hmmm...somethings up, page-64

fixator,

Thanks for that. I have a lot of time for Steve Keen. I agree almost 100% with what he says. I'd have to think further on his endorsement of the UK government's initiative. It doesn't immediately appeal to me, in the way that the rest of what he says does. I've found Keen to be a very good judge of what is and will happen, however his proposed solutions to get us out of the pooh sound a bit Marxist (which he freely admits). It's at the solution stage where I'm unconvinced. As regards his analysis of historical and current events, I think he's very prescient.

He makes a great point about the montetarist economists. Their entire theory was developed and propounded during a period when there was a "dirty" gold standard - viz. Bretton Woods. What is finally dawning on traditional economists is that, with the abandonment of the "dirty" gold standard, which Bretton Woods enforced, all discipline on money creation disappeared.

To clarify: even on the bastardized gold standard applying up until 1971, governments had complete control of the money creation and they kept a rigorous check on the amount of credit which their banks were creating. Why? Because money constitutes a "promise to pay". If a bank created more promises to pay than the government had gold to back it up, the government's gold reserves would start to deplete and that bank would feel the wrath of government.

Once that discipline was gone, however, that was the real birth of fractional reserve banking. When the threat of the government having to come up with a quantity of gold, or other physical counter is removed, governments don't care so much if their banks start promising more than they have on hand.

Fractional reserve banking (loaning out more than you hold in the vaults in real money) has been practised for centuries, on the basis that it was highly unlikely that all of your customers would demand their money at once. However, it was traditionally done on an extremely conservative basis, because there was always a chance that a financial crisis would come along and a big percentage (say, more than 50%) of your depositors would want to collect their gold.

In contrast, when all that the depositors will be doing is coming to collect some paper notes, the risk assessment becomes somewhat different. In this instance, the bank has to assess the likelihood of the government printing more paper (ie. debasing the currency) to bail out the bank's bad debts. Banks have always, throughout history, been institutions which push the limits, so it's no surprise they have done so in the past 40 years.

In the 1970's, central banks and governments tightly controlled the amount of reserves banks had to have, versus the amount they could lend out. My first recollection is of a Standard Deposit Ratio of 25% deposits vs. total loans. This imposed a natural limit on the amount banks could lend out, but also the amount of credit which they could "create" out of thin air.

The important point to grasp here, is that banks - by lending out more than they have on deposit - are essentially committing governments to print enough money to meet a run on that bank, in the event that everyone, rather than 25%, 50%, 75%, etc. come to collect their money. That's because the government knows the banks are making these bets and they authorize them to do so. Therefore, if a run on the bank happens, the government has already agreed to print the paper currency to cover it.

This is a really hard aspect for most people to grasp about money (and it's not surprising, because it's kind of surreal). Notionally, only governments can create money. However, the moment they allow some entity - in this case banks - to promise more than they own, on the basis that it's highly unlikely that everyone will ask for their money at once, the government either has to cover the bet, or to admit that they've participated in an active fraud on The People.

This is why central banks have tried to control the fractional ratios - the extent of promises to pay - which bankers have been making since the final skerrick of Bretton Woods was abandoned. Would you want a private sector banker in charge of your money supply? Hell, that's worse than a politician!

What could possibly be worse? Oh, maybe if the politicians' biggest donors are the bankers, the Sec of Treas. is head of the biggest bank in history...and so on. I wish this was some sort of silly conspiracy, but unfortunately it's just the facts.

So, fractional reserve banking is essentially private banks writing cheques which the rely on the government to cash. You'd think that the government would exercise extremely tight control on private companies which have such power, wouldn't you? Nope.

I could go on, but I won't. This is already a ridiculously long post (albeit, attempting to explain a long and involved narrative).

However, I will add one final thing, which I think I will explore in future.

The bankers weren't satisified with just their fractional reserve banking system, effectively creating money on behalf of the government. They then developed over-the-counter derivatives. These foul instruments had one similarity and one difference, as compared with traditional fractional reserve banking.

They were nothing other than gambling bets between one party and another. However, because they became so massively large and because many of them were either done by banks, or facilitated by them and insured by respected insurers, the government of the day essentially became commirtted to print enough dollars to meet the debts, otherwise there'd be a default...etc.

The inital response of all authorities is to try and meet the debts which have been built up in the system. Time and again, authorities try and do it, even if it comes down to inflation.

When it becomes patently obvious that a country simply cannot meet its debts (as will occur with the USA, when all of the accepted debts, plus the OTC derivatives promises are taken into account), they will initially try and inflate them away, but if that does not work they will repudiate them and walk away.