This is the second of a two-part series.
IN Part 1 I explained how the world's economies become over-reliant upon debt-based money. That is money which gets lent into circulation when people borrow. When repaid, it goes out of circulation. This can lead to a shortage of money.
Reportedly, by 2004, 97% or more of all money in circulation in some of the advanced economies was debt-based money.
The world had became 'drunk' on borrowed money. The 'hangover' produced a shortage of money in circulation. It was called a 'liquidity crisis'.
This raises the question: why did central banks ever stop creating debt-free money in the first place?
It appears to be because they thought that printing debt-free money would always lead to hyper-inflation. There was no law to limit the quantity which they could create. That was unfortunate, because that is what is needed.
What causes hyper-inflation is spending too much newly-created money. Inflation is not caused by HOW money is created, whether it is lent into circulation or printed into circulation.
When they finally realised that they have to print some money, central bankers did not give it to their people to spend. Instead, they spent it themselves. This was another bad mistake. They have become wealthier than many nations and caused even more problems.
Unfortunately, economists and central bankers are not clear-thinking people with full knowledge of what they are doing or what they ought to be doing, and how they should to be doing it. When they started to create all of this debt-free money in 2008, they bought real assets like bonds.
This created a shortage of bonds which inflated their value. They also kept interest rates low by creating all of this extra money. The wealthy people, people who could borrow plenty, bought bonds and assets like property at inflated prices. The cost of borrowing was so low that it actually cost them nothing. The rentals would pay off the debt. Hello, Donald Trump.
Those economies are now suffering the consequences.
Central bankers still have a whole lot to learn
Central bankers have a whole lot they still need to learn. Economies need more debt-free money and less debt-based money to make them stable. And they need a law or a guideline on how much of each and how much in total to allow into circulation.
In December 2016, the world's oldest bank failed. A rescue plan was put in place. Taxpayers may be asked to pay for the rescue. Another mistake.
When a bank fails to recover a loan (called a bad debt), the debt-based money which it lent is never repaid. The borrower cannot repay. The money created and lent remains in circulation in the hands of those who gave goods and services in return for it. None of them are obliged to repay the lender. It is now debt-free money.
We know that the economy constantly needs more money just to keep going (see Part 1), so that is all right. But a whole lot more debt-free money is constantly needed than just that which is accidentally created through bad loans.
What is needed is enough money in circulation - not too much and not too little. And stable rates of interest (not super-low rates) are needed to create confidence. That creates jobs. Cheap money doesn't.
Cheap money gets used to buy properties, investments, and other currencies. Businesses use it to take over competitors. The profits from the ex-competitor company pays off the debt. It is a free take-over adding nothing to the economy. It reduces competition.
These conditions, together with the instabilities built into the lending contracts in use for bonds and home loans and commercial loans too (see the LOW INFLATION TRAP), have weakened some well-established banks in Europe. Many more banks are on the verge of bankruptcy. The remedy is to change the nature of those contracts which are causing the problem, along the lines explained in my course.
LET THE BANKS FAIL.
When banks fail, some debt-free money should be given to protect those depositors and savers who might otherwise lose it. Depositors are not the experts; the banks are. Let the banks fail. No taxpayer bailout is needed to rescue banks. Some other entity, or management group, will have to administer the staff and the loans. They can also have some free new money to keep them afloat.
For more about macro-economic design and management, here are some links:
Peer reviews and background
Main research website
General equations for lending
- Edward Ingram is a leading thinker on the world stage of macro-economic design and has written a series of essays for Fin24. Views expressed are his own. His course in Macro-economic Design and Management is revolutionary. The first module is free to the public and can be found here. The main research website which predated that can be found here.