What happens when you can’t sleep? Well, at least for me, I start reading. And, Zero Hedge always seems to be a great place to start. mog’s comment/question posed some serious and important questions so here we go…
From Zero Hedge:
The Crisis Is Spreading: China, Australia, Brazil, Canada, Sweden…
Comment by mog:
Quote above (from The Crisis Is Spreading: China, Australia, Brazil, Canada, Sweden…)
“We’ve written before that governments all around the world have borrowed too much money and the weight of these debts are choking economic growth.”
QUESTIONS: Can all you financial whizzes out there please explain this to me. I admit to not understanding – sorry. I am not really in to high finance. Now who had all this massive amount of money they could borrow? Presumably it was from Banks. But how do banks have such enormous sums of money? Enough to finance the globe? Where have they made it? How did they make it? Have they got it because THEY printed it? If they just printed it – is it money or just printed paper? If its printed paper what gave them the right to use it as money and for their personal profit… And if its just ‘privately printed pieces of paper’ – why should the people pay it back. Its counterfeit – pretending to be money. Where have I lost the plot?
RESPONSE: How did government get all that money? Go back through history, and the money always comes from three sources: 1) loans from current bank capital and deposits, 2) the bond markets and/or 3) newly created government (or a government controlled central bank) issued money. And in current times, 2) and 3) are typically funneled through 1), so one could say the money does indeed come from banks. And, where do banks get the money? From the collective resources of every individual, institution and business that inhabits the earth. And, how does government convince banks to finance their operations? The same way they convince you to pay your taxes – through force. They force banks directly, through the rule of law, backed by imprisonment, fines and/or the threat of substantial personal loss, to hold a minimum amount of government securities in some cases, and indirectly by elevating what would otherwise be completely worthless debt securities into AAA risk free “investments”. Government ensures, as best they can, that their operations will always be fully funded. And, when that does not suffice? Well, governments create more money. This is source 3), rinsed and repeated, over and over and over again, to a point where prior government deficits even help fund future government deficits by substantially increasing the amount of money available.
Let’s step back for a moment, though. First, banks do indeed have a license to “print” and loan money no different than a car company has a license to manufacture and sell automobiles. And, asking how a bank has all of that money and why do they have it, and not someone else, is like asking, “what is that car dealership doing with all of those cars?” This is not evil. (See my post: https://miltonchurchill.wordpress.com/2015/07/27/fractional-reserve-banking-something-for-the-little-guy/) Second, all banks are required to start out with their own capital. Every shareholder antes up a portion of their own wealth to invest into a banking venture. Even the regional Federal Reserve branches are funded by their member banks. So, contrary to some beliefs, “bankers” DO have skin in the game. Third, banks do not simply print money and go to the local mall and start spending it (if they did they would be bankrupt in short order). They do “print” (create) money, but that printed money is loaned at interest, and that interest makes up a banks revenues. The bank also has interest expense (the cost of money) and operational expenses for employees, space, technology, security, etc., etc. In very simplistic terms, it is the interest earned on their own invested capital and loans (additional created money) in excess of expenses that make up banking profits, or losses. And, indeed, if losses are significant enough, all shareholder capital can be wiped out. Think about something; there are no current restrictions on the number of banks that can operate in the US, and I am unaware of any similar restrictions in other developed countries. So, with the right amount of capital and know-how, anyone can have their own, shall we say, “printing press”. I ask you, if it really were the panacea some claim banking to be, wouldn’t everybody be a banker?
I presume there would have been limited exceptions, but for all intents and purposes, the entire banking system was insolvent, let me be more clear, bankrupt, in 2008. By creating a structure of institutionalized moral hazard, government policy, laws and regulatory structures were the primary reason why banks were suffering such a major crises. Like a patient that goes in to have a mole excised, but mistakenly had their heart removed by an incompetent doctor, it was the banks, depositors and their shareholders lives that now hung in the balance while the same doctor (the government) was charged with saving the day. And, was it really the “banks” that were bailed out? Or was it bank shareholders, depositors and taxpayers (collectively, aka, potentially very angry citizens), that were bailed out? Not only can shareholders be completely wiped out, but depositors and, thanks to deposit insurance (FDIC coverage in the US), taxpayers can be on the hook as well. So, it was government that started the fire, and was left with two choices; a) admit to the citizens that their system of privilege-based socialism, cronyism, ill-conceived economic policies and massive deficit spending had failed or, b) enlist their central banks in papering over their complete malfeasance. They selected option b), and in the process, created an even bigger problem today.
With regards to questions surrounding the need to pay back “printed” money and questioning the validity of printed “fiat” money. Money, ultimately, is whatever a society collectively agrees is money. Governments can issue, by law, “fiat” money. Citizens collectively agree, or not, to use or accept it. Someone can develop an alternative form of money, like Bitcoin, but until the masses accept using it, it’s value as money is diminished. While it is true that all modern money is printed (and, as it exists only in electronic format, much money is not even printed), that does not infer that it should be provided for free – and it is not. Money is developed, manufactured and distributed much the same way a car or software is developed, manufactured and distributed. And, just as there is a cost to developing, manufacturing and distributing automobiles and software, there are substantial costs within the entire banking system and money creation process. So, should there not be compensation for this? I say there should. For any bank that you might deal with, there is a cost to money (interest) and operations and failure to pay back any loan puts that bank, it’s shareholders, depositors, taxpayers and the entire economy, for that matter, in jeopardy.
One last thing. As for the insinuation or accusation that “printed” money is not real money and that gold, for example, is real money, is simply not based on the facts. History, and the fact that there simply is no gold standard that has ever survived, provide proof to this assertion. (See my post https://miltonchurchill.wordpress.com/2015/07/21/in-defense-of-milton-friedman/)