So everything is hunkey-dorey - France and Germany declare that their recessions are over, and helicopter Ben Bernanke says that the US recession is also ending.
Meanwhile Mervyn King of the Bank of England thinks that Britain faces a slow and protracted recovery. He went on to say that he had "hoped to see more signs of a pickup in money growth". Which is fascinating because money = debt!
For most of us the subject of money is as mysterious as gravity - we make use of it every day, but have no idea as to what it is or how it comes into being. Governments create money by going to privately run central banks such as the US Federal Reserve or the Bank of England and borrow money from them using the mechanism of Treasuries and Bonds.
So all forms of money (cash or 'financial instruments') are created in response to a debt. The money did not exist before the debt (IOU) was created. The money for your loan or mortgage was created out of nothing when you signed on the dotted line (and acquired a debt).
Remember from an earlier post, under the rules of fractional reserve accounting, each pound that is created gets loaned out many times over, so £10 of new money can create anything from £90 to £5000 of new debt!
What happens when you pay off a debt? - money is destroyed! And the multiplier effect works in reverse - paying off a few hundreds of pounds debt can wipe out many thousands of pounds of money. If we paid off the national debt, there would effectively be no money in circulation!
Returning to Mr King, why does he want us to have more debt? The BofE has recently printed £150bn of new money - the multiplier effect means that several trillion pounds have been injected into the British economy. The Federal Reserve has done the same. Where has it gone?
It has gone to the banks, saving them from the reverse multiplier consequence of their actions. Adding insult to injury, they charge us interest for the pleasure of creating the money that we borrowed to bail them out of the problems they created!
Remember those 'toxic assets' - they are still there, according to the head of the Congessional Oversight Committee. Indeed, as she says, there is an even bigger problem heading our way - the collapse of the commercial real estate market.
So what that nice Mr King wants is for us to have more and more debt in order to create more and more money to stuff in the holes of the sinking global financial system. And he seems such a nice, genuine, affable sort of chap.
Posted by Nicholas Moore 12:29:18 pm