Publications
Partners
LAST week I was saying that we need a new way of managing the level of deposits in an economy. The more deposits there are, the more can be lent.
If deposits can be created at the whim of the banks just because someone new wants to borrow money and there are not enough deposits around, then instead of seeing interest rates rise as people scramble to get a loan, the banks just create a loan and that loan becomes a new deposit.
The reason why this is not a good idea is because it can lead to too many loans and too much demand in the economy compared to its capacity to supply goods and services.
So the result is that asset prices inflate, imports are brought in and most importantly, too many people are able to borrow at below market rates of interest. The market rate is not what it ought to be.
When these distortions in the economy come to their limit and the interest rate is at last raised, we find that there is excessive debt, people cannot afford the higher market rates of interest, property and bond prices tumble, everyone feels poorer and threatened, spending from borrowed money dries up so that there may not even be enough demand from spending to supply the spending needed to keep employment at anywhere close to its previous level.
The Minsky Moment
Some people call this ‘The Minsky Moment’, named after US economist Professor Hyman Philip Minsky.
He warned about the complacency that pervades the world when interest rates are low and unemployment is low, everything seems to be stable and perfect, but almost unobserved, and as all of the above bubbles and debts have been created, it is the moment at which all these problems hit the economy in a kind of ambush, and a depression or a deep recession is triggered.
“Does this apply in South Africa?” a reader wanted to know last week. “What about all the other economies like the Asian Tigers?”
It does apply. All over the world, banks are creating new debts and new deposits in this way. And the central banks are not providing the correct rate of interest. If you look at the records of interest rates around the world you will not find a steady rate, and that is especially true in the developing nations he cited.
The result of this instability is a lot of confusion and that is a big problem for all of us.
So the question I asked last week was how we can set about changing to a new model, without for example upsetting the banks.
The first thing to do is to make a plan and then to consult the banks and all other players in the economy. You don’t just impose something.
I suggested that the aim should be to create a money supply authority (an MSA) which can be situated at the central (reserve) bank. They have the responsibility of creating cash and all of the money that there is.
I suggested that this MSA should have custody of all of the money they create and that the banks should become agents that seek to find borrowers for that money.
The banks would then administer the repayments and set out how and when the repayments must be made.
Not too big to fail
Any defaults or arrears would be the responsibility of the banks. All deposits made at a bank would be passed to the MSA. If a loan is not repaid, the bank is liable. If a bank goes bust, another bank simply steps in and takes over the administration of their remaining loan book (loans).
The deposits will be safe and there will not be any banks that are too big to fail.
The bank that lends badly will lose its capital and that will be that.
The staff can be employed by a new employer to continue handling the loans. The MSA will have many non-performing loans on its hands which were created by its defaulting agent bank.
The MSA is in a position to create new money to replace any money that is lost and so safeguard the deposits owned by everyone with a bank account.
So that is the destination sought.
We still need a way to get there. We have to create 10 to 20 times as much in genuine deposits as we have at present, because at the moment when a loan is repaid the money that created that loan and the deposit belonging to the borrower, disappears.
These artificial deposits were created when new loans were made and they vanish when those new loans get repaid.
So a way is needed to prevent those deposits from vanishing as they get repaid, so that the money can be lent again and the economy continue as normal.
The MSA will be able to create new money deposits just as fast as those loans are repaid so as to keep the total amount of lendable deposits unchanged.
The question then arises: “Will that be too many deposits?” And: “To whom will they belong?”
See you next week.
- Fin24
* Edward Ingram has a strong and growing support base. One American has started a petition asking President Barack Obama and/or his senate committees to look into these ideas. Ingram says: “Why not here in South Africa? The ideas are universal.”
If deposits can be created at the whim of the banks just because someone new wants to borrow money and there are not enough deposits around, then instead of seeing interest rates rise as people scramble to get a loan, the banks just create a loan and that loan becomes a new deposit.
The reason why this is not a good idea is because it can lead to too many loans and too much demand in the economy compared to its capacity to supply goods and services.
So the result is that asset prices inflate, imports are brought in and most importantly, too many people are able to borrow at below market rates of interest. The market rate is not what it ought to be.
When these distortions in the economy come to their limit and the interest rate is at last raised, we find that there is excessive debt, people cannot afford the higher market rates of interest, property and bond prices tumble, everyone feels poorer and threatened, spending from borrowed money dries up so that there may not even be enough demand from spending to supply the spending needed to keep employment at anywhere close to its previous level.
The Minsky Moment
Some people call this ‘The Minsky Moment’, named after US economist Professor Hyman Philip Minsky.
He warned about the complacency that pervades the world when interest rates are low and unemployment is low, everything seems to be stable and perfect, but almost unobserved, and as all of the above bubbles and debts have been created, it is the moment at which all these problems hit the economy in a kind of ambush, and a depression or a deep recession is triggered.
“Does this apply in South Africa?” a reader wanted to know last week. “What about all the other economies like the Asian Tigers?”
It does apply. All over the world, banks are creating new debts and new deposits in this way. And the central banks are not providing the correct rate of interest. If you look at the records of interest rates around the world you will not find a steady rate, and that is especially true in the developing nations he cited.
The result of this instability is a lot of confusion and that is a big problem for all of us.
So the question I asked last week was how we can set about changing to a new model, without for example upsetting the banks.
The first thing to do is to make a plan and then to consult the banks and all other players in the economy. You don’t just impose something.
I suggested that the aim should be to create a money supply authority (an MSA) which can be situated at the central (reserve) bank. They have the responsibility of creating cash and all of the money that there is.
I suggested that this MSA should have custody of all of the money they create and that the banks should become agents that seek to find borrowers for that money.
The banks would then administer the repayments and set out how and when the repayments must be made.
Not too big to fail
Any defaults or arrears would be the responsibility of the banks. All deposits made at a bank would be passed to the MSA. If a loan is not repaid, the bank is liable. If a bank goes bust, another bank simply steps in and takes over the administration of their remaining loan book (loans).
The deposits will be safe and there will not be any banks that are too big to fail.
The bank that lends badly will lose its capital and that will be that.
The staff can be employed by a new employer to continue handling the loans. The MSA will have many non-performing loans on its hands which were created by its defaulting agent bank.
The MSA is in a position to create new money to replace any money that is lost and so safeguard the deposits owned by everyone with a bank account.
So that is the destination sought.
We still need a way to get there. We have to create 10 to 20 times as much in genuine deposits as we have at present, because at the moment when a loan is repaid the money that created that loan and the deposit belonging to the borrower, disappears.
These artificial deposits were created when new loans were made and they vanish when those new loans get repaid.
So a way is needed to prevent those deposits from vanishing as they get repaid, so that the money can be lent again and the economy continue as normal.
The MSA will be able to create new money deposits just as fast as those loans are repaid so as to keep the total amount of lendable deposits unchanged.
The question then arises: “Will that be too many deposits?” And: “To whom will they belong?”
See you next week.
- Fin24
* Edward Ingram has a strong and growing support base. One American has started a petition asking President Barack Obama and/or his senate committees to look into these ideas. Ingram says: “Why not here in South Africa? The ideas are universal.”
