Bank for International Settlements – David Archer (Head of Central Banking Studies) • Reserve Bank of Australia – Anthony Dickman (Secretary) • Bank of England – John Footman (Secretary) • Bank of Israel – Daniel Hahiashvili (Chief of Staff to the Governor); Yoav Soffer (Spokesperson and Head of Economic Information); Esther Schwartz (Secretary of the Monetary Committee) • Bank of Canada – Stephen Poloz (Governor) Summary of discussions The representatives from the central banks discussed the decision-making and governance models employed at each of their respective central banks. The following key points were also raised in the discussions: • International trends Given the depth of powers of central banks, and more recognition about the ability to get things wrong, there is political discomfort internationally with the limitations on holding central banks to account. Countries are struggling with financial policy. There is a trend towards interagency financial stability councils with unclear powers. There is recognition within central banks that there is an issue that needs to be dealt with, but generally speaking action on this has been limited.
End
Prasanna Gai University of Auckland excerpt of submission to this process;
The costs of financial system failure thus far exceed the private costs to the managers, creditors, and shareholders of the failing entities. This is a consequence of negative externalities – the private benefits of the socially destructive behaviour exceed the private costs. In financial systems, these externalities take two broad forms. First, the actions of a financial firm can directly influence the choices that other firms make.6 And second, the actions of a financial firm can influence the constraints facing other firms through their effect on prices. Such “pecuniary” externalities can also arise in efficient markets and are not of themselves distortionary. But when there are other constraints and distortions present, the effect of one agent’s actions on other agents in the system via prices can matter.
The endogeneity of risk means that macroprudential regulation avoids an important fallacy of composition – the financial system is not made safe by simply making sure that each and every financial balance sheet is sound. What may look stable at the level of an individual institution can be fragile and unstable at the system level due to the interconnections of financial institutions. For example, Beale et al. (2011) demonstrate how, in an inter-linked and procyclical system, the homogeneity of risk management practices can be collectively disastrous.
In the I(ntermediation)-theory of money, Brunnermeier and Sannikov (2016) argue that the presence of financial frictions means that price stability and financial stability are so intimately intertwined that it is impossible to make a distinction. The close connection arises because the health of the financial intermediation sector determines the degree of inside money creation and the price of risk in the economy.
Central banks must, thus, be acutely aware of aggregate and sector-specific credit growth and other monetary aggregates, since a narrow focus on current interest rates can be misleading.3
End
10 – Very relevant to this process I would like to take the opportunity to applaud those within government, who in recent times have realised the national security value of keeping at hand a state-owned electronic payment, transfer and settlement system, that presently is resided within the RBNZ/Kiwi Bank/ Post Office structures, to guard against private interests gaining a monopoly of these most important of facilities.
Facilities that if ever become entirely external of state-owned without a ready state alternative, would leave our society wide open to criminal exploitation that would be very hard to hold to account. As a number of nations found out the hard way post the 2008 GFC.
I was very proud to be the only individual submitter outside of the privately owned financial service sector institutions to put forward a submission during the “public consultation” period (that bizarrely called for submissions from only industry participants) and the only one that was pointing out the negatives of privitisation of the facilities.
I am encouraged that Government has not only decided to keep a ready alternative means of money distribution internal of the state, but has also set about strengthening the legislation in regards the obligations of the parts of the facilities that are privately owned.
11 - When you fully comprehend the fundamentals of money as a system of human & natural resource capital value, base credit underwritten economic enablement, you soon realise that no government has ever needed to be revenue constrained to any lesser extent than the territory it governs is constrained by physical resources available to it.
Any government has had at hand the means to develop the physical resources within its territory for internal use, or in readiness to trade with societies external of it, any goods surplus to their own requirements for goods that would further increase the standard of living of its citizens.
No government has ever needed to external borrow to develop the commonwealth resources within its own territory. If it has been doing so it has suffered a conjob at great external extortion expense to the citizens it represents.
Money system pyramid frauds orchestrated by shysters (a person who uses unscrupulous, fraudulent, or deceptive methods in business.) have been noted as regular occurrences since humans started recording written history.
But very bizarrely an intergenerational class of associated people are still able to suppress the knowledge of this most important of issues and get away with doing it with seeming impunity.
12 – Several nations have grown tired of institutions external of the state being entrusted with the extraordinary privilege of custodianship of the base credit of societies money only for them to repeatedly cook the credit books in very destabilising ways out of short-term self-interest and have made meaningful money system funding structure reforms that have reinstated a state institution at the top of the wholesale base credit tree to be administered as a public trust in the public interest.
This includes Japan. The third largest economy in the world with who New Zealand has just signed into the CPTPP trade agreement and are still accepting their currency as payments.
Adair Turner 20 Sept 2018
Japan's Successful Economic Model
"As for government debt and unsustainable fiscal deficits, doom-mongers who warn of an inevitable crisis if belt tightening is not soon imposed are likely to be disappointed. Japan’s gross government debt may be 236% of GDP, but after netting out government-owned financial assets, the International Monetary Fund estimates net debt at a much lower 152%.
Moreover, the Bank of Japan owns government bonds worth 90% of GDP, and ultimately returns to the government as dividends all the money it receives from the government as interest on the bonds it holds. Deducting both public financial assets and all the debts the Japanese government and people effectively owe to themselves, the debt level is only about 60% percent of GDP and not rising. This level of debt could be sustainable even if fiscal deficits remain high for many years.
To see why, suppose a country had gross government debt of 250% of GDP, net debt of 150%, and central bank bond holdings of 100% of GDP, leaving net debt of 50%. Then suppose that inflation and real growth were steady at 1% each, so that nominal GDP grows at 2%. With bond yields at 2% (versus 0.1% in Japan today), those debt ratios would remain stable even if the government ran a primary deficit of 4% of GDP, and a total deficit of 5%, year after year.
That is roughly what Japan is doing now. Far from reacting in horror at this clearly unsustainable behavior, bond buyers around the world still line up to buy government bonds in return for yields that are little more than zero."
End
Bank of Japan Monetary Policy
https://www.boj.or.jp/en/mopo/outline/qqe.htm/
13 – The IMF are now saying that more progressive monetary policy reform is justified.
I agree with them;
Winds of Change: The Case for New Digital Currency
By Christine Lagarde, IMF Managing Director
Singapore Fintech Festival
November 14, 2018
https://www.imf.org/en/News/Articles/2018/11/13/sp111418-winds-of-change-the-case-for-new-digital-currency
Let me now turn to my second issue: the role of the state—of central banks—in this new monetary landscape.
Some suggest the state should back down.
Providers of e-money argue that they are less risky than banks, because they do not lend money. Instead, they hold client funds in custodian accounts, and simply settle payments within their networks.
For their part, cryptocurrencies seek to anchor trust in technology. So long as they are transparent—and if you are tech savvy—you might trust their services.
Still, I am not entirely convinced. Proper regulation of these entities will remain a pillar of trust.
Should we go further? Beyond regulation, should the state remain an active player in the market for money? Should it fill the void left by the retreat of cash?
Let me be more specific: should central banks issue a new digital form of money? A state-backed token, or perhaps an account held directly at the central bank, available to people and firms for retail payments? True, your deposits in commercial banks are already digital. But a digital currency would be a liability of the state, like cash today, not of a private firm.
This is not science fiction. Various central banks around the world are seriously considering these ideas, including Canada, China, Sweden, and Uruguay. They are embracing change and new thinking—as indeed is the IMF.
Today, we are releasing a new paper [1] on the pros and cons of central bank digital currency—or “digital currency” for short. It focuses on domestic, not cross-border effects of digital currency. The paper is available on the IMF website.
I believe we should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy.
This currency could satisfy public policy goals, such as (i) financial inclusion, and (ii) security and consumer protection; and to provide what the private sector cannot: (iii) privacy in payments.
End
Please expand the terms of reference to include the soundness of the decentralised central bank entirely external of state base credit model.
Yours sincerely
Iain Parker
13/1/2019
The opening terms of reference prior to the phase 1 government external expert panel consultations;
Scope of the Review
To ensure the Act continues to support the operation of the Reserve Bank, the Review will consider the following:
- The institutional arrangements for prudential regulation and supervision
- Objectives, objective setting processes, and alignment with government policy and risk appetite
- Statutory functions and powers
- Role clarity for the Minister of Finance, the Board, and the Governor, including the allocation and coordination of powers, functions and tools
- Accountabilities
- The strengths of current legislation, including its flexibility
- The balance between primary, secondary, and tertiary legislation, including in respect of setting policy
- Coordination across government, including pre-existing forums such as the Council of Financial Regulators
- Alignment with the domestic regulatory management system - Procedural approaches, fairness, and safeguards - International experience and best practice.
A successful regulatory regime is one that has the following characteristics
- The Act’s purpose and the Reserve Bank’s objectives are clear
- The roles and responsibilities of key participants, including the Minister, the Board, and the Governor, are defined in statute and are clear and coherent
- The regime engenders trust and confidence in New Zealand financial markets
- The regime is enduring
- The regime provides sufficient flexibility to adapt and evolve in response to market developments
- The regime engenders trust and confidence in decision-making processes
- Powers available to the Reserve Bank are sufficient to achieve its objectives
- There is clarity as to how the regime interacts with other regulatory regimes and government policy as whole
- The regime is clear about the role of government and the scope of the Reserve Bank’s operational independence.
End
By the end of phase 1 the all-encompassing terms of reference had been reduced to this;
The key decisions that have been made by Cabinet under phase 1 are:
- To include supporting maximum sustainable employment alongside price stability as an objective of monetary policy in the Act.
- To require that monetary policy decisions be made by a Monetary Policy Committee (MPC) of 5-7 members that includes a minority of external members.
- The MPC will take decisions by consensus where possible, but publish records of meetings that outline differences when they exist and the balance of votes where consensus is not reached
- Members of the MPC will be appointed by the Minister of Finance following a nomination of the Reserve Bank Board, with the Reserve Bank Governor and Deputy Chief Executive being members by virtue of their positions in the Bank. The Governor will be the chair of the MPC.
- The Reserve Bank will retain operational independence.
End
1 - This review was promoted as an exercise investigating if the present checks and balances in regards to the stability, soundness and fiscal responsibility of our nations financial infrastructure are sufficient.
2 - For over a decade I have had a passionate interest in the fundamentals of money as a system and the history of money systems.
I have spent thousands of hours reading thousands of on the record official documents from many governments and global regulatory institutions in regards of credit liquidity facilities at the wholesale level, financial system infrastructure and the outcomes for their citizenships.
3 - I have taken the time to read every submission and the internal government department/expert panel communications of phase 1 & 2 of the Reserve Bank Act Review process set up essentially to investigate if the checks & balances of the financial infrastructure of New Zealand ensure equitable stable outcomes for its citizenship, need reforming or remain status quo.
4 – I contend that this process is a very expensive facile exercise for the reasons detailed here on in;
5 – The review is investigating the worthiness of expanding the consultation group that announces the Official Cash Rate (OCR)
This to me is an exercise in futility given it is on the record common knowledge among both state and private financial infrastructure executives, that as it stands within our entirely foreign borrowed base credit, decentralised central banking money system, the OCR follows the Overseas Funding Cost Rate rather than in any way truly influencing it.
I include below several quotes from prominent institutions and people that make this absolutely clear;
This RBNZ paper:
http://www.rbnz.govt.nz/financial-stability/financial-stability-report/fsr2015-11/implications-of-global-liquidity-developments-for-new-zealand
Titled - Implications of global liquidity developments for New Zealand - from the Nov 2015 Financial Stability Report;
"There are three key channels through which New Zealand could be affected by declining market liquidity: the impact on New Zealand banks’ funding markets; the impact on short-term interest rates and monetary policy implementation; and the impact on the New Zealand government bond market.
New Zealand banks fund a significant proportion of their balance sheets by accessing offshore wholesale debt markets. They do this by borrowing in foreign currency, then ‘swapping’ this back into NZD. Conditions in global financial markets are therefore an important determinant of New Zealand bank funding. New Zealand banks tend to focus on the primary market (new issues) rather than the secondary market for debt. Hence, funding liquidity is of more immediate importance than market liquidity. Funding liquidity refers to the ability of the banks to raise debt as required at a reasonable cost. Reserve Bank discussions with bank treasurers suggest that funding liquidity conditions have deteriorated somewhat in 2015, owing largely to greater market volatility caused by events such as the Greek crisis mid-year and recent turbulence tied to China.
New Zealand banks typically use market makers to help facilitate the foreign currency swap leg involved in borrowing from offshore. Market makers take the other side of the transaction with New Zealand banks (providing NZD in exchange for foreign currency that the banks have raised), while charging a spread. This spread has widened as costs have increased for the institutions providing these market making services for the reasons described above. Overall, the cost increases have been manageable thus far, but this highlights the flow-on effects of changes in market liquidity to New Zealand entities seeking offshore funding."
end
Former New Zealand Prime Minister and former international investment banker John Key said 17 November 2012;
https://www.youtube.com/watch?v=5Nc6aoQGmLk
“Our (Govt) debt to GDP levels by then will top at just under 30 percent. In other words we'll be relatively lowly indebted compared to countries like America and Europe, but I put it to you we are a small open economy, we have high levels of private sector debt, We, Mum and Dad, have borrowed that debt effectively from foreigners because their local bank has sourced that from foreigners.”
end quote
Bernard Hickey(BH) - Grant Robertson(GR) interview 23 March 2016
https://www.youtube.com/watch?v=253QChyCREI
GR - "There are problems in our monetary policy and we do need to look at it"
BH - "What would a policy targets agreement under a Labour Government, you would be, if you were Finance Minister you would be the one signing the agreement."
GR - " Yeah, and look we have got to sit down and talk that through with the Reserve Bank Governor. I am still a supporter of an independent monetary policy. I think, I think that the Government can help create the settings, but in the end we are, we are well served by the independence of the Reserve Bank, so it will be a genuine conversation.
I have said often before that it is possible for the Reserve Bank to have a mandate beyond just controlling inflation.
I think if it had, had a mandate around employment we wouldn't have seen the rates go up when they did, we might have seen them come down a little bit quicker.
I have been clear before that I would like to see something like an employment based or an overall health of the economy based target included within the PTA.
On inflation itself, this is where we have to sit down and have a genuine conversation with a range of experts involved about what s the future of inflation.
Its a big topic and I know the Reserve Bank Governor is concerned about it himself.
So, you know, there will be some change. I could see a broadening of the criteria and we do have to look at how we, how inflation is measured and what it means in the economy."
BH - " So the Reserve Bank could cut interest rates, do what it wants and then the banks might not pass it on, so, what,"
GR - " Yeah well"
BH - "what do you think the banks should do about it. Because they haven't passed on, they haven't passed on all the official cash rate cut. "
GR - "No they have not. Although they were very quick to cut savings rates. So clearly on that side of the ledger they responded quickly. Look that is, you know, it was the Reserve Bank Governor who said very clearly at the Parliamentary Select Committee I was at, that he expected the rate to be passed on, it wasn't.
I understand that there has been an increase in the cost of borrowing overseas for banks, but I also don't think that increase legitimises not passing on the cut and it does start to neuter the value of monetary policy.
That's a conversation for me as Finance Minister to have with the Reserve Bank Governor as well, is does he have the tools in his tool box that makes him comfortable that, that the value of him setting an official cash rate is still there and we will have that conversation.
That's not, that's not to say that we would determine those rates, but it is to say that we need some pretty serious conversations with the banks about what they are doing."
BH - "Would Labour go as far as to looking to regulate retail interest rates."
GR - " Agh I am reluctant to say that. I think that what we would do is to talk to the bank, the Reserve Bank Governor about the tools that he has. I mean the, the overall relationship between the trading banks and the Reserve Bank is one that's, you know, has a number of different levers within it and I think that's probably the place to go looking for whether or not, you know, you can assure New Zealander's they should, they'll get the value that they should from an OCR cut, but that is the primary relationship, the Governor to the trading banks.
The government is there to set the rules, not be involved in the middle of that."
End of interview.
6 – So lets now move onto the musings of including for improvement the maximising of employment as a dual mandate alongside the present primary mandate of price stability;
It is also on the record common knowledge among state and private financial infrastructure executives that the methodology presently being used for official statistics to judge a person employed or not employed is seriously flawed.
The flaw is that a person in the survey period need only have been employed for one hour of paid employment or have swapped a minuscule amount of work for a minuscule amount of barter goods to be deemed employed. Despite it being very clear and evident this amount of employment would in no way ensure a person of dignified access to the bare essentials of life.
It is very questionable what improvement in regards the greater common good this measure would bring as long as this flawed methodology remains in place.
Labour force categories used in the Household Labour Force Survey
http://archive.stats.govt.nz/browse_for_stats/income-and-work/employment_and_unemployment/Labour-force-categories-in-HLFS.aspx
People employed
Definition
All people in the working-age population who, during the reference week:
- worked for one hour or more for pay or profit in the context of an employee/employer relationship or self-employment
- worked without pay for one hour or more in work that contributed directly to a farm, business, or professional practice operation owned or operated by a relative
- had a job but were not at work due to: their own illness or injury, personal or family responsibilities, bad weather or mechanical breakdown, direct involvement in an industrial dispute, or leave or holiday.
7 - This is an opportune time to also examine the soundness of the present primary mandate of price stability as determined by what is known as the Consumer Price Index (CPI) within an overarching Interest Rate Inflation Targeting model. The CPI is a list of various goods and services of which the cost of them is monitored and the averaged change of cost up or down is said to represent the changing cost of living.
It is on the record common knowledge among state and private financial infrastructure executives that this measure is presently seriously flawed due to the cost of housing not be accurately represented due to the land portion of property being removed from the CPI list back in 1999;
Joseph Stiglitz, Ex Vice President of the World Bank and Nobel Price winner for economics wrote of the shortcomings of Interest Rate Inflation Tageting in a 2008 article;
The answer came in the form of “inflation targeting,” which says that whenever price growth exceeds a target level, interest rates should be raised. This crude recipe is based on little economic theory or empirical evidence; there is no reason to expect that regardless of the source of inflation, the best response is to increase interest rates. One hopes that most countries will have the good sense not to implement inflation targeting; my sympathies go to the unfortunate citizens of those that do. (Among the list of those who have officially adopted inflation targeting in one form or another are: Israel, the Czech Republic, Poland, Brazil, Chile, Colombia, South Africa, Thailand, Korea, Mexico, Hungary, Peru, the Philippines, Slovakia, Indonesia, Romania, New Zealand, Canada, the United Kingdom, Sweden, Australia, Iceland, and Norway.)
End
20 February 2012 Deirdre Kent put this Official Information Act question to the New Zealand Minister of Statistics;
Despite the fact that section prices tripled in fifteen years to 2007, land is not now included in the Consumer Price Index. This means that the official measure of inflation is unreliable as it is far lower than the actual figure.
and received this reply;
Today I received a letter back from the Minister of Statistics, Hon Maurice Williamson. I had heard that land went out of the CPI but couldn’t remember when or why so I sent in an Official Information request. The Minister dates the letter 14 Mar 2012 and says
Dear Ms Kent
Thank you for your letter of 20 February regarding the exclusion of the price of land from the Consumers Price Index (CPI) basket of goods.
I am advised by Statistics New Zealand that land (i.e. residential section) was included in the CPI until the June 1999 quarter. Following a review of the CPI in 1997 land was excluded, taking effect from the September 1999 quarter.
The 1997 review by an external advisory committee confirmed the CPI’s main purpose as being informing monetary policy setting, and that the CPI should be focussed on the concept of acquisition. The reason given for excluding land from the CPI from 1999 was that it was considered to represent the investment component of home ownership (with dwellings representing the shelter component).
The September 1999 quarter CPI information release explained it as follows: A dwelling provides shelter over a long period of time. Over time land is not consumed and so can be considered to represent the investment component of home ownership. As investment expenses are outside the scope of the CPI the rebased CPI excludes expenditure on residential sections.
Information on the sale of land is available from QV (www.qv.co.nz) and the Real Estate Insititute of New Zealand (www.reinz.co.nz).
I trust this information meets your needs and thank you again for taking the time to write.
Yours sincerely
Hon Maurice Williamson
Minister of Statistics.
End
A speech by Governor Reserve Bank Of New Zealand Dr Alan Bollard and Enzo Cassino, delivered by Dr John McDermott to the Sim Kee Boon Institute Conference on Financial Economics Singapore, 5 May 2011
http://www.rbnz.govt.nz/speeches/4389919.pdf
Overall, there has also been a recognition that credit growth over the past decade was excessive and a potential risk to financial stability given the build-up in leverage and rising asset prices that accompanied it. We are continuing to build our understanding of money and credit at the RBNZ, and its inter-relationship with both sectoral financial decision making and potential risks for the banking sector.
End
Signs suggest inflation cycle is bottoming out 19 October 2016
https://www.odt.co.nz/business/signs-suggest-inflation-cycle-bottoming-out
Labour finance spokesman Grant Robertson said low inflation piled pressure on the Reserve Bank and the Government.
Low inflation would be welcomed by many but the data painted a troubling picture of the New Zealand economy.
The CPI only counted new builds in terms of housing costs. Those rose 2% annually and 6.2% for the quarter. Factoring in rises in rents and the spiraling cost of purchasing existing homes, the cost of housing for most New Zealanders was rising far in excess of inflation, he said.
''This is a huge problem for most New Zealanders who have seen their wages barely rise in recent years,'' he said.
End
8 – Now I would like to turn to the question of fiscal responsibility and fuduciary duty.
Given the unsoundness of much of the methodology used to measure the success of the present money system funding structures that I contend already render the proposed changes an exercise of futility, of great concern is the refusal to take a closer look at the fact that we belong to a club of nations whose base credit supply of their money systems is presently entirely borrowed from external of state institutions who type the credit they lend out into their account at the time of lending rather than relending anyone's savings that have been deposited with them and how it impacts our society.
The motives for this have to be questioned given that these surely most interesting of facts are documented in many of the reference sources from which the government expert advisory panel have included information but never mentioned the primary base credit creation issue and again it is common knowledge among the executives of state and private financial institutions;
Mr. Alan R Holmes was Senior Vice President, Federal Reserve Bank of New York. Worked for 33 years at the Federal Reserve Bank of New York, where from 1965 to 1979 he was manager of the Federal Reserve System Open Market Account. In that position, he was responsible for the creation of money in the United States and nations to which they made loans.
1969 speech – Operational Constraints On Stabilization of Money Supply
http://bostonfed.org/economic/conf/conf1/conf1i.pdf
"The idea of a regular injection of reserves-in some approaches at least-also suffers from a naive assumption that the banking system only expands loans after the System (or market factors) have put reserves in the banking system.In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand; over time, its influence can obviously be felt. In any given statement week, the reserves required to be maintained by the banking system are predetermined by the level of deposits existing two weeks earlier."
End
What should the future form of our money be?
Speech by Deputy Governor Jon Nicolaisen at the Norwegian Academy of Science and Letters, 25 April 2017.
https://www.norges-bank.no/en/Published/Speeches/2017/2017-04-25-dnva/
How is money created?
So how do banks create money? The answer to that question comes as quite a surprise to most people.
When you borrow from a bank, the bank credits your bank account. The deposit – the money – is created by the bank the moment it issues the loan. The bank does not transfer the money from someone else’s bank account or from a vault full of money. The money lent to you by the bank has been created by the bank itself – out of nothing: fiat – let it become.
The money created by the bank does not disappear when it leaves your account. If you use it to make a payment, it is just transferred to the recipient’s account. The money is only removed from circulation when someone uses their deposits to repay a bank, as when we make a loan repayment.The money supply is therefore only reduced when banks’ claims on the rest of the economy decrease.
Banks also fund lending by raising loans themselves instead of creating money in the form of deposits. In order to reduce risk, banks also use other forms of investment in addition to lending. Nevertheless, the money supply is growing at almost at the same pace as total bank credit.
To sum up: banks create money out of nothing and withdraw it when loans are repaid. Growth in total bank credit is normally matched by growth in the money supply.
End
Money – Born of Credit?
Christopher Kent
Assistant Governor (Financial Markets) Reserve Bank Australia 19 September 2018
https://www.rba.gov.au/speeches/2018/sp-ag-2018-09-19.html
How Is Money ‘Created’?
In summary, changes in the stock of broad money are the result of a myriad of decisions, including those of banks, their borrowers, creditors and shareholders. And these decisions take place within the framework of a range of regulatory and institutional arrangements. It is worth noting that the Reserve Bank does not target a particular level or growth rate of money (although it has done so under a previous monetary policy regime). Instead, the Reserve Bank has some influence on the money stock via the effect of its interest rate target for the overnight cash rate on other interest rates in the economy. These in turn affect the cost of borrowing and economic conditions more generally. Ultimately, borrowing and lending decisions – and thus the creation of money – are constrained by the need for prudent banking behaviour, the budget constraints of borrowers and the profitability of lenders.
One final word on the creation of money is that as fun as it is to teach students about traditional money multipliers, I don't find them to be a very helpful way of thinking about the process. In Australia, simple regulatory regimes – which had earlier required banks to hold a minimum share of their deposits as reserves with the Reserve Bank – have been replaced with modern prudential regulation and market discipline. Again, the demand for and supply of credit is the real driver of money. That point can be reinforced by examining the behaviour of credit and money over time.
End
Banking in New Zealand Fourth Edition - published by the New Zealand Bankers Association in 2006
Chapter 4 - The Creation of Money and Credit
https://issuu.com/iainparkerpubliccreditorbust/docs/nzba_banking_in_new_zealand_fourth_?fbclid=IwAR1UxdCgMQgo5AIRjbMb7aTg_EXND2Zw4exHRWw8CXtM3j9OdgAsAa3TrpM
THE CREATION OF MONEY AND CREDIT
what Actually Happens in reality, although the process outlined in the previous sections could occur, cash balances in bank vaults no longer act as a constraint on bank lending in the way that they might have up until the latter part of the 20th century.......
in such an environment, there is still scope for a bank to expand its lending and create credit, but it is dependent on there being net inflows of funds into the banking system as a whole. These inflows of funds may come from depositors from outside New Zealand (and we have seen significant inflows of funds from such sources in recent years), or from the government making net deposits of funds into the banking system (through its fiscal policy, as outlined below).
We also have a situation where, since 1985, New Zealand banks have not had any specific reserve requirements applied to their deposit liabilities. This means that, in theory, banks could keep on creating credit and expanding their loan portfolios indefinitely. in such an environment, it is the cost of credit, based upon the costs that banks have to pay to raise the deposits, that becomes the constraint on the quantity of credit that is created.
end
Excerpts from book - CRISIS - by New Zealand Reserve Bank Governor - Alan Bollard - published September 2010.
Preface - I have also tried to be scrupulous to ensure that I have written nothing on New Zealand that could not have been made public under the Official Information Act; indeed, much of the official policy is already in the public arena. This means at times the book is less revealing than it might otherwise be. We hope its no less insightful and interesting.
*Pg 19-20 - “Banking practices differ around the world, but we ensure ours meet international standards. These are set by a somewhat shadowy group called the Basel Committee on Banking Supervision. Comprised of representatives of large countries( not including New Zealand ), the group meets in Switzerland at the Bank of International Settlements (BIS).”
*pg 157 - Another governance worry related to the power and competence, or lack thereof, on the part of banks chief risk officers and risk committees. These officers assess the possible outcomes from any deal and decide whether the risks are acceptable under the banks mandated policies. We were now hearing about cases where risks had been miscalculated, procedures bypassed and officers overruled, all in the race for higher earnings.
*pg 183 - “In self-interest, banks may encourage New Zealander’s to take on more debt than is good for them individually or deliver more external liability than is good for the country.”
End
Iain Rennie government external consultant to this process;
Between 15 and 24 March 2017 discussions were held with representatives from the Bank for International Settlements and various overseas central banks to obtain their views on, and experiences with, different central bank decision-making models and governance. The representatives were: • Bank for International Settlements – David Archer (Head of Central Banking Studies) • Reserve Bank of Australia – Anthony Dickman (Secretary) • Bank of England – John Footman (Secretary) • Bank of Israel – Daniel Hahiashvili (Chief of Staff to the Governor); Yoav Soffer (Spokesperson and Head of Economic Information); Esther Schwartz (Secretary of the Monetary Committee) • Bank of Canada – Stephen Poloz (Governor) Summary of discussions The representatives from the central banks discussed the decision-making and governance models employed at each of their respective central banks. The following key points were also raised in the discussions: • International trends Given the depth of powers of central banks, and more recognition about the ability to get things wrong, there is political discomfort internationally with the limitations on holding central banks to account. Countries are struggling with financial policy. There is a trend towards interagency financial stability councils with unclear powers. There is recognition within central banks that there is an issue that needs to be dealt with, but generally speaking action on this has been limited.
End
Prasanna Gai University of Auckland excerpt of submission to this process;
The costs of financial system failure thus far exceed the private costs to the managers, creditors, and shareholders of the failing entities. This is a consequence of negative externalities – the private benefits of the socially destructive behaviour exceed the private costs. In financial systems, these externalities take two broad forms. First, the actions of a financial firm can directly influence the choices that other firms make.6 And second, the actions of a financial firm can influence the constraints facing other firms through their effect on prices. Such “pecuniary” externalities can also arise in efficient markets and are not of themselves distortionary. But when there are other constraints and distortions present, the effect of one agent’s actions on other agents in the system via prices can matter.
The endogeneity of risk means that macroprudential regulation avoids an important fallacy of composition – the financial system is not made safe by simply making sure that each and every financial balance sheet is sound. What may look stable at the level of an individual institution can be fragile and unstable at the system level due to the interconnections of financial institutions. For example, Beale et al. (2011) demonstrate how, in an inter-linked and procyclical system, the homogeneity of risk management practices can be collectively disastrous.
In the I(ntermediation)-theory of money, Brunnermeier and Sannikov (2016) argue that the presence of financial frictions means that price stability and financial stability are so intimately intertwined that it is impossible to make a distinction. The close connection arises because the health of the financial intermediation sector determines the degree of inside money creation and the price of risk in the economy.
Central banks must, thus, be acutely aware of aggregate and sector-specific credit growth and other monetary aggregates, since a narrow focus on current interest rates can be misleading.3
End
10 – Very relevant to this process I would like to take the opportunity to applaud those within government, who in recent times have realised the national security value of keeping at hand a state-owned electronic payment, transfer and settlement system, that presently is resided within the RBNZ/Kiwi Bank/ Post Office structures, to guard against private interests gaining a monopoly of these most important of facilities.
Facilities that if ever become entirely external of state-owned without a ready state alternative, would leave our society wide open to criminal exploitation that would be very hard to hold to account. As a number of nations found out the hard way post the 2008 GFC.
I was very proud to be the only individual submitter outside of the privately owned financial service sector institutions to put forward a submission during the “public consultation” period (that bizarrely called for submissions from only industry participants) and the only one that was pointing out the negatives of privitisation of the facilities.
I am encouraged that Government has not only decided to keep a ready alternative means of money distribution internal of the state, but has also set about strengthening the legislation in regards the obligations of the parts of the facilities that are privately owned.
11 - When you fully comprehend the fundamentals of money as a system of human & natural resource capital value, base credit underwritten economic enablement, you soon realise that no government has ever needed to be revenue constrained to any lesser extent than the territory it governs is constrained by physical resources available to it.
Any government has had at hand the means to develop the physical resources within its territory for internal use, or in readiness to trade with societies external of it, any goods surplus to their own requirements for goods that would further increase the standard of living of its citizens.
No government has ever needed to external borrow to develop the commonwealth resources within its own territory. If it has been doing so it has suffered a conjob at great external extortion expense to the citizens it represents.
Money system pyramid frauds orchestrated by shysters (a person who uses unscrupulous, fraudulent, or deceptive methods in business.) have been noted as regular occurrences since humans started recording written history.
But very bizarrely an intergenerational class of associated people are still able to suppress the knowledge of this most important of issues and get away with doing it with seeming impunity.
12 – Several nations have grown tired of institutions external of the state being entrusted with the extraordinary privilege of custodianship of the base credit of societies money only for them to repeatedly cook the credit books in very destabilising ways out of short-term self-interest and have made meaningful money system funding structure reforms that have reinstated a state institution at the top of the wholesale base credit tree to be administered as a public trust in the public interest.
This includes Japan. The third largest economy in the world with who New Zealand has just signed into the CPTPP trade agreement and are still accepting their currency as payments.
Adair Turner 20 Sept 2018
Japan's Successful Economic Model
"As for government debt and unsustainable fiscal deficits, doom-mongers who warn of an inevitable crisis if belt tightening is not soon imposed are likely to be disappointed. Japan’s gross government debt may be 236% of GDP, but after netting out government-owned financial assets, the International Monetary Fund estimates net debt at a much lower 152%.
Moreover, the Bank of Japan owns government bonds worth 90% of GDP, and ultimately returns to the government as dividends all the money it receives from the government as interest on the bonds it holds. Deducting both public financial assets and all the debts the Japanese government and people effectively owe to themselves, the debt level is only about 60% percent of GDP and not rising. This level of debt could be sustainable even if fiscal deficits remain high for many years.
To see why, suppose a country had gross government debt of 250% of GDP, net debt of 150%, and central bank bond holdings of 100% of GDP, leaving net debt of 50%. Then suppose that inflation and real growth were steady at 1% each, so that nominal GDP grows at 2%. With bond yields at 2% (versus 0.1% in Japan today), those debt ratios would remain stable even if the government ran a primary deficit of 4% of GDP, and a total deficit of 5%, year after year.
That is roughly what Japan is doing now. Far from reacting in horror at this clearly unsustainable behavior, bond buyers around the world still line up to buy government bonds in return for yields that are little more than zero."
End
Bank of Japan Monetary Policy
https://www.boj.or.jp/en/mopo/outline/qqe.htm/
13 – The IMF are now saying that more progressive monetary policy reform is justified.
I agree with them;
Winds of Change: The Case for New Digital Currency
By Christine Lagarde, IMF Managing Director
Singapore Fintech Festival
November 14, 2018
https://www.imf.org/en/News/Articles/2018/11/13/sp111418-winds-of-change-the-case-for-new-digital-currency
Let me now turn to my second issue: the role of the state—of central banks—in this new monetary landscape.
Some suggest the state should back down.
Providers of e-money argue that they are less risky than banks, because they do not lend money. Instead, they hold client funds in custodian accounts, and simply settle payments within their networks.
For their part, cryptocurrencies seek to anchor trust in technology. So long as they are transparent—and if you are tech savvy—you might trust their services.
Still, I am not entirely convinced. Proper regulation of these entities will remain a pillar of trust.
Should we go further? Beyond regulation, should the state remain an active player in the market for money? Should it fill the void left by the retreat of cash?
Let me be more specific: should central banks issue a new digital form of money? A state-backed token, or perhaps an account held directly at the central bank, available to people and firms for retail payments? True, your deposits in commercial banks are already digital. But a digital currency would be a liability of the state, like cash today, not of a private firm.
This is not science fiction. Various central banks around the world are seriously considering these ideas, including Canada, China, Sweden, and Uruguay. They are embracing change and new thinking—as indeed is the IMF.
Today, we are releasing a new paper [1] on the pros and cons of central bank digital currency—or “digital currency” for short. It focuses on domestic, not cross-border effects of digital currency. The paper is available on the IMF website.
I believe we should consider the possibility to issue digital currency. There may be a role for the state to supply money to the digital economy.
This currency could satisfy public policy goals, such as (i) financial inclusion, and (ii) security and consumer protection; and to provide what the private sector cannot: (iii) privacy in payments.
End
Please expand the terms of reference to include the soundness of the decentralised central bank entirely external of state base credit model.
Yours sincerely
Iain Parker
13/1/2019
Tuesday, 22 August 2017
Quantitative Easing vs Qualitative Easing.
Quantitative Easing vs Qualitative Easing.
There are presently three different so-called 'pump priming' monetary policy initiatives, that are confusingly being referred to by many as all being the same thing. But more accurately two of them favour the private banking sector over society, and one society over the banking sector.
1 - Printing bank credit reserves 1st example that favours banking sector over mainstreet;
Boosting bank credit reserves to replace what senior most owners and executives have stripped from the institution via remuneration packages with reported levels of profit justification that are creative accountancy, fraudulent counterfeit credit based cover-ups.
Creative accountancy fraud that leaves the institution itself insolvent and in need of assistance.
This does not work to pump prime the economy of course because no increased purchasing power reaches already debt saturated main street without it being via loans from the banks. Which when society is already debt saturated and been given no relief from the counterfeit credit already existing in the system, it is like pushing a piece of string.
Boosting bank credit reserves to replace what senior most owners and executives have stripped from the institution via remuneration packages with reported levels of profit justification that are creative accountancy, fraudulent counterfeit credit based cover-ups.
Creative accountancy fraud that leaves the institution itself insolvent and in need of assistance.
This does not work to pump prime the economy of course because no increased purchasing power reaches already debt saturated main street without it being via loans from the banks. Which when society is already debt saturated and been given no relief from the counterfeit credit already existing in the system, it is like pushing a piece of string.
2 - Printing bank credit reserves 2nd example that favours banking sector over main street;
Boosting banks credit reserves for them to purchase real assets from debt-encumbered companies or even countries. The benefit said to be by the bankers, injecting cash into cash-strapped sectors in an attempt to get the economy flowing again. They say they will sell the 'real assets' back to the market once the economy is flowing again.
Again given that there is no relief of the already existing levels of counterfeit credit based demands, and much of the cash changing hands comes straight back to the banks as payments, it is again like pushing a piece of string.
What it essentially does is allow the senior most vested interests to use counterfeit credit in a predatory way to gain ownership of the real assets of the society, so as they can then rent them back to society.
3 - Printing state institution mutual public credit reserves to be spent, rather than lent, into circulation that favours mainstreet over the senior most owners and executives of the banking sector;
Presently many societies of the world via contracts organised by their leaders, have entrusted institutions external of the state to administer the nation's currency originating 'pump priming' credit mechanism at the heart of their money system funding structures.
That, for a fee covering their cost of business and fair remuneration for their expertise of keeping everything in endgame loan repayment equilibrium, they will contractually administer the system in a fair way that will enhance the well-being of all of the society.
But many societies are starting to realise that the senior most owners and executives of these institutions external of the state have been committing grand-scale, predatory lending of counterfeit credit, control fraud.
They have been cooking the credit books in pursuit of short-sighted personal kings ransoms, rather than the long-term well-being of as many of society as possible.
The only way to now to fill the gap that has developed between the needs of mainstream and the lack of being able to access those needs due to interest payment demands upon a massive amount of already existing counterfeit credit, at least if society still wishes to retain a central currency, is by giving relief from those fraudulent claims by using another way to pump prime the economy in a way that bridges the poverty among plenty gap.
That way is via society, via their government, rescinding the contract of the institutions external of the state that has them at the top of the currency originating credit tree and occupying that space themselves.
Rather than first externally lending its purchasing power from external sources to then spend, it simply credits its own account with the value of its own credit, as is any nations sovereign right, then sets about doing what is necessary to give relief from the private banking sector counterfeit credit levels, by essentially doing the first two methods described above in this article, but to benefit society as a public trust and not institutions external of the state.
I would describe the 3rd of these processes as Qualitative Easing, rather than Quantitative Easing.
Wednesday, 2 August 2017
2017 Ideal Money System Funding Structure Reform Advisory Panel
If you conclude that these people have merit, please bring the information they possess, to the attention of as many people within the political and media public protection agencies of your nation, as you can.
These money system funding structure reformists are senior most international level Bankers – Academics – Regulators, and Me, who have integrity and are using their knowledge trying to prevent the breakdown of civilised society.
These people are not the path of least resistance, ego-preserving apologists for what they have played a part in, they are proven advocates for true reform of the presently failed money system funding structures of the world.
As the world seems to be reversing away from learned behaviours of common decency, into a selfish slave master minded, feudal commercial pyramid fraud ideology.
Before parents consider allowing their children being sent off to kill each other en masse in wars. Please take the time to read these peoples findings and suggestions for a more socially stable and environmentally sustainable, money system funding structure.
David C Korten
Dr. David C. Korten worked for more than thirty-five years in preeminent business, academic, and international development institutions. Served for five and a half years as a faculty member of the Harvard University Graduate School of Business, where he taught in Harvard’s middle management, MBA, and doctoral programs. Asia regional adviser on development management to the U.S. Agency for International Development before he turned away from the establishment to work exclusively with public interest citizen-action groups.
Short summary of his findings in this video;
https://www.youtube.com/watch?v=gTKE_mpEUu0
More detailed written summary here;
http://www.yesmagazine.org/pdf/liberateamericadownload.pdf
Adair Turner
Present -2015- Senior Fellow of the Institute For New Economic Thinking.
Prior to September 2008 Lord Turner was a non-executive Director at Standard Chartered Bank, United British Media and Siemens; from 2000-2006 he was Vice-Chairman of Merrill Lynch Europe, and from 1995-99, Director General of the Confederation of British Industry. He was with McKinsey & Co. from 1982 to 1995, building McKinsey’s practice in Eastern Europe and Russia as a Director. He was previously Chair of the Overseas Development Institute (2007-10).
Lord Turner studied History and Economics at Gonville and Caius College, Cambridge from 1974-78.
The Case for Monetary Finance – An Essentially. Political Issue
Video
https://www.youtube.com/watch?v=7pZzrdpHMZs
Transcript
http://www.imf.org/external/np/res/seminars/2015/arc/pdf/adair.pdf
The Truth About Banking: Former Top Regulator Speaks Out
http://www.theepochtimes.com/n3/1895986-the-truth-about-banking-former-top-regulator-speaks-out/2/
Adair Turner's book challenges the belief that private credit is essential to growth and fiat money is inevitably dangerous. The author argues that debt needs to be taxed as a form of economic pollution because most credit is not needed for economic growth and just drives real estate booms and busts and leads to financial crisis and depression. The author also debunks the big myth about fiat money—the erroneous notion that printing money will lead to harmful inflation. He believes that policy makers need to monetize government debt and finance fiscal deficits with central-bank money to overcome the mess that is created by past policy errors.
http://live.worldbank.org/between-debt-devil
John Fullerton
Former JP Morgan Managing Director says entirely compounding interest attached money system has out grown boundaries of the biosphere and is mathematically unsustainable!
About John Fullerton;
During an 18-year career at JP Morgan, John managed multiple capital markets and derivatives businesses around the globe, and finally ran the venture investment activity of Lab Morgan as Chief Investment Officer. He was JP Morgan’s representative on the Long Term Capital Oversight Committee in 1997-98. John is currently a director of the New Economics Institute, Investors’ Circle, New Day Farms, Inc., and an Advisor to Natural Systems Utilities. He is a participant/author of the UNEP Green Economy Report. John earned a BA in Economics at the University of Michigan, and an MBA at the Stern School of New York University’s in the Executive MBA Program.
Video interview here;
https://www.youtube.com/watch?v=bnbxRW8FnT8
Transcript here;
“ I learned that a lot of what we practiced in finance through no ill intent, this is unrelated to the financial crisis, and the ethical challenges of the financial system, but that the system itself is designed to propel growth in the economic system with no regard to the physical boundaries of the planet and with little regard to the social criteria, social constraints of human well being and so it struck me that a lot of the symptoms that we talk about such as climate change obviously being on top of everyone’s agenda, but ecosystem degradation, soil degradation, biodiversity loss. All of these issues are symptoms of an economic system that is essentially bumping into the boundaries of the biosphere, and if you think about finance and even our money system, which is built on a money system which is created through expanding money that has interest associated, so as the money supply grows the requirement to service money grows at a compound rate. That forces at a systemic level the economy to continue growing which if the economy is related to material throughput eventually creates this conflict with the boundaries of the biosphere. So its been a very profound realisation and what I have discovered is that there are an increasing amount of people thinking about this question, but its very much outside the halls of conventional economics and very much new economic thinking.”
The Road To Regenerative Capitalism
https://www.youtube.com/watch?v=nHnYZ4_qQIM
Michael Hudson
Michael Hudson is a former balance-of-payments economist for Chase Manhattan Bank and Arthur Andersen, and economic futurist for the Hudson Institute (no relation).
Born in 1939, Chicago, Illinois, USA is research professor of Economics at University of Missouri, Kansas City (UMKC). He is also a Wall Street analyst and consultant as well as president of The Institute for the Study of Long-term Economic Trends (ISLET) and a founding member of International Scholars Conference on Ancient Near Eastern Economies (ISCANEE).
Economic advisor to the U.S., Canadian, Mexican and Latvian governments, to the United Nations Institute for Training and Research (UNITAR), and he is president of the Institute for the Study of Long-term Economic Trends (ISLET).
http://www.nakedcapitalism.com/2012/04/michael-hudson.html
[9.00] Back in the 1960s, I ( Michael Hudson )was Chase Manhattan Bank’s balance of payments analyst, and my job was to focus on the Latin American countries: Argentina, Brazil, and Chile, and my job was to calculate how much of a balance of payments surplus they could generate, and the idea of the bank marketing department was the entire economic surplus could be used to pay debt service to the seven major Americam banks.
[9:40] And pretty quickly we found out that there wasn’t any surplus to pay the banks, and there was an international department that got very upset because he said “Look, I get promoted for making loans, and the real estate guys are making all the loans, you’re telling us they can’t afford to repay!” And he took it up to David Rockefeller, we went across the street to the Federal Reserve bank, and the Federal Reserve bank said “It’s in America’s interest to make these loans to Latin America. Mr. Hudson, according to your calculations, Britain can’t afford to replay any more.” “That’s right. I don’t see any way in which it can get the money to repay the debt.” And the Federal Reserve man said “Ah! But did you take into account the fact that the US Treasury is always going to lend Britain the money to pay? We will never let it go down.” I said, “Well, that’s a deus ex machina from outside the system. Yes, you can lend them the money to repay.”
Transcript of interview with Michael Hudson former Chase Manhattan Global Bank Balance of Payments Analyst - How Financial Parasites and Debt Bondage Destroy the Global Economy.
These money system funding structure reformists are senior most international level Bankers – Academics – Regulators, and Me, who have integrity and are using their knowledge trying to prevent the breakdown of civilised society.
These people are not the path of least resistance, ego-preserving apologists for what they have played a part in, they are proven advocates for true reform of the presently failed money system funding structures of the world.
As the world seems to be reversing away from learned behaviours of common decency, into a selfish slave master minded, feudal commercial pyramid fraud ideology.
Before parents consider allowing their children being sent off to kill each other en masse in wars. Please take the time to read these peoples findings and suggestions for a more socially stable and environmentally sustainable, money system funding structure.
David C Korten
Dr. David C. Korten worked for more than thirty-five years in preeminent business, academic, and international development institutions. Served for five and a half years as a faculty member of the Harvard University Graduate School of Business, where he taught in Harvard’s middle management, MBA, and doctoral programs. Asia regional adviser on development management to the U.S. Agency for International Development before he turned away from the establishment to work exclusively with public interest citizen-action groups.
Short summary of his findings in this video;
https://www.youtube.com/watch?v=gTKE_mpEUu0
More detailed written summary here;
http://www.yesmagazine.org/pdf/liberateamericadownload.pdf
Adair Turner
Present -2015- Senior Fellow of the Institute For New Economic Thinking.
Prior to September 2008 Lord Turner was a non-executive Director at Standard Chartered Bank, United British Media and Siemens; from 2000-2006 he was Vice-Chairman of Merrill Lynch Europe, and from 1995-99, Director General of the Confederation of British Industry. He was with McKinsey & Co. from 1982 to 1995, building McKinsey’s practice in Eastern Europe and Russia as a Director. He was previously Chair of the Overseas Development Institute (2007-10).
Lord Turner studied History and Economics at Gonville and Caius College, Cambridge from 1974-78.
The Case for Monetary Finance – An Essentially. Political Issue
Video
https://www.youtube.com/watch?v=7pZzrdpHMZs
Transcript
http://www.imf.org/external/np/res/seminars/2015/arc/pdf/adair.pdf
The Truth About Banking: Former Top Regulator Speaks Out
http://www.theepochtimes.com/n3/1895986-the-truth-about-banking-former-top-regulator-speaks-out/2/
Adair Turner's book challenges the belief that private credit is essential to growth and fiat money is inevitably dangerous. The author argues that debt needs to be taxed as a form of economic pollution because most credit is not needed for economic growth and just drives real estate booms and busts and leads to financial crisis and depression. The author also debunks the big myth about fiat money—the erroneous notion that printing money will lead to harmful inflation. He believes that policy makers need to monetize government debt and finance fiscal deficits with central-bank money to overcome the mess that is created by past policy errors.
http://live.worldbank.org/between-debt-devil
John Fullerton
Former JP Morgan Managing Director says entirely compounding interest attached money system has out grown boundaries of the biosphere and is mathematically unsustainable!
About John Fullerton;
During an 18-year career at JP Morgan, John managed multiple capital markets and derivatives businesses around the globe, and finally ran the venture investment activity of Lab Morgan as Chief Investment Officer. He was JP Morgan’s representative on the Long Term Capital Oversight Committee in 1997-98. John is currently a director of the New Economics Institute, Investors’ Circle, New Day Farms, Inc., and an Advisor to Natural Systems Utilities. He is a participant/author of the UNEP Green Economy Report. John earned a BA in Economics at the University of Michigan, and an MBA at the Stern School of New York University’s in the Executive MBA Program.
Video interview here;
https://www.youtube.com/watch?v=bnbxRW8FnT8
Transcript here;
“ I learned that a lot of what we practiced in finance through no ill intent, this is unrelated to the financial crisis, and the ethical challenges of the financial system, but that the system itself is designed to propel growth in the economic system with no regard to the physical boundaries of the planet and with little regard to the social criteria, social constraints of human well being and so it struck me that a lot of the symptoms that we talk about such as climate change obviously being on top of everyone’s agenda, but ecosystem degradation, soil degradation, biodiversity loss. All of these issues are symptoms of an economic system that is essentially bumping into the boundaries of the biosphere, and if you think about finance and even our money system, which is built on a money system which is created through expanding money that has interest associated, so as the money supply grows the requirement to service money grows at a compound rate. That forces at a systemic level the economy to continue growing which if the economy is related to material throughput eventually creates this conflict with the boundaries of the biosphere. So its been a very profound realisation and what I have discovered is that there are an increasing amount of people thinking about this question, but its very much outside the halls of conventional economics and very much new economic thinking.”
The Road To Regenerative Capitalism
https://www.youtube.com/watch?v=nHnYZ4_qQIM
Michael Hudson
Michael Hudson is a former balance-of-payments economist for Chase Manhattan Bank and Arthur Andersen, and economic futurist for the Hudson Institute (no relation).
Born in 1939, Chicago, Illinois, USA is research professor of Economics at University of Missouri, Kansas City (UMKC). He is also a Wall Street analyst and consultant as well as president of The Institute for the Study of Long-term Economic Trends (ISLET) and a founding member of International Scholars Conference on Ancient Near Eastern Economies (ISCANEE).
Economic advisor to the U.S., Canadian, Mexican and Latvian governments, to the United Nations Institute for Training and Research (UNITAR), and he is president of the Institute for the Study of Long-term Economic Trends (ISLET).
http://www.nakedcapitalism.com/2012/04/michael-hudson.html
[9.00] Back in the 1960s, I ( Michael Hudson )was Chase Manhattan Bank’s balance of payments analyst, and my job was to focus on the Latin American countries: Argentina, Brazil, and Chile, and my job was to calculate how much of a balance of payments surplus they could generate, and the idea of the bank marketing department was the entire economic surplus could be used to pay debt service to the seven major Americam banks.
[9:40] And pretty quickly we found out that there wasn’t any surplus to pay the banks, and there was an international department that got very upset because he said “Look, I get promoted for making loans, and the real estate guys are making all the loans, you’re telling us they can’t afford to repay!” And he took it up to David Rockefeller, we went across the street to the Federal Reserve bank, and the Federal Reserve bank said “It’s in America’s interest to make these loans to Latin America. Mr. Hudson, according to your calculations, Britain can’t afford to replay any more.” “That’s right. I don’t see any way in which it can get the money to repay the debt.” And the Federal Reserve man said “Ah! But did you take into account the fact that the US Treasury is always going to lend Britain the money to pay? We will never let it go down.” I said, “Well, that’s a deus ex machina from outside the system. Yes, you can lend them the money to repay.”
Transcript of interview with Michael Hudson former Chase Manhattan Global Bank Balance of Payments Analyst - How Financial Parasites and Debt Bondage Destroy the Global Economy.
http://michael-hudson.com/2015/10/rewriting-economic-thought/
Nomi Prins
https://www.youtube.com/watch?v=msgMAx1dNs0
William White, a former deputy governor of the Bank of Canada, and a former head of the Monetary and Economic Department of the Bank for International Settlements, is Chairman of the Economic and Development Review Committee at the OECD.
William White website
http://www.williamwhite.ca/
Overt Monetary Financing (OMF) and Crisis Management
https://www.project-syndicate.org/blog/overt-monetary-financing--omf--and-crisis-management
Ann Pettifor
Ann Pettifor's work and writing has concentrated on the international financial architecture, the sovereign debts of the poorest countries, and the rise in sovereign, corporate and private debt in OECD economies. Her latest book, Just Money: how society can break the despotic power of finance was published by Commonwealth in 2014. She is well known for her leadership of an organisation Jubilee 2000, that placed the debts of the poorest countries on the global political agenda, and brought about both substantial debt cancellation, and radical policy changes, at national and international levels. In 2003 she edited the new economics foundation's ‘The Real World Economic Outlook’ (Palgrave) with a prescient sub-title: ‘the legacy of globalisation: debt and deflation’. In 2006 Palgrave published her book: “The coming first world debt crisis”. In 2008 she co-authored “The Green New Deal” and in 2010 co-authored an essay with Professor Victoria Chick: “The economic consequences of Mr. Osborne.”Her website is a wealth of knowledge in regards to the money system funding structure issue;
http://www.primeeconomics.org/
William Black
Steve Keen was formerly an associate professor of economics at University of Western Sydney, until he applied for voluntary redundancy in 2013, due to the closure of the economics program at the university.[2] In autumn 2014 he became a professor and Head of the School of Economics, History and Politics at Kingston University in London. He is also a Fellow at the Centre for Policy Development.
His website contains a mountain of data of the debt situations of many nations, including New Zealand. He is also a mountain of knowledge in regards to why and how the money system funding structures of the present failed economic orthodoxy need reforming.
Nomi Prins
Nomi Prins is a renowned journalist, author and speaker. Her latest book, All the Presidents’ Bankers: The Hidden Alliances that Drive American Power, is a groundbreaking narrative about the relationships of presidents to key bankers over the past century and how they impacted domestic and foreign policy. Her other books include It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street. She is also the author of Other People’s Money: The Corporate Mugging of America, which was chosen as a Best Book of 2004 by The Economist, Barron’s and The Library Journal.
Nomi’s insights comes from having worked as a Managing Director at Goldman Sachs, a Senior Managing Director and head of the international analytics group at Bear Stearns in London, a Senior Strategist at Lehman Brothers, and an analyst at the Chase Manhattan Bank (now JPM Chase) which she joined at age 19. She holds a Bachelors of Science degree in Mathematics from SUNY Purchase, and a Masters of Science degree in Statistics and Operations Research from New York University, where she also completed all coursework for a PhD in Statistics.
She has appeared on television numerous times: internationally on BBC, RtTV, and nationally on CNN, CNBC, MSNBC, CSPAN, Democracy Now, Fox and PBS. She has been featured on hundreds of radio shows globally including CNNRadio, Marketplace, NPR, BBC, and Canadian Programming. She is featured in numerous documentaries shot by international production companies, alongside prominent thought-leaders, and Nobel Prize winners.
Her writing has been featured in The New York Times, Fortune, Newsday, Mother Jones, The Daily Beast, Newsweek, Truthdig, The Guardian, The Nation, Alternet, NY Daily News, LaVanguardia, and other publications.
Her engaging key-note speeches are thoughtfully tailored, and she has spoken at numerous venues including the Purdue University/Sinai Forum, University of Wisconsin Eau Claire Forum, Ohio State University Law School, Columbia University, Pepperdine Graduate School of Business, Manhattan College, National Consumer Law Center, Environmental Grantmakers Association, NASS Spinal Surgeons Conference, and the Mexican Senate.
She is a member of Senator Bernie Sanders (I-VT) Federal Reserve Reform Advisory Council, and is listed as one of America’s TopWonks. She is on the advisory board of the whistle-blowing organization ExposeFacts, and a board member of the animal welfare and wildlife conservation group, Born Free USA. She is currenty a Senior Fellow at the non-partisan public policy think-tank, Demos.
Nomi Prins Public Bankinghttps://www.youtube.com/watch?v=msgMAx1dNs0
William White, a former deputy governor of the Bank of Canada, and a former head of the Monetary and Economic Department of the Bank for International Settlements, is Chairman of the Economic and Development Review Committee at the OECD.
William White website
http://www.williamwhite.ca/
Overt Monetary Financing (OMF) and Crisis Management
https://www.project-syndicate.org/blog/overt-monetary-financing--omf--and-crisis-management
Ann Pettifor
Ann Pettifor's work and writing has concentrated on the international financial architecture, the sovereign debts of the poorest countries, and the rise in sovereign, corporate and private debt in OECD economies. Her latest book, Just Money: how society can break the despotic power of finance was published by Commonwealth in 2014. She is well known for her leadership of an organisation Jubilee 2000, that placed the debts of the poorest countries on the global political agenda, and brought about both substantial debt cancellation, and radical policy changes, at national and international levels. In 2003 she edited the new economics foundation's ‘The Real World Economic Outlook’ (Palgrave) with a prescient sub-title: ‘the legacy of globalisation: debt and deflation’. In 2006 Palgrave published her book: “The coming first world debt crisis”. In 2008 she co-authored “The Green New Deal” and in 2010 co-authored an essay with Professor Victoria Chick: “The economic consequences of Mr. Osborne.”Her website is a wealth of knowledge in regards to the money system funding structure issue;
http://www.primeeconomics.org/
William Black
A financial system regulator of the highest knowledge and integrity who knows what needs to be kept an eye on.
William Black jailed 1000 odd bankers in the US back in 1980's when they committed the same crimes they did during the 2008 global mass counterfeit credit crisis - for which hardly any of the frauds have been brought to justice.
Which is the prime cause of the massive inequality in the world that is now leading to massive civil unrest.
William Black jailed 1000 odd bankers in the US back in 1980's when they committed the same crimes they did during the 2008 global mass counterfeit credit crisis - for which hardly any of the frauds have been brought to justice.
Which is the prime cause of the massive inequality in the world that is now leading to massive civil unrest.
Written here;
http://www.alternet.org/economy/how-elite-economic-hucksters-drive-americas-biggest-fraud-epidemics
http://neweconomicperspectives.org/2012/10/the-best-way-to-rob-a-bank-is-still-to-own-one-a-postscript.html
http://www.alternet.org/economy/how-elite-economic-hucksters-drive-americas-biggest-fraud-epidemics
http://neweconomicperspectives.org/2012/10/the-best-way-to-rob-a-bank-is-still-to-own-one-a-postscript.html
Videos here;
With transcript
http://www.pbs.org/moyers/journal/04032009/watch.html
https://www.youtube.com/watch?v=-JBYPcgtnGE
Iain Parker
There are also my own articles in regards the impact of criminal banking sector activity upon New Zealand - helped very much by having discovered and followed the works of the above-linked banking insiders turned reform advocates for over a decade now;
Universal Public Credit Public Policy Submission
With transcript
http://www.pbs.org/moyers/journal/04032009/watch.html
https://www.youtube.com/watch?v=-JBYPcgtnGE
Danielle DiMartino Booth has given a modern example top up to my inspiration. After failing in attempting to change the immoral ways of the US Federal Reserve from within for many years she has resigned and now gone independent.
She recently (2017) published a book titled Fed Up - An insiders view of why the Federal Reserve is bad for America - which imho is a must read for anyone in state services anywhere in the world.
When asked why she continues with her quest after many setbacks - she says because it is just the right thing to do.
US Federal Reserve Whistleblower Danielle DiMartino Booth.
http://dimartinobooth.com/
ABOUT FED UP
A Federal Reserve insider pulls back the curtain on the secretive institution that controls America’s economy
After correctly predicting the housing crash of 2008 and quitting her high-ranking Wall Street job, Danielle DiMartino Booth was surprised to find herself recruited as an analyst at the Federal Reserve Bank of Dallas, one of the regional centers of our complicated and widely misunderstood Federal Reserve System. She was shocked to discover just how much tunnel vision, arrogance, liberal dogma, and abuse of power drove the core policies of the Fed.
DiMartino Booth found a cabal of unelected academics who made decisions without the slightest understanding of the real world, just a slavish devotion to their theoretical models. Over the next nine years, she and her boss, Richard Fisher, tried to speak up about the dangers of Fed policies such as quantitative easing and deeply depressed interest rates. But as she puts it, “In a world rendered unsafe by banks that were too big to fail, we came to understand that the Fed was simply too big to fight.”
Now DiMartino Booth explains what really happened to our economy after the fateful date of December 8, 2008, when the Federal Open Market Committee approved a grand and unprecedented experiment: lowering interest rates to zero and flooding America with easy money. As she feared, millions of individuals, small businesses, and major corporations made rational choices that didn’t line up with the Fed’s “wealth effect” models. The result: eight years and counting of a sluggish “recovery” that barely feels like a recovery at all.
While easy money has kept Wall Street and the wealthy afloat and thriving, Main Street isn’t doing so well. Nearly half of men eighteen to thirty-four live with their parents, the highest level since the end of the Great Depression. Incomes are barely increasing for anyone not in the top ten percent of earners. And for those approaching or already in retirement, extremely low interest rates have caused their savings to stagnate. Millions have been left vulnerable and afraid.
Perhaps worst of all, when the next financial crisis arrives, the Fed will have no tools left for managing the panic that ensues. And then what?
DiMartino Booth pulls no punches in this exposé of the officials who run the Fed and the toxic culture they created. She blends her firsthand experiences with what she’s learned from dozens of high-powered market players, reams of financial data, and Fed documents such as transcripts of FOMC meetings.
Whether you’ve been suspicious of the Fed for decades or barely know anything about it, as DiMartino Booth writes, “Every American must understand this extraordinarily powerful institution and how it affects his or her everyday life, and fight back.”
She recently (2017) published a book titled Fed Up - An insiders view of why the Federal Reserve is bad for America - which imho is a must read for anyone in state services anywhere in the world.
When asked why she continues with her quest after many setbacks - she says because it is just the right thing to do.
US Federal Reserve Whistleblower Danielle DiMartino Booth.
http://dimartinobooth.com/
ABOUT FED UP
A Federal Reserve insider pulls back the curtain on the secretive institution that controls America’s economy
After correctly predicting the housing crash of 2008 and quitting her high-ranking Wall Street job, Danielle DiMartino Booth was surprised to find herself recruited as an analyst at the Federal Reserve Bank of Dallas, one of the regional centers of our complicated and widely misunderstood Federal Reserve System. She was shocked to discover just how much tunnel vision, arrogance, liberal dogma, and abuse of power drove the core policies of the Fed.
DiMartino Booth found a cabal of unelected academics who made decisions without the slightest understanding of the real world, just a slavish devotion to their theoretical models. Over the next nine years, she and her boss, Richard Fisher, tried to speak up about the dangers of Fed policies such as quantitative easing and deeply depressed interest rates. But as she puts it, “In a world rendered unsafe by banks that were too big to fail, we came to understand that the Fed was simply too big to fight.”
Now DiMartino Booth explains what really happened to our economy after the fateful date of December 8, 2008, when the Federal Open Market Committee approved a grand and unprecedented experiment: lowering interest rates to zero and flooding America with easy money. As she feared, millions of individuals, small businesses, and major corporations made rational choices that didn’t line up with the Fed’s “wealth effect” models. The result: eight years and counting of a sluggish “recovery” that barely feels like a recovery at all.
While easy money has kept Wall Street and the wealthy afloat and thriving, Main Street isn’t doing so well. Nearly half of men eighteen to thirty-four live with their parents, the highest level since the end of the Great Depression. Incomes are barely increasing for anyone not in the top ten percent of earners. And for those approaching or already in retirement, extremely low interest rates have caused their savings to stagnate. Millions have been left vulnerable and afraid.
Perhaps worst of all, when the next financial crisis arrives, the Fed will have no tools left for managing the panic that ensues. And then what?
DiMartino Booth pulls no punches in this exposé of the officials who run the Fed and the toxic culture they created. She blends her firsthand experiences with what she’s learned from dozens of high-powered market players, reams of financial data, and Fed documents such as transcripts of FOMC meetings.
Whether you’ve been suspicious of the Fed for decades or barely know anything about it, as DiMartino Booth writes, “Every American must understand this extraordinarily powerful institution and how it affects his or her everyday life, and fight back.”
There are also my own articles in regards the impact of criminal banking sector activity upon New Zealand - helped very much by having discovered and followed the works of the above-linked banking insiders turned reform advocates for over a decade now;
Universal Public Credit Public Policy Submission
To whom it may concern,
Attempting to form public policy for equal economic opportunity of all citizens without a full knowledge of the function of money as invented and intended - that this submission details - is doing so by looking at 1/3 of a many piece puzzle forced together in frustrated confusion - thinking its complete - when 2/3 of the picture needed in the middle to make clear sense of it all - is in-fact one large piece that has been hidden by a self-serving few to steal from wider society under false pretenses.
http://publiccreditorbust.blogspot.co.nz/2013/04/universal-public-credit-public-policy.html
The New Zealand Money System De-Fib Documentary - Giving a jolt to the heart of an ailing democracy.
https://www.youtube.com/watch?v=sqOG-b1pJRw
A global economy based more upon thieving & killing of many for the profits of a few - than sharing & caring for the greater common good of humanity within boundaries of sustainable resources - I contest is a cancerous tumor threatening the survival of the progress of learned behaviours of common decency over self-destructive animal instincts - is in great need of the checks and balances detailed in this article linked below for the very same reasons evidenced in these articles linked below;
Social Credit with Demurrage
https://realcurrencies.wordpress.com/2013/05/18/social-credit-with-demurrage/
Re-conceptualizing Money for a 21st Century Society
http://www.dailykos.com/story/2015/01/15/1357742/-Re-conceptualizing-Money-for-a-21st-Century-Society
Attempting to form public policy for equal economic opportunity of all citizens without a full knowledge of the function of money as invented and intended - that this submission details - is doing so by looking at 1/3 of a many piece puzzle forced together in frustrated confusion - thinking its complete - when 2/3 of the picture needed in the middle to make clear sense of it all - is in-fact one large piece that has been hidden by a self-serving few to steal from wider society under false pretenses.
http://publiccreditorbust.blogspot.co.nz/2013/04/universal-public-credit-public-policy.html
The New Zealand Money System De-Fib Documentary - Giving a jolt to the heart of an ailing democracy.
https://www.youtube.com/watch?v=sqOG-b1pJRw
A global economy based more upon thieving & killing of many for the profits of a few - than sharing & caring for the greater common good of humanity within boundaries of sustainable resources - I contest is a cancerous tumor threatening the survival of the progress of learned behaviours of common decency over self-destructive animal instincts - is in great need of the checks and balances detailed in this article linked below for the very same reasons evidenced in these articles linked below;
Social Credit with Demurrage
https://realcurrencies.wordpress.com/2013/05/18/social-credit-with-demurrage/
Re-conceptualizing Money for a 21st Century Society
http://www.dailykos.com/story/2015/01/15/1357742/-Re-conceptualizing-Money-for-a-21st-Century-Society
Monday, 5 June 2017
The Mandrake Mechanism (Counterfeiting of credit)
The Creature from Jekyll Island
by G. Edward Griffin
Chapter 10
What is the Mandrake Mechanism?
It's the most important financial lesson of your life!
THE MANDRAKE MECHANISM . . . What is it? It is the method by which the Federal Reserve creates money out of nothing; the concept of usury as the payment of interest on pretended loans; the true cause of the hidden tax called inflation; the way in which the Fed creates boom-bust cycles.
In the 1940s, there was a comic strip character called Mandrake the Magician. His specialty was creating things out of nothing and, when appropriate, to make them disappear back into that same void. It is fitting, therefore, that the process to be described in this section should be named in his honor.
In the previous chapters, we examined the technique developed by the political and monetary scientists to create money out of nothing for the purpose of lending. This is not an entirely accurate description because it implies that money is created first and then waits for someone to borrow it.
On the other hand, textbooks on banking often state that money is created out of debt. This also is misleading because it implies that debt exists first and then is converted into money. In truth, money is not created until the instant it is borrowed. It is the act of borrowing which causes it to spring into existence. And, incidentally, it is the act of paying off the debt that causes it to vanish. There is no short phrase that perfectly describes that process. So, until one is invented along the way, we shall continue using the phrase "create money out of nothing" and occasionally add "for the purpose of lending" where necessary to further clarify the meaning.
So, let us now . . . see just how far this money/debt-creation process has been carried -- and how it works.
The first fact that needs to be considered is that our money today has no gold or silver behind it whatsoever. The fraction is not 54% nor 15%. It is 0%. It has traveled the path of all previous fractional money in history and already has degenerated into pure fiat money. The fact that most of it is in the form of checkbook balances rather than paper currency is a mere technicality; and the fact that bankers speak about "reserve ratios" is eyewash. The so-called reserves to which they refer are, in fact, Treasury bonds and other certificates of debt.
Our money is "pure fiat" through and through.
The second fact that needs to be clearly understood is that, in spite of the technical jargon and seemingly complicated procedures, the actual mechanism by which the Federal Reserve creates money is quite simple. They do it exactly the same way the goldsmiths of old did except, of course, the goldsmiths were limited by the need to hold some precious metals in reserve, whereas the Fed has no such restriction.
The Federal Reserve is candid.
The Federal Reserve itself is amazingly frank about this process.
A booklet published by the Federal Reserve Bank of New York tells us:
"Currency cannot be redeemed, or exchanged, for Treasury gold or any other asset used as backing. The question of just what assets 'back' Federal Reserve notes has little but bookkeeping significance."
Elsewhere in the same publication we are told: "Banks are creating money based on a borrower's promise to pay (the IOU) . . . Banks create money by 'monetizing' the private debts of businesses and individuals."
In a booklet entitled Modern Money Mechanics, the Federal Reserve Bank of Chicago says:
In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper. Deposits are merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face amount.
What, then, makes these instruments -- checks, paper money, and coins -- acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and real goods and services whenever they choose to do so. This partly is a matter of law; currency has been designated "legal tender" by the government -- that is, it must be accepted.
In the fine print of a footnote in a bulletin of the Federal Reserve Bank of St. Louis, we find this surprisingly candid explanation:
Modern monetary systems have a fiat base -- literally money by decree -- with depository institutions, acting as fiduciaries, creating obligations against themselves with the fiat base acting in part as reserves. The decree appears on the currency notes: "This note is legal tender for all debts, public and private."
While no individual could refuse to accept such money for debt repayment, exchange contracts could easily be composed to thwart its use in everyday commerce. However, a forceful explanation as to why money is accepted is that the federal government requires it as payment for tax liabilities. Anticipation of the need to clear this debt creates a demand for the pure fiat dollars.
Money would vanish without debt.
It is difficult for Americans to come to grips with the fact that their total money-supply is backed by nothing but debt, and it is even more mind boggling to visualize that, if everyone paid back all that was borrowed, there would be no money left in existence.
That's right, there would not be one penny in circulation -- all coins and all paper currency would be returned to bank vaults -- and there would be not one dollar in any one's checking account. In short, all money would disappear.
Marriner Eccles was the Governor of the Federal Reserve System in 1941. On September 30 of that year, Eccles was asked to give testimony before the House Committee on Banking and Currency. The purpose of the hearing was to obtain information regarding the role of the Federal Reserve in creating conditions that led to the depression of the 1930s.
Congressman Wright Patman, who was Chairman of that committee, asked how the Fed got the money to purchase two billion dollars worth of government bonds in 1933.
This is the exchange that followed.
Eccles: We created it.
Patman: Out of what?
Eccles: Out of the right to issue credit money.
Patman: And there is nothing behind it, is there, except our government's credit?
Eccles: That is what our money system is. If there were no debts in our money system, there wouldn't be any money.
It must be realized that, while money may represent an asset to selected individuals, when it is considered as an aggregate of the total money supply, it is not an asset at all. A man who borrows $1,000 may think that he has increased his financial position by that amount but he has not. His $1,000 cash asset is offset by his $1,000 loan liability, and his net position is zero. Bank accounts are exactly the same on a larger scale. Add up all the bank accounts in the nation, and it would be easy to assume that all that money represents a gigantic pool of assets which support the economy. Yet, every bit of this money is owed by someone. Some will owe nothing. Others will owe many times what they possess. All added together, the national balance is zero. What we think is money is but a grand illusion. The reality is debt.
Robert Hemphill was the Credit Manager of the Federal Reserve Bank in Atlanta. In the foreword to a book by Irving Fisher, entitled 100% Money, Hemphill said this:
If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible -- but there it is.
With the knowledge that money in America is based on debt, it should not come as a surprise to learn that the Federal Reserve System is not the least interested in seeing a reduction in debt in this country, regardless of public utterances to the contrary.
Here is the bottom line from the System's own publications. The Federal Reserve Bank of Philadelphia says:
"A large and growing number of analysts, on the other hand, now regard the national debt as something useful, if not an actual blessing . . . [They believe] the national debt need not be reduced at all."
The Federal Reserve Bank of Chicago adds:
"Debt -- public and private -- is here to stay. It plays an essential role in economic processes . . . What is required is not the abolition of debt, but its prudent use and intelligent management."
What's wrong with a little debt?
There is a kind of fascinating appeal to this theory. It gives those who expound it an aura of intellectualism, the appearance of being able to grasp a complex economic principle that is beyond the comprehension of mere mortals. And, for the less academically minded, it offers the comfort of at least sounding moderate. After all, what's wrong with a little debt, prudently used and intelligently managed? The answer is nothing, provided the debt is based on an honest transaction. There is plenty wrong with it if it is "based upon fraud".
An honest transaction is one in which a borrower pays an agreed upon sum in return for the temporary use of a lender's asset. That asset could be anything of tangible value. If it were an automobile, for example, then the borrower would pay "rent." If it is money, then the rent is called "interest." Either way, the concept is the same.
When we go to a lender -- either a bank or a private party -- and receive a loan of money, we are willing to pay interest on the loan in recognition of the fact that the money we are borrowing is an asset which we want to use. It seems only fair to pay a rental fee for that asset to the person who owns it. It is not easy to acquire an automobile, and it is not easy to acquire money -- real money, that is. If the money we are borrowing was earned by someone's labor and talent, they are fully entitled to receive interest on it. But what are we to think of money that is created by the mere stroke of a pen or the click of a computer key? Why should anyone collect a rental fee on that?
When banks place credits into your checking account, they are merely pretending to lend you money. In reality, they have nothing to lend. Even the money that non-indebted depositors have placed with them was originally created out of nothing in response to someone else's loan. So what entitles the banks to collect rent on nothing? It is immaterial that men everywhere are forced by law to accept these nothing certificates in exchange for real goods and services. We are talking here, not about what is legal, but what is moral. As Thomas Jefferson observed at the time of his protracted battle against central banking in the United States, "No one has a natural right to the trade of money lender, but he who has money to lend."
Third reason to abolish the system.
Centuries ago, usury was defined as any interest charged for a loan. Modern usage has redefined it as excessive interest. Certainly, any amount of interest charged for a pretended loan is excessive. The dictionary, therefore, needs a new definition.
Usury: The charging of any interest on a loan of fiat money.
Let us, therefore, look at debt and interest in this light. Thomas Edison summed up the immorality of the system when he said:
People who will not turn a shovel of dirt on the project [Muscle Shoals] nor contribute a pound of materials will collect more money . . . than will the people who will supply all the materials and do all the work.
Is that an exaggeration? Let us consider the purchase of a $100,000 home in which $30,000 represents the cost of the land, architect's fee, sales commissions, building permits, and that sort of thing and $70,000 is the cost of labor and building materials. If the home buyer puts up $30,000 as a down payment, then $70,000 must be borrowed. If the loan is issued at 11% over a 30-year period, the amount of interest paid will be $167,806. That means the amount paid to those who loan the money is about 2 1/2 times greater than paid to those who provide all the labor and all the materials. It is true that this figure represents the time-value of that money over thirty years and easily could be justified on the basis that a lender deserves to be compensated for surrendering the use of his capital for half a lifetime. But that assumes the lender actually had something to surrender, that he had earned the capital, saved it, and then loaned it for construction of someone else's house. What are we to think, however, about a lender who did nothing to earn the money, had not saved it, and, in fact, simply created it out of thin air?
What is the time-value of nothing?
As we have already shown, every dollar that exists today, either in the form of currency, checkbook money, or even credit card money -- in other words, our entire money supply -- exists only because it was borrowed by someone; perhaps not you, but someone.
That means all the American dollars in the entire world are earning daily and compounding interest for the banks which created them. A portion of every business venture, every investment, every profit, every transaction which involves money -- and that even includes losses and the payment of taxes -- a portion of all that is earmarked as payment to a bank.
And what did the banks do to earn this perpetually flowing river of wealth? Did they lend out their own capital obtained through investment of stockholders? Did they lend out the hard-earned savings of their depositors? No, neither of these were their major source of income. They simply waved the magic wand called fiat money.
The flow of such unearned wealth under the guise of interest can only be viewed as usury of the highest magnitude. Even if there were no other reasons to abolish the Fed, the fact that it is the supreme instrument of usury would be more than sufficient by itself.
Who creates the money to pay the interest?
One of the most perplexing questions associated with this process is "Where does the money come from to pay the interest?" If you borrow $10,000 from a bank at 9%, you owe $10,900. But the bank only manufactures $10,000 for the loan. It would seem, therefore, that there is no way that you -- and all others with similar loans -- can possibly pay off your indebtedness. The amount of money put into circulation just isn't enough to cover the total debt, including interest. This has led some to the conclusion that it is necessary for you to borrow the $900 for interest, and that, in turn, leads to still more interest. The assumption is that, the more we borrow, the more we have to borrow, and that debt based on fiat money is a never ending spiral leading inexorably to more and more debt.
This is a partial truth. It is true that there is not enough money created to include the interest, but it is a fallacy that the only way to pay it back is to borrow still more. The assumption fails to take into account the exchange value of labor. Let us assume that you pay back your $10,000 loan at the rate of approximately $900 per month and that about $80 of that represents interest. You realize you are hard pressed to make your payments so you decide to take on a part-time job.
The bank, on the other hand, is now making $80 profit each month on your loan. Since this amount is classified as "interest," it is not extinguished as is the larger portion which is a return of the loan itself. So this remains as spendable money in the account of the bank. The decision then is made to have the bank's floors waxed once a week. You respond to the ad in the paper and are hired at $80 per month to do the job. The result is that you earn the money to pay the interest on your loan, and -- this is the point -- the money you receive is the same money which you previously had paid. As long as you perform labor for the bank each month, the same dollars go into the bank as interest, then out of the revolving door as your wages, and then back into the bank as loan repayment.
It is not necessary that you work directly for the bank. No matter where you earn the money, its origin was a bank and its ultimate destination is a bank. The loop through which it travels can be large or small, but the fact remains all interest is paid eventually by human effort. And the significance of that fact is even more startling than the assumption that not enough money is created to pay back the interest. It is that the total of this human effort ultimately is for the benefit of those who create fiat money.
It is a form of modern serfdom in which the great mass of society works as indentured servants to a ruling class of financial nobility.Understanding the Illusion . . .
That's really all one needs to know about the operation of the banking cartel under the protection of the Federal Reserve. But it would be a shame to stop here without taking a look at the actual cogs, mirrors, and pulleys that make the magical mechanism work. It is a truly fascinating engine of mystery and deception.
Let us, therefore, turn our attention to the actual process by which the magicians create the illusion of modern money. First we shall stand back for a general view to see the overall action.
Then we shall move in closer and examine each component in detail.
The Mandrake Mechanism: An Overview
The entire function of this machine is to convert debt into money. It's just that simple. First, the Fed takes all the government bonds which the public does not buy and writes a check to Congress in exchange for them. (It acquires other debt obligations as well, but government bonds comprise most of its inventory.) There is no money to back up this check. These fiat dollars are created on the spot for that purpose. By calling those bonds "reserves," the Fed then uses them as the base for creating nine (9) additional dollars for every dollar created for the bonds themselves. The money created for the bonds is spent by the government, whereas the money created on top of those bonds is the source of all the bank loans made to the nation's businesses and individuals. The result of this process is the same as creating money on a printing press, but the illusion is based on an accounting trick rather than a printing trick.
The bottom line is that Congress and the banking cartel have entered into a partnership in which the cartel has the privilege of collecting interest on money which it creates out of nothing, a perpetual override on every American dollar that exists in the world.
Congress, on the other hand, has access to unlimited funding without having to tell the voters their taxes are being raised through the process of inflation. If you understand this paragraph, you understand the Federal Reserve System.
Now for a more detailed view. There are three general ways in which the Federal Reserve creates fiat money out of debt.
One is by making loans to the member banks through what is called the Discount Window.
The second is by purchasing Treasury bonds and other certificates of debt through what is called the Open Market Committee.
The third is by changing the so-called reserve ratio that member banks are required to hold. Each method is merely a different path to the same objective: taking IOUs and converting them into spendable money.
THE DISCOUNT WINDOW
The Discount Window is merely bankers' language for the loan window. When banks run short of money, the Federal Reserve stands ready as the "bankers' bank" to lend it. There are many reasons for them to need loans. Since they hold "reserves" of only about one or two per cent of their deposits in vault cash and eight or nine per cent in securities, their operating margin is extremely thin. It is common for them to experience temporary negative balances caused by unusual customer demand for cash or unusually large clusters of checks all clearing through other banks at the same time. Sometimes they make bad loans and, when these former "assets" are removed from their books, their "reserves" are also decreased and may, in fact, become negative. Finally, there is the profit motive. When banks borrow from the Federal Reserve at one interest rate and lend it out at a higher rate, there is an obvious advantage. But that is merely the beginning.
When a bank borrows a dollar from the Fed, it becomes a one-dollar reserve.
Since the banks are required to keep reserves of only about ten per cent, they actually can loan up to nine dollars for each dollar borrowed.
Let's take a look at the math. Assume the bank receives $1 million from the Fed at a rate of 8%. The total annual cost, therefore, is $80,000 (.08 X $1,000,000). The bank treats the loan as a cash deposit, which means it becomes the basis for manufacturing an additional $9 million to be lent to its customers. If we assume that it lends that money at 11% interest, its gross return would be $990,000 (.11 X $9,000,000). Subtract from this the bank's cost of $80,000 plus an appropriate share of its overhead, and we have a net return of about $900,000. In other words, the bank borrows a million and can almost double it in one year. That's leverage! But don't forget the source of that leverage: the manufacture of another $9 million which is added to the nation's money supply.
THE OPEN MARKET OPERATION
The most important method used by the Federal Reserve for the creation of fiat money is the purchase and sale of securities on the open market. But, before jumping into this, a word of warning. Don't expect what follows to make any sense. Just be prepared to know that this is how they do it.
The trick lies in the use of words and phrases which have technical meanings quite different from what they imply to the average citizen. So keep your eye on the words. They are not meant to explain but to deceive. In spite of first appearances, the process is not complicated. It is just absurd.
THE MANDRAKE MECHANISM: A DETAILED VIEW
Start with . . .
GOVERNMENT DEBT
The federal government adds ink to a piece of paper, creates impressive designs around the edges, and calls it a bond or Treasury note. It is merely a promise to pay a specified sum at a specified interest on a specified date. As we shall see in the following steps, this debt eventually becomes the foundation for almost the entire nation's money supply. In reality, the government has created cash, but it doesn't yet look like cash. To convert these IOUs into paper bills and checkbook money is the function of the Federal Reserve System. To bring about that transformation, the bond is given to the Fed where it is then classified as a . . .
SECURITIES ASSET
An instrument of government debt is considered an asset because it is assumed the government will keep its promise to pay. This is based upon its ability to obtain whatever money it needs through taxation. Thus, the strength of this asset is the power to take back that which it gives. So the Federal Reserve now has an "asset" which can be used to offset a liability. It then creates this liability by adding ink to yet another piece of paper and exchanging that with the government in return for the asset. That second piece of paper is a . . .
FEDERAL RESERVE CHECK
There is no money in any account to cover this check. Anyone else doing that would be sent to prison. It is legal for the Fed, however, because Congress wants the money, and this is the easiest way to get it. (To raise taxes would be political suicide; to depend on the public to buy all the bonds would not be realistic, especially if interest rates are set artificially low; and to print very large quantities of currency would be obvious and controversial.) This way, the process is mysteriously wrapped up in the banking system. The end result, however, is the same as turning on government printing presses and simply manufacturing fiat money (money created by the order of government with nothing of tangible value backing it) to pay government expenses. Yet, in accounting terms, the books are said to be "balanced" because the liability of the money is offset by the "asset" of the IOU. The Federal Reserve check received by the government then is endorsed and sent back to one of the Federal Reserve banks where it now becomes a . . .
GOVERNMENT DEPOSIT
Once the Federal Reserve check has been deposited into the government's account, it is used to pay government expenses and, thus, is transformed into many . . .
GOVERNMENT CHECKS
These checks become the means by which the first wave of fiat money floods into the economy. Recipients now deposit them into their own bank accounts where they become . . .
COMMERCIAL BANK DEPOSITS
Commercial bank deposits immediately take on a split personality.
On the one hand, they are liabilities to the bank because they are owed back to the depositors. But, as long as they remain in the bank, they also are considered as assets because they are on hand. Once again, the books are balanced: the assets offset the liabilities. But the process does not stop there. Through the magic of fractional-reserve banking, the deposits are made to serve an additional and more lucrative purpose. To accomplish this, the on-hand deposits now become reclassified in the books and called . . .
BANK RESERVES
Reserves for what? Are these for paying off depositors should they want to close out of their accounts? No. That's the lowly function they served when they were classified as mere assets. Now that they have been given the name of "reserves," they become the magic wand to materialize even larger amounts of fiat money. This is where the real action is: at the level of the commercial banks. Here's how it works. The banks are permitted by the Fed to hold as little as 10% of their deposits in "reserve." That means, if they receive deposits of $1 million from the first wave of fiat money created by the Fed, they have $900,000 more than they are required to keep on hand ($1 million less 10% reserve). In bankers' language, that $900,000 is called . . .
EXCESS RESERVES
The word "excess" is a tip off that these so-called reserves have a special destiny. Now that they have been transmuted into an “excess,” they are considered as available for lending. And so in due course these excess reserves are converted into . . .
BANK LOANS
But wait a minute. How can this money be loaned out when it is owned by the original depositors who are still free to write checks and spend it any time they wish? The answer is that, when the new loans are made, they are not made with the same money at all. They are made with brand new money created out of thin air for that purpose. The nation's money supply simply increases by ninety per cent of the bank's deposits. Furthermore, this new money is far more interesting to the banks than the old. The old money, which they received from depositors, requires them to pay out interest or perform services for the privilege of using it. But, with the new money, the banks collect interest, instead, which is not too bad considering it cost them nothing to make. Nor is that the end of the process. When this second wave of fiat money moves into the economy, it comes right back into the banking system, just as the first wave did, in the form of . . .
MORE COMMERCIAL BANK DEPOSITS
The process now repeats but with slightly smaller numbers each time around. What was a "loan" on Friday comes back into the bank as a "deposit" on Monday. The deposit then is reclassified as a "reserve" and ninety per cent of that becomes an "excess" reserve which, once again, is available for a new "loan." Thus, the $1 million of first wave fiat money gives birth to $900,000 in the second wave, and that gives birth to $810,000 in the third wave ($900,000 less 10% reserve). It takes about twenty-eight times through the revolving door of deposits becoming loans becoming deposits becoming more loans until the process plays itself out to the maximum effect, which is . . .
BANK FIAT MONEY = UP TO 9 TIMES GOVERNMENT DEBT
The amount of fiat money created by the banking cartel is approximately nine times the amount of the original government debt which made the entire process possible. When the original debt itself is added to that figure, we finally have . . .
TOTAL FIAT MONEY = UP TO 10 TIMES GOVERNMENT
The total amount of fiat money created by the Federal Reserve and the commercial banks together is approximately ten times the amount of the underlying government debt. To the degree that this newly created money floods into the economy in excess of goods and services, it causes the purchasing power of all money, both old and new, to decline. Prices go up because the relative value of the money has gone down. The result is the same as if that purchasing power had been taken from us in taxes. The reality of this process, therefore, is that it is a . . .
HIDDEN TAX = UP TO 10 TIMES THE NATIONAL DEBT
Without realizing it, Americans have paid over the years, in addition to their federal income taxes and excise taxes, a completely hidden tax equal to many times the national debt! And that still is not the end of the process. Since our money supply is purely an arbitrary entity with nothing behind it except debt, its quantity can go down as well as up. When people are going deeper into debt, the nation's money supply expands and prices go up, but when they pay off their debts and refuse to renew, the money supply contracts and prices tumble. That is exactly what happens in times of economic or political uncertainty. This alternation between period of expansion and contraction of the money supply is the underlying cause of . . .
BOOMS, BUSTS, AND DEPRESSIONS
Who benefits from all of this? Certainly not the average citizen.
The only beneficiaries are the political scientists in Congress who enjoy the effect of unlimited revenue to perpetuate their power, and the monetary scientists within the banking cartel called the Federal Reserve System who have been able to harness the American people, without their knowing it, to the yoke of modern feudalism.
RESERVE RATIOS
The previous figures are based on a "reserve" ratio of 10% (a money-expansion ratio of 10-to-1). It must be remembered, however, that this is purely arbitrary. Since the money is fiat with no previous-metal backing, there is no real limitation except what the politicians and money managers decide is expedient for the moment. Altering this ratio is the third way in which the Federal Reserve can influence the nation's supply of money. The numbers, therefore, must be considered as transient.
At any time there is a "need" for more money, the ratio can be increased to 20-to-1 or 50-to-1, or the pretense of a reserve can be dropped altogether. There is virtually no limit to the amount of fiat money that can be manufactured under the present system.
NATIONAL DEBT NOT NECESSARY FOR INFLATION
Because the Federal Reserve can be counted on to "monetize" (convert into money) virtually any amount of government debt, and because this process of expanding the money supply is the primary cause of inflation, it is tempting to jump to the conclusion that federal debt and inflation are but two aspects of the same phenomenon. This, however, is not necessarily true. It is quite possible to have either one without the other.
The banking cartel holds a monopoly in the manufacture of money. Consequently, money is created only when IOUs are "monetized" by the Fed or by commercial banks. When private individuals, corporations, or institutions purchase government bonds, they must use money they have previously earned and saved. In other words, no new money is created, because they are using funds that are already in existence. Therefore, the sale of government bonds to the banking system is inflationary, but when sold to the private sector, it is not. That is the primary reason the United States avoided massive inflation during the 1980s when the federal government was going into debt at a greater rate than ever before in its history. By keeping interest rates high, these bonds became attractive to private investors, including those in other countries. Very little new money was created, because most of the bonds were purchased with American dollars already in existence. This, of course, was a temporary fix at best.
Today, those bonds are continually maturing and are being replaced by still more bonds to include the original debt plus accumulated interest. Eventually this process must come to an end and, when it does, the Fed will have no choice but to literally buy back all the debt of the '80s -- that is, to replace all of the formerly invested private money with newly manufactured fiat money -- plus a great deal more to cover the interest. Then we will understand the meaning of inflation.
On the other side of the coin, the Federal Reserve has the option of manufacturing money even if the federal government does not go deeper into debt. For example, the huge expansion of the money supply leading up to the stock market crash in 1929 occurred at a time when the national debt was being paid off. In every year from 1920 through 1930, federal revenue exceeded expenses, and there were relatively few government bonds being offered. The massive inflation of the money supply was made possible by converting commercial bank loans into "reserves" at the Fed's discount window and by the Fed's purchase of banker's acceptances, which are commercial contracts for the purchase of goods.
Now the options are even greater. The Monetary Control Act of 1980 has made it possible for the Creature to monetize virtually any debt instrument, including IOUs from foreign governments. The apparent purpose of this legislation is to make it possible to bail out those governments which are having trouble paying the interest on their loans from American banks. When the Fed creates fiat American dollars to give foreign governments in exchange for their worthless bonds, the money path is slightly longer and more twisted, but the effect is similar to the purchase of U.S. Treasury Bonds. The newly created dollars go to the foreign governments, then to the American banks where they become cash reserves. Finally, they flow back into the U.S money pool (multiplied by nine) in the form of additional loans. The cost of the operation once again is born by the American citizen through the loss of purchasing power. Expansion of the money supply, therefore, and the inflation that follows, no longer even require federal deficits. As long as someone is willing to borrow American dollars, the cartel will have the option of creating those dollars specifically to purchase their bonds and, by so doing, continue to expand the money supply.
We must not forget, however, that one of the reasons the Fed was created in the first place was to make it possible for Congress to spend without the public knowing it was being taxed. Americans have shown an amazing indifference to this fleecing, explained undoubtedly by their lack of understanding of how the Mandrake Mechanism works. Consequently, at the present time, this cozy contract between the banking cartel and the politicians is in little danger of being altered. As a practical matter, therefore, even though the Fed may also create fiat money in exchange for commercial debt and for bonds of foreign governments, its major concern likely will be to continue supplying Congress.
The implications of this fact are mind boggling. Since our money supply, at present at least, is tied to the national debt, to pay off that debt would cause money to disappear. Even to seriously reduce it would cripple the economy. Therefore, as long as the Federal Reserve exists, America will be, must be, in debt.
The purchase of bonds from other governments is accelerating in the present political climate of internationalism. Our own money supply increasingly is based upon their debt as well as ours, and they, too, will not be allowed to pay it off even if they are able.
EXPANSION LEADS TO CONTRACTION
While it is true that the Mandrake Mechanism is responsible for the expansion of the money supply, the process also works in reverse. Just as money is created when the Federal Reserve purchases bonds or other debt instruments, it is extinguished by the sale of those same items. When they are sold, the money is given back to the System and disappears into the inkwell or computer chip from which it came. Then, the same secondary ripple effect that created money through the commercial banking system causes it to be withdrawn from the economy. Furthermore, even if the Federal Reserve does not deliberately contract the money supply, the same result can and often does occur when the public decides to resist the availability of credit and reduce its debt. A man can only be tempted to borrow, he cannot be forced to do so.
There are many psychological factors involved in a decision to go into debt that can offset the easy availability of money and a low interest rate: A downturn in the economy, the threat of civil disorder, the fear of pending war, an uncertain political climate, to name just a few. Even though the Fed may try to pump money into the economy by making it abundantly available, the public can thwart that move simply by saying no, thank you. When this happens, the old debts that are being paid off are not replaced by new ones to take their place, and the entire amount of consumer and business debt will shrink. That means the money supply also will shrink, because, in modern America, debt is money. And it is this very expansion and contraction of the monetary pool -- a phenomenon that could not occur if based upon the laws of supply and demand -- that is at the very core of practically every boom and bust that has plagued mankind throughout history.
In conclusion, it can be said that modern money is a grand illusion conjured by the magicians of finance in politics. We are living in an age of fiat money, and it is sobering to realize that every previous nation in history that has adopted such money eventually was economically destroyed by it. Furthermore, there is nothing in our present monetary structure that offers any assurances that we may be exempted from that morbid roll call.
Correction. There is one. It is still within the power of Congress to abolish the Federal Reserve System.
SUMMARY
The American dollar has no intrinsic value. It is a classic example of fiat money with no limit to the quantity that can be produced. Its primary value lies in the willingness of people to accept it and, to that end, legal tender laws require them to do so.
It is true that our money is created out of nothing, but it is more accurate to say that it is based upon debt. In one sense, therefore, our money is created out of less than nothing. The entire money supply would vanish into the bank vaults and computer chips if all debts were repaid.
Under the present System, therefore, our leaders cannot allow a serious reduction in either the national or consumer debt. Charging interest on pretended loans is usury, and that has become institutionalized under the Federal Reserve System.
The Mandrake Mechanism by which the Fed converts debt into money may seem complicated at first, but it is simple if one remembers that the process is not intended to be logical but to confuse and deceive. The end product of the Mechanism is artificial expansion of the money supply, which is the root cause of the hidden tax called inflation.
This expansion then leads to contraction and, together, they produce the destructive boom-bust cycle that has plagued mankind throughout history wherever fiat money has existed.
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