Will Big Data keeps its promise?

Blogger Ref   https://wiki.p2pfoundation.net/Transfinancial_Economics




The following link has very important implications for economics especially for TFE which is described in the above link..

















https://www.bankofengland.co.uk/-/media/boe/files/speech/2018/will-big-data-keep-its-promise-speech-by-andy-haldane.pdf

Mapping the economy in real time is almost ‘within our grasp’

Delphine Strauss in London

 APRIL 30, 2018  FT


Andy Haldane, BoE chief economist, says economists should embrace data flood
It should be said here that Andy Haldane also knows about Transfinancial Economics, and the notion of "mapping the economy in real time..." is clearly indicated in the following article. Though Big Data is part of the TFE Paradigm it is only part of the whole picture for a modern futuristic economics...  See   https://wiki.p2pfoundation.net/Transfinancial_Economics





The goal of mapping economic activity in real time, just as we do for weather or traffic, is “closer than ever to being within our grasp”, according to Andy Haldane, the Bank of England’s chief economist. In recent years, “data has become the new oil . . . and data companies have become the new oil giants”, Mr Haldane told an audience at King’s Business School earlier this month and released on Monday. But economics and finance have been “rather reticent about fully embracing this oil-rush”, partly because economists have tended to prefer a deductive approach that puts theory ahead of measurement. This needs to change, he said, because relying too much on either theory or real-world data in isolation can lead to serious mistakes in policymaking — as was seen when the global financial crisis exposed the “empirical fragility” of macroeconomic models.


 Parts of the private sector and academia have been far swifter to exploit the vast troves of ever-accumulating data now available — 90 per cent of which has been created in the last two years alone.  Massachusetts Institute of Technology’s “Billion Prices Project”, name-checked in Mr Haldane’s speech, now collects enough data from online retailers for its commercial arm to provide daily inflation updates for 22 economies. The Alan Turing Institute — the UK’s new national institute for data science — runs a programme, with funding from HSBC, which aims to use new data to measure economic activity faster and more precisely than was previously possible. National statisticians are taking tentative steps in the same direction. The UK’s Office for National Statistics — which has faced heavy criticism over the quality of its data in recent years — is experimenting with “web-scraping” to collect price quotes for food and groceries, for example, and making use of VAT data from small businesses to improve its output-based estimates of gross domestic product. In both cases, the increased sample size and granularity could bring considerable benefits on top of existing surveys, Mr Haldane said. The BoE itself is trying to make better use of financial data — for example, by using administrative data on owner-occupied mortgages to better understand pricing decisions in the UK housing market. Recommended Analysis UK politics & policy Starting gun prepped in race to replace Mark Carney at Bank of England Mr Haldane sees scope to go further with the new data coming on stream on payment, credit and banking flows. “Almost all economic activity leaves a financial footprint,” he said. “In time, it is possible that these sorts of data could help to create a real-time map of financial and activity flows across the economy, in much the same way as is already done for flows of traffic or information or weather.

Once mapped, there would then be scope to model and, through policy, modify these flows.” New data sources and techniques could also help policymakers think about human decision-making — which rarely conforms with the rational process assumed in many economic models. Data on music downloads from Spotify, used as an indicator of sentiment, has recently been shown to do at least as well as a standard consumer confidence survey in tracking consumer spending. “Why stop at music?” Mr Haldane asked. He saw potential to create a gaming environment “to explore behaviour in a virtual economy where players can spend or save, and one could test their reactions to monetary and regulatory policy intervention”.

If you think Positive Money's ideas are crank, you should see the conventional wisdom

Written by Ralph (Guest Author) on May 3, 2011. Positive Money .Blogger Ref http://www.p2pfoundation.net/Transfinancial_Economics


Positive Money http://www.positivemoney.org/uk


      

          

Just in case you thought Positive Money’s ideas are a bit cranky, they nowhere near as cranky as some of the ideas that make up the conventional wisdom in economics. Here is a selection of truly crackpot ideas which for some extraordinary reason are accepted without question by leading members of the economics profession and the powers that be. I’ll start with interest rates.
The recent recession, like most recessions, was sparked off by excessive and irresponsible borrowing. So how have the authorities responded? By cutting interest rates to record lows – with a view to bringing stimulus via . . . . wait for it . . . . more borrowing!
You couldn’t make it up.
The above absurdity is a bit like the emperor with no clothes. The folk looking at the emperor with no clothes got so used to the sight that they ceased seeing anything absurd. Likewise, most of us are so used to mantra about interest rate reductions being a good way of dealing with recessions that we fail to see the absurdity.
A second, and possibly even more hilarious bit of nonsense is Keynsian “borrow and spend”.
The idea here is that government borrows and then spends the money borrowed. This allegedly brings stimulus. The big problem here is that taking money away from the private sector (borrowing) and then channelling it back to the private sector in the form of more spending quite possibly has no net effect. The tendency of the above borrowing to negate the effects of the above spending is commonly referred to as “crowding out”. And there is very little agreement amongst economists as to how serious this crowding out problem is.
But even if “borrow and spend” does have a net effect, there is still a nonsense involved, as follows. The government of a sovereign currency issuing country (e.g. the U.K., U.S., Japan, etc) can create or “print” any amount of money any time. Now what’s the point of borrowing something (i.e. money), when you can produce it yourself for free? Even worse, what’s the point of borrowing money from OTHER COUNTRIES and paying them interest for the privilege of having something you could have produced yourself for free? Darned if I know.
It’s a bit like a dairy farmer buying milk in a shop when there is a thousand gallon tank of milk right outside the farmer’s back door.
Of course there is the possibility that too much money is printed, which leads to inflation. But there is no reason to suppose that the effect of spending £X borrowed from China will have any different effect to spending £X produced by the Bank of England out of thin air.
As David Hume pointed out in his essay “On Money” 250 years ago, simply creating new money is not inflationary: it’s the fact of spending that money which may cause inflation.
A third absurdity is quantitative easing (QE). This involves giving cash (produced out of thin air) to the rich in exchange for their securities. Now what’s the reaction of the rich going to be? No prizes for guessing the answer.
What they WON’T do is what we want them to do: raise their weekly spending, which would raise demand and create jobs. The spending habits of the rich are not much influenced by changes in the value of their income or assets.
What they WILL do is purchase other assets with their newly acquired pile of cash. That is, they’ll try to buy other securities – hence the stock market appreciation. Or they’ll seek investment opportunities abroad, which messes up other countries: exactly what has happened as a result of QE in the U.S.
And a final big question mark over QE is this. What exactly is the West doing trying to boost its economies by stuffing the pockets of the rich?  First, this does not exactly sound like social justice. And second, in a recession, it’s the ENTIRE economy that needs a boost, not just specific sectors, or specific sectors of the population.
A fourth bit of crackpot nonsense, popular with the political right on both sides of the Atlantic is that cutting the deficit raises “confidence” which in turn induces people to spend, which in turn gets us out of the recession.
Now I ask you, what does the average household do before deciding to spend a bit more? Do they keep a keen eye on the government’s deficit, or on the other hand do they look at their bank balance, their wage or salary, or how much unused credit they have on their credit cards? It’s staggering that I even need to ask the latter question.
Apart from dropping nukes on cities so as to provide re-construction work, I can’t think of a more hopeless collection of anti-recessionary policies than the above. When we eventually come out of this recession, will it be because of various governments’ anti-recessionary policies or will it be in spite of those policies?
And finally, I’ve been thoroughly negative above, which prompts the very reasonable question: do I have any better alternative? The answer is “yes”: Modern Monetary Theory (MMT). MMT does not involve interest rate reductions (the first absurdity dealt with above). It does not involve “borrow and spend” (the second absurdity). And it does not involve the third or fourth absurdity mentioned above.
However, explaining MMT takes hours or several thousand words, and this is not the place for that. Click here to Google “Modern Monetary Theory” if you are interested..
The main point, to repeat, is that if you think Positive Money’s ideas are crank, they are no more crank than the conventional wisdom.

A different kind of QE – stimulus injected into the veins of the economy

Nov28 2013

 

Written by Positive Money on . Posted in Bank of England & QE, Economic Analysis, Theory, Financial Crisis, Global Situation, Housing, In the News

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‘The comedian Russell Brand has stirred debate with his talk of revolution. Russell Brand is more right than wrong. Pre-revolutionary grievances are simmering in half the world, openly in France and Italy, less openly in Russia and China”, reads the article in the Telegraph of 21st November 2013 entitled “There is talk of revolution in the air” by Ambrose Evans-Pritchard, International Business Editor.  

He explains that the income inequality has been rising for 25 years almost everywhere:

“the income share of the richest 1pc of Americans reached a record 19.6pc last year. It never rose above 10pc for the whole post-War era until the mid-1980s.”

and argues that:

“quantitative easing as conducted in the rich countries risks making matters worse. The money is leaking into asset booms, without much economic trickle down.”

Instead of Quantitative Easing he offers an alternative :

Rather than relying on more bond purchases, the stimulus could be injected into the veins of the economy, or into the “income stream”

“We can spend it on roads, railways, smart electricity grids, or anything we want,” said Lord Turner, ex-chief of the Financial Services Authority. “Or we can cut taxes, targeting employers’ national insurance so that it creates jobs here and does not leak out.”

You can read the whole article here
These ideas are very similar to what Positive Money is advocating in the most recent publication Sovereign Money Creation: Paving the Way for a Sustainable Recovery.








Sovereign Money Creation (SMC) offers a way to make the recovery sustainable. In a similar way to Quantitative Easing, SMC relies on the state creating money and putting this money into the economy. But whereas QE relied on flooding financial markets and hoping that some of this money would ‘trickle down’ to the real economy, SMC works by injecting new money directly into the real economy, via government spending, tax cuts or rebates. Our analysis shows that by getting spending power directly into the hands of the public, this new solution could be up to 37 times more effective than Quantitative Easing in boosting GDP.
The pivotal advantage of SMC is that unlike the Government’s current growth strategies – which all rely on an over-indebted household sector going even further into debt – SMC requires no increase in either household debt or Government debt. In fact, SMC can actually reduce the overall levels of household debt. It would also make banks more liquid and the economy fundamentally safer.
Similar ideas have recently been proposed by Lord Adair Turner, under the name Overt Money Finance. The March 2013 budget included a review of the monetary policy framework, which expressly permitted the Bank of England to use ‘unconventional policy instruments’ to support the government’s objectives for growth and employment, meaning that SMC could be used within the current operating framework.


Download Here (Free, PDF, 60 pages)

Quantitative Easing: What happened to the money?

Quantitative Easing (QE) created reserves to pay for bonds (eventually entirely government bonds) bought by the Bank of England from the private sector. The expectation was that those who sold the bonds would use the money to buy new bonds issued by private corporations to replace bank lending which had dried up.
The first chart shows how the levels of securities outstanding have changed relative to their levels in March 2009, the start of QE.







In the run-up to the crisis, private non-financial corporations (PNFCs) were not raising any new money by issuing bonds or shares, whilst banks and other financial corporations (OFCs) were each issuing new securities at a similar rate to the government. These rates accelerated sharply after Lehmans’ collapse in September 2008, but slowed markedly at the onset of QE (although the gilt issue settled at around £15bn a month – by September 2013, the par value of gilts in issue had increased by £825bn since the onset of QE). PNFCs however, did start to issue bonds to take advantage of the QE money.
The second chart stacks the bond issues together to compare the amounts raised with the money made available by QE.







This shows that for the first round of QE, around 75% of the money was taken up through bond issues by the private sector, although the finance sector took the lions’ share. With the onset of the second round, however, the banks began to pay off their bonds, and with the third round, so did the other financial corporations. The PNFCs, however, continue to raise money through this route.
The third chart shows that the banks were able to retire their debt funding because of the accumulation of retained earnings, which stabilised their levels of capital, although these slipped back during the second half of last year.







The other financial corporations were presumably also able to redeem their bonds by accumulating retained earnings.
It can be surmised from this, that the balance of the money from the first round of QE, and substantially all of that from subsequent rounds was used to purchase gilts, and the fourth chart shows that there were plenty to choose from, with falling yields providing attractive opportunities for capital gains.






In conclusion, quantitative easing has had three effects:

1. by creating an artificial demand for gilts it increased their market price, thereby reducing yields and increasing the attractiveness of higher-yielding corporate bonds;
2. in a time of uncertain asset valuations it enabled the financial sector to raise temporary loss-absorbing loan capital by issuing bonds, which gave them the breathing space to build up their equity; and
3. it provided for those corporations who were able to manage the issue of bonds a source of debt funding to replace the bank lending which had dried up due to that uncertainty.

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The Post-crash Economics Society

 

We are The Post-Crash Economics Society and we are a group of economics students at The University of Manchester who believe that the content of the economics syllabus and the way it is taught could and should be seriously rethought.

 

We were inspired to start this society when we heard about a Bank of England Conference called ‘Are Economics Graduates Fit for Purpose?’ At this event leading economists from the public and private sphere came together to discuss whether economics undergraduates were being taught the right things in the light of the 2008 Financial Crisis. This chimed with some of our frustrations about the economics we were learning and so we decided to set up a society that would through doing research, organising events and running workshops seek to bring this discussion to Manchester. That was at the start of the 2012/13 academic year.
As of today we have a fully-fledged society, a book club, an incredibly successful launch event led by world class economists, many student and academic supporters, a petition that is constantly gaining signatures, links with a national network of economic societies and organisation and even more passion and determination to change the current state of economic education!
However, this is just the start. We will ensure that this society will become a permanent fixture on the Manchester economics landscape in the years to come, forever seeking to provoke discussion between students and staff about what economics is, what it should be and how it should be taught.
Society Constitution
1) The Post-Crash Economics Society has been set up to try and broaden the range of perspectives and the teaching methods used by the Manchester Economics Department.
2) We will run a campaign to build student support and engage in dialogue with the economics department.
3) We will run events, workshops and other activities.
4) We aim to be a society that is accessible to all students and staff with an interest in economics whatever their economic and political beliefs.


http://www.post-crasheconomics.com/our-petition/



Blogger Reference Link http://www.p2pfoundation.net/Transfinancial_Economics


 

UK QE has failed, says quantitative easing inventor

22 October 2013 Last updated at 00:12  Business/BBC

 

Blogger Reference Link   http://www.p2pfoundation.net/Transfinancial_Economics

 

 

When the UK embarked on quantitative easing (QE) in March 2009, in the aftermath of the Lehman Brothers collapse, the Bank of England was expected to administer a monetary stimulus equal to £50bn, writes Liam Halligan.

Over the past four years, such "extraordinary measures" have extended somewhat more, with the Bank's bond-buying programme now amounting to £375bn - almost eight times the original estimate.

Since the financial crisis began, the Bank of England's balance sheet has expanded four-fold. But where did the phrase "quantitative easing" come from?

Arguably among the most controversial economic policies of recent years, QE is surely the most unpronounceable. Not many Western analysts are aware that this tongue-challenging name originated in Japan, the modern-day spiritual home of money-printing.

Find out more

• Liam Halligan is the Sunday Telegraph economics commentator and a former investment manager
• Quantitative Easing: Miracle Cure or Dangerous Addiction? was broadcast on Analysis on BBC Radio 4 on Monday 21 October and is repeated on Sunday 27 October at 21.30
• Listen again via the Radio 4 website or Analysis download

Even fewer know that the man who coined the phrase comes from Germany - which, of all the big Western economies, has probably the most deep-seated aversion to printing money.

In the mid-1990s, Prof Richard Werner, a German academic fluent in Japanese, was working as an economist in Tokyo. Japan's real estate bubble had burst and property and share prices were tumbling. The country was locked in a debate about the use of unconventional monetary policy to support asset prices and boost broader commercial activity.

Prof Werner submitted an article to Nikkei, a leading business newspaper, advocating a new type of radical monetary measure.

Rather than attempting to shift interest rates, he argued that the country's central bank, the Bank of Japan should instead intervene directly to influence the size of the money supply by taking steps to encourage commercial banks to extend more credit.

Prof Werner argued against lowering interest rates or expanding central bank reserves

"I was promoting a policy that involved more credit creation, rather than changing the price of money," says Prof Werner.

"So when I wrote my article, and after the newspaper's editors insisted on a phrase readers would understand, I added the Japanese adjective for quantity to the standard expression for monetary stimulation. 'Quantitative easing' was the literal translation back into English of these two Japanese words."

Prof Werner's article was widely noticed. Several years later, in fact, the Bank of Japan decided to implement extreme monetary measures and adopted the Japanese name the German economist had coined.

"In 2001, the Japanese central bank said, 'Now we're actually doing this'," he recalls.

"To communicate this to global markets, they had to give the policy a name in English. I suppose the translators had a bad day, or were under time pressure. Normally, you'd try to come up with something slightly more fluent than 'quantitative easing', but they did only a literal translation."

While the Bank of Japan adopted the precise name of Prof Werner's policy, it was somewhat less accurate when interpreting his actual proposal.

Incredibly, the Japanese version of QE that was eventually implemented was a policy Prof Werner had specifically ruled-out.

Prof Werner's argument was that, because more than 95% of the money supply in a modern economy is derived not from cash or reserves, but from private bank lending, it is essential to get banks to lend.

So he urged the Japanese government to enter into private long-term agreements to borrow from commercial banks, instead of issuing government debt.

The Bank of Japan's version of QE, in contrast, involved creating money out of nothing at the central bank.

"That's absolutely not what my policy was about," says Prof Werner. "In my original article, I specifically argued against either lowering interest rates or expanding central bank reserves. That was my whole point - traditional solutions weren't going to work. Actually, it was a bit upsetting."

Then, in an additional twist, the Bank of England also later adopted Prof Werner's QE label - but, again, to describe a policy with which he didn't agree.

"It was one thing when the Bank of Japan did it, because that was over in Japan and was some time ago," he says. "But once the Bank of England also started using the phrase, I thought 'Hang on - I've got to speak up and make clear that the original definition is quite different.'"
Quantitative Easing: Step by step Continue reading the main story

First, with the permission of the Treasury, the Bank of England creates lots of money. It does this by just crediting its own bank account.

The Bank of England wants to use that cash to increase spending and boost the economy so it spends it, mainly on buying government bonds from financial firms such as banks, insurance companies and pension funds.

The Bank buying bonds makes them more expensive, so they are a less attractive investment. That means companies that have sold bonds may use the proceeds to invest in other companies or lend to individuals.

If banks, pension funds and insurance companies are more enthusiastic about lending to companies and individuals, the interest rates they charge should fall, so more money is spent and the economy is boosted.

Theoretically, when the economy has recovered, the Bank of England sells the bonds it has bought and destroys the cash it receives. That means in the long term there has been no extra cash created.

Continue reading the main story

previous slide next slide 1/5

The Bank of England's interpretation of QE also involves the creation of central bank credits, as in Japan. But in the UK these have been used to buy government bonds from commercial banks rather than from the government directly.

Prof Werner says this is "a little better" than Japanese QE, as it "at least in theory increases commercial banks' reserves". He maintains, though, that the "best way to boost the economy is to increase bank credit", and that can only be guaranteed by governments borrowing from banks directly.

"That creates new credit," says Prof Werner. "The money supply then expands, transactions increase, there's more demand, more employment, more tax revenues and suddenly you have a virtuous circle."
'Household name'
In both Japan and the UK, QE isn't working, he says, because it doesn't focus on "the most important part of the money supply", which is bank lending. "UK QE has singularly failed, as bank credit is still shrinking."

When faced with the claim used by some British banks that the demand for credit is low, Prof Werner is dismissive. "I'm quite used to this argument, because banks in Japan used it for 20 years," he says. "The banks, of course, have become very risk-averse, as they have many non-performing assets."

Prof Werner is also critical of the UK's concentrated banking structure - which he argues has made the economy more vulnerable. "British banking is dominated by a small number of big banks - with just five banks controlling 90% of deposits," he says.

"Big banks want to lend to big firms and do big deals that give big bonuses. Small firms are too much hassle, and the banks are absolutely not interested - even though small firms need the credit and account for 70% of UK employment. So these small firms are credit-rationed and that's a problem."

"In Germany, 70% of deposits are held by 2,000 banks," says Prof Werner. "These local German banks lend a lot more to small- and medium-sized firms, and when the credit crunch happened most of them were fine."

When it comes to QE, although his policy recommendations have been misinterpreted in Japan, the UK and elsewhere, Prof Werner maintains his natural sense of humour about giving the world a phrase that's so challenging to say.

"It's become a household name anyway and I should get some kind of fee, some royalties, for that," he says with a smile.

Economists Are (Still) Clueless

By John Mauldin | Jun 15, 2013 / The Economist

 

The Revenge of Minksy Moment.


 

Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.

- John Maynard Keynes, A Tract on Monetary Reform

There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have insight to appreciate the incredible wonders of the present.

- John Kenneth Galbraith

Hitler must have been rather loosely educated, not having learned the lesson of Napoleon's autumn advance on Moscow.

- Sir Winston Churchill
Economists Are (Still) Clueless

In November of 2008, as stock markets crashed around the world, the Queen of England visited the London School of Economics to open the New Academic Building. While she was there, she listened in on academic lectures. The Queen, who studiously avoids controversy and almost never lets people know what she's actually thinking, finally asked a simple question about the financial crisis: "How come nobody could foresee it?" No one could answer her.

If you've suspected all along that economists are useless at the job of forecasting, you would be right. Dozens of studies show that economists are completely incapable of forecasting recessions. But forget forecasting. What's worse is that they fail miserably even at understanding where the economy is today. In one of the broadest studies of whether economists can predict recessions and financial crises, Prakash Loungani of the International Monetary Fund wrote very starkly, "The record of failure to predict recessions is virtually unblemished." He found this to be true not only for official organizations like the IMF, the World Bank, and government agencies but for private forecasters as well. They're all terrible. Loungani concluded that the "inability to predict recessions is a ubiquitous feature of growth forecasts." Most economists were not even able to recognize recessions once they had already started.

In plain English, economists don't have a clue about the future.

If you think the Fed or government agencies know what is going on with the economy, you're mistaken. Government economists are about as useful as a screen door on a submarine. Their mistakes and failures are so spectacular you couldn't make them up if you tried. Yet now, in a post-crisis world, we trust the same people to know where the economy is, where it is going, and how to manage monetary policy.

Central banks say they will know the right time to end the current policies of quantitative easing and financial repression and when to shrink the bloated monetary base. However, given their record at forecasting, how will they know? The Federal Reserve not only failed to predict the recessions of 1990, 2001, and 2007, it also didn't even recognize them after they had already begun. Financial crises frequently happen because central banks cut interest rates too late and hike rates too soon.

Trusting central bankers now is a big bet that (1) they'll know what to do, (2) they'll know when to do it. Sadly, given the track record, that is not a good wager. Unfortunately, the problem is not that economists are simply bad at what they do; it's that they're really, really bad. They're so bad that it cannot even be a matter of chance. The statistician Nate Silver points this out in his book The Signal and the Noise:

Indeed, economists have for a long time been much too confident in their ability to predict the direction of the economy. If economists' forecasts were as accurate as they claimed, we'd expect the actual value for GDP to fall within their prediction interval nine times out of ten, or all but about twice in eighteen years.

In fact, the actual value for GDP fell outside the economists' prediction interval six times in eighteen years, or fully one-third of the time. Another study, which ran these numbers back to the beginning of the Survey of Professional Forecasters in 1968, found even worse results: the actual figure for GDP fell outside the prediction interval almost half the time. There is almost no chance that economists have simply been unlucky; they fundamentally overstate the reliability of their predictions.
So economists are not only generally wrong, they're overly confident in their bad forecasts.
If economists were merely wrong at betting on horse races, their failure would be amusing. But central bankers have the power to create money, change interest rates, and affect our lives in multiple ways – and they don't have a clue.
Despite this, they remain perennially confident. There's no overestimating the hubris of central bankers. On 60 Minutes in December, 2010, Scott Pelley interviewed Fed Chairman Ben Bernanke and asked him whether he would be able to do the right thing at the right time. The exchange was startling (at least to us):
Pelley: Can you act quickly enough to prevent inflation from getting out of control?
Bernanke: We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.
Pelley: You have what degree of confidence in your ability to control this?

Bernanke: One hundred percent.

There you have it. Bernanke was not 95% confident, he was not 99% confident – no, he had zero doubts about his ability to know what is going on in the economy and what to do about it. We would love to have that sort of certainty about anything in life.

We're not just picking on Bernanke; we're picking on all central bankers who think they're infallible. The Bank of England has had by far the largest QE program relative to the size of its economy (though the Bank of Japan is about to show it a thing or two). It also has the worst forecasting track record of any bank, and the worst record on inflation. Sir Mervyn King, the head of the Bank of England, was asked if it would be difficult to withdraw QE. He very confidently replied, "I have absolutely no doubt that when the time comes for us to reduce the size of our balance sheet that we'll find that a whole lot easier than we did when expanding it." (Are central bankers just naturally more overconfident than regular human beings, or are they smoking some powerful stuff at their meetings?)

Let's see whether this sort of absolute certainty is in any way warranted.

In his book Future Babble, Dan Gardner writes that economists are treated with the reverence the ancient Greeks bestowed on the Oracle of Delphi. But unlike the vague pronouncements from Delphi, economists' predictions can be checked against the future, and as Gardner says, "Anyone who does that will quickly conclude that economists make lousy soothsayers."

The nearsightedness of economists is nothing new. In 1994 Paul Ormerod wrote a book called The Death of Economics. He pointed to economists' failure to forecast the Japanese recession after their bubble burst in 1989 or to foresee the collapse of the European Exchange Rate Mechanism in 1992. Ormerod was scathing in his assessment of economists: "The ability of orthodox economics to understand the workings of the economy at the overall level is manifestly weak (some would say it was entirely non-existent)."

When most people think of economic forecasts, they almost always think of recessions, while economists think of forecasting growth rates or interest rates. But the average man in the street only wants to know, "Will we be in a recession soon?" And if the economy is actually in a recession he wants to know, "When will it end?" The reason he cares is that he knows recessions mean job cuts and firings.

Recessions lead to falls in GDP and spikes in the unemployment rate:

Unfortunately, economists are of little use to the man in the street. If you look at the history of the last three recessions in the United States, you will see that the inability of economists and central bankers to understand the state of the economy was so bad that you might be tempted to say they couldn't find their derrieres with both hands.

Economists have yet to corrrectly call a recession:

Let's remind ourselves what a recession is and how economists decide that one has started. A recession is a downturn in economic activity. Normally, a recession means unemployment goes up, GDP contracts, stock prices fall, and the economy weakens. The lofty body that decides when a recession has started or ended is the Business Cycle Dating Committee of the National Bureau of Economic Research. It is packed with eminent economists – all extremely smart people. Unfortunately, their pronouncements are completely unusable in real time. Their dating of recessions is authoritative and more or less accurate, but this exercise in hindsight comes long after a recession has started or ended.

To give you an idea just how late recessions are officially called, let's look at the past three. The NBER dated the 1990-91 recession as beginning in August 1990 and ending in March 1991. It announced these facts in April 1991, by which time the recession was already over and the economy was growing again. The NBER was no faster at catching up with the recession that followed the dotcom bust. It wasn't until June 2003 that the NBER pinpointed the start of the 2001 recession – a full 28 months after the recession ended. The NBER didn't date the recession that started in December 2007 until exactly one year later. By that time, Lehman had gone bust, and the world was engulfed in the biggest financial cataclysm since the Great Depression.

The Federal Reserve and private economists also missed the onset of the last three US recessions – even after they had started. Let's look quickly at each one.

Starting with the 1990-91 recession, let's see what the head of the Federal Reserve – the man who is charged with running American monetary policy – was saying at the time. That recession started in August 1990, but one month before it began Alan Greenspan said, "In the very near term there's little evidence that I can see to suggest the economy is tilting over [into recession]." The following month – the month the recession actually started – he continued on the same theme: "... those who argue that we are already in a recession I think are reasonably certain to be wrong." He was just as clueless two months later, in October 1990, when he persisted, "... the economy has not yet slipped into recession." It was only near the end of the recession that Greenspan came around to accepting that it had begun.

The Federal Reserve did no better in the dotcom bust. Let's look at the facts. The recession started in March 2001. The tech-heavy NASDAQ Index had already fallen 50% in a full-scale bust. Even so, Chairman Greenspan declared before the Economic Club of New York on May 24, 2001, "Moreover, with all our concerns about the next several quarters, there is still, in my judgment, ample evidence that we are experiencing only a pause in the investment in a broad set of innovations that has elevated the underlying growth rate in productivity to a level significantly above that of the two decades preceding 1995."

Charles Morris, a retired banker and financial writer, looked at a decade's worth of forecasts by the professionals at the White House's Council of Economic Advisers, the crème de la crème of academic economists. In 2000, the council raised their growth estimates just in time for the dot-com bust and the recession of 2001-02. And in a survey in March 2001, 95% of American economists said there would not be a recession. (John forecast it in September 2000 in this letter). The recession had already started that March, and the signs of contraction were evident. Industrial production had already been contracting for five months.

You would have thought that failure to forecast two recessions in a row might have sharpened the wits of the Federal Reserve, the Council of Economic Advisers, and private economists. Maybe they would have tried to improve their methods or figured out why they had failed so miserably. You would be wrong. Because along came the Great Recession, and once again they completely missed the boat.
The Revenge of the Minsky Moment

Let's look at what the Fed was doing as the world was about to go up in flames in 2008. Recently, complete minutes of the Fed's October 2007 meeting were released. Keep in mind that the recession started two months later, in December. The word recession does not appear once in the entire transcript.

It gets worse. The month the recession started, the Federal Reserve was all optimistic laughter. Dr. David Stockton, the Federal Reserve chief economist, presented his views to Chairman Bernanke and the meeting of the Federal Open Market Committee on December 11, 2007. When you read the following quote, remember that, at the time, the Fed was already providing ample liquidity to the shadow banking system after dozens of subprime lenders had gone bust in the spring, the British bank Northern Rock had been nationalized and had spooked the European banking system, dozens of money market funds had been shut due to toxic assets, credit spreads were widening, stock prices had started to fall, and almost all the classic signs of a recession were evident. These included an inverted yield curve, which had received the casual attention of New York Fed economists even as it screamed recession. (John had pointed to it numerous times here in Thoughts from the Frontline.)

Read these words of the Fed's Chief Economist and weep. You can't make this stuff up:
Overall, our forecast could admittedly be read as still painting a pretty benign picture: Despite all the financial turmoil, the economy avoids recession and, even with steeply higher prices for food and energy and a lower exchange value of the dollar, we achieve some modest edging-off of inflation. So I tried not to take it personally when I received a notice the other day that the Board had approved more frequent drug-testing for certain members of the senior staff, myself included. [Laughter]

I can assure you, however, that the staff is not going to fall back on the increasingly popular celebrity excuse that we were under the influence of mind-altering chemicals and thus should not be held responsible for this forecast. No, we came up with this projection unimpaired and on nothing stronger than many late nights of diet Pepsi and vending-machine Twinkies.

All other government economists were equally awful. The President's Council of Economic Advisers' 2008 forecast saw positive growth for the first half of the year and foresaw a strong recovery in the second half. Note the date on the cartoon below: May 28, 2008!

Unfortunately, private-sector economists didn't do much better. With very few exceptions, they failed to foresee the financial and economic meltdown of 2008. Economists polled in the Survey of Professional Forecasters also failed to see a recession developing. They forecasted a slightly below -average growth rate of 2.4 percent for 2008, and they thought there was almost no chance of a recession as severe as the one that actually unfolded. In December 2007 a Businessweek survey showed that every single one of 54 economists surveyed actually predicted that the US economy would avoid a recession in 2008. The experts were unanimous that unemployment wouldn't be a problem, leading to the consensus conclusion that 2008 would be a good year.

As Nate Silver has pointed out, the worst thing about the bad predictions isn't that they were awful; it's that the economists in question were so confident in them. Now, this was a very bad forecast: far from growing by 2.4%, GDP actually shrank by 3.3% once the financial crisis hit. Yet these economists assigned only a 3% chance to the economy's shrinking by any margin at all over the whole of 2008, and they gave it only about a 1-in-500 chance of shrinking by 2 percent, as it did.

It is one thing to be wrong; it is quite another to be consistently and confidently and egregiously wrong.

As the global financial meltdown unfolded, Chairman Bernanke, too, continued to believe that the US would avoid a recession. Mind you, the recession had started in December 2007, yet in January '08 Bernanke told the press, "The Federal Reserve is not currently forecasting a recession." Even after banks like Bear Stearns needed to be rescued, Bernanke continued seeing rainbows and candy-colored elves ahead for the US economy. He declared on June 9, 2008, "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so." At that stage, the economy had already been in a recession for the past six months!

Why do people listen to economists anymore? Scott Armstrong, an expert on forecasting at the Wharton School of the University of Pennsylvania, has developed a "seer-sucker" theory: "No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers." Even if experts fail repeatedly in their predictions, most people prefer to have seers, prophets, and gurus tell them something – anything at all – about the future.

So, we have cataloged the incredible failures of economists to predict the future or even to understand the present. Now think of the vast powers Fed economists have to print money and move interest rates. When you contemplate the consummate skill that would actually be required to manage post-Great Recession policies, you realize they're really just flying blind. If that reality doesn't scare the living daylights out of you, you're not paying attention.

The longer the Federal Reserve sticks to its current policy, the more likely that policy will end in tears. Call it the Revenge of the Minsky Moment.




The Blogger Ref Link http://www.p2pfoundation.net/Transfinancial_Economics

Where Does Money Come From?

Key findings

• Physical cash accounts for less than 3% of total money in the economy.
• Commercial banks create the other 97% and play a key role in deciding where it should be allocated.

Download

December 12, 2012 // Written by:

Andrew Jackson,Richard Werner,Tony Greenham,Josh Ryan-Collins

Second edition available to buy now, including new sections on Quantitative Easing, LIBOR and the Eurozone sovereign debt crisis.
There is widespread misunderstanding of how new money is created. Where Does Money Come From? examines the workings of the UK monetary system and concludes that the most useful description is that new money is created by commercial banks when they extend or create credit, either through making loans or buying existing assets. In creating credit, banks simultaneously create deposits in our bank accounts, which, to all intents and purposes, is money.
Many people would be surprised to learn that even among bankers, economists, and policymakers, there is no common understanding of how new money is created. This is a problem for two main reasons. First, in the absence of this understanding, attempts at banking reform are more likely to fail. Second, the creation of new money and the allocation of purchasing power are a vital economic function and highly profitable. This is therefore a matter of significant public interest and not an obscure technocratic debate. Greater clarity and transparency about this could improve both the democratic legitimacy of the banking system and our economic prospects.
Defining money is surprisingly difficult. We cut through the tangled historical and theoretical debate to identify that anything widely accepted as payment, particularly by the government as payment of tax, is, to all intents and purpose, money. This includes bank credit because although an IOU from a friend is not acceptable at the tax office or in the local shop, an IOU from a bank most definitely is.
We identify that the UK’s national currency exists in three main forms, the second two of which exist in electronic form:

1. Cash – banknotes and coins.
2. Central bank reserves – reserves held by commercial banks at the Bank of England.
3. Commercial bank money – bank deposits created either when commercial banks lend money, thereby crediting credit borrowers’ deposit accounts, make payments on behalf of customers using their overdraft facilities, or when they purchase assets from the private sector and make payments on their own account (such as salary or bonus payments).  

Only the Bank of England or the government can create the first two forms of money, which is referred to in this book as ‘central bank money’. Since central bank reserves do not actually circulate in the economy, we can further narrow down the money supply that is actually circulating as consisting of cash and commercial bank money.
Physical cash accounts for less than 3 per cent of the total stock of money in the economy. Commercial bank money – credit and coexistent deposits – makes up the remaining 97 per cent of the money supply.
There are several conflicting ways of describing what banks do. The simplest version is that banks take in money from savers, and lend this money out to borrowers. This is not at all how the process works. Banks do not need to wait for a customer to deposit money before they can make a new loan to someone else. In fact, it is exactly the opposite; the making of a loan creates a new deposit in the customer’s account.
More sophisticated versions bring in the concept of ‘fractional reserve banking’. This description recognises that banks can lend out many times more than the amount of cash and reserves they hold at the Bank of England. This is a more accurate picture, but is still incomplete and misleading. It implies a strong link between the amount of money that banks create and the amount that they hold at the central bank. It is also commonly assumed by this approach that the central bank has significant control over the amount of reserves banks hold with it.
We find that the most accurate description is that banks create new money whenever they extend credit, buy existing assets or make payments on their own account, which mostly involves expanding their assets, and that their ability to do this is only very weakly linked to the amount of reserves they hold at the central bank. At the time of the financial crisis, for example, banks held just £1.25 in reserves for every £100 issued as credit. Banks operate within an electronic clearing system that nets out multilateral payments at the end of each day, requiring them to hold only a tiny proportion of central bank money to meet their payment requirements.
The power of commercial banks to create new money has many important implications for economic prosperity and financial stability. We highlight four that are relevant to the reforms of the banking system under discussion at the time of writing:

1. Although useful in other ways, capital adequacy requirements have not and do not constrain money creation, and therefore do not necessarily serve to restrict the expansion of banks’ balance sheets in aggregate. In other words, they are mainly ineffective in preventing credit booms and their associated asset price bubbles.
2. Credit is rationed by banks, and the primary determinant of how much they lend is not interest rates, but confidence that the loan will be repaid and confidence in the liquidity and solvency of other banks and the system as a whole.
3. Banks decide where to allocate credit in the economy. The incentives that they face often lead them to favour lending against collateral, or assets, rather than lending for investment in production. As a result, new money is often more likely to be channelled into property and financial speculation than to small businesses and manufacturing, with profound economic consequences for society.
4. Fiscal policy does not in itself result in an expansion of the money supply. Indeed, the government has in practice no direct involvement in the money creation and allocation process. This is little known, but has an important impact on the effectiveness of fiscal policy and the role of the government in the economy.

The basic analysis of Where Does Money Come From? is neither radical nor new. In fact, central banks around the world support the same description of where new money comes from. And yet many naturally resist the notion that private banks can really create money by simply making an entry in a ledger. Economist J. K. Galbraith suggested why this might be:

The process by which banks create money is so simple that the mind is repelled. When something so important is involved, a deeper mystery seems only decent.

This book aims to firmly establish a common understanding that commercial banks create new money. There is no deeper mystery, and we must not allow our mind to be repelled. Only then can we properly address the much more significant question: Of all the possible alternative ways in which we could create new money and allocate purchasing power, is this really the best?


Ref  New Economics Foundation.


Blogger Reference Link  http://www.p2pfoundation.net/Transfinancial_Economics

Money has been privatised by stealth

 

The greatest privatisation in history has gone unnoticed. It's time to take from the banks the power to produce money

Blogger Ref Link  http://www.p2pfoundation.net/Transfinancial_Economics

•                    

• 
• • Ben Dyson
  • guardian.co.uk, Tuesday 15 November 2011 10.47 GMT
•  

         

Rich pickings: but only a fraction of the world's money is physical. Photograph: Paul Rapson/Alamy

 

 

It's common knowledge that printing your own £10 notes at home is frowned upon by Her Majesty's police. Yet there's a small collection of companies that are authorised to create – and spend – more new money than the counterfeiters have ever been able to print. In industry jargon, these companies are called "monetary and financial institutions", but you probably know them by their street name: "banks".
The money that they create, effectively out of nothing, isn't the paper money that bears the logo of the government-owned Bank of England. It's the electronic money that flashes up on the screen when you check your balance at an ATM. Right now, this electronic money makes up over 97% of all the money in the economy. Only 3% of money is still in that old-fashioned form of real cash that can be touched.
Hard to believe, isn't it? Martin Wolf, one of the experts who sat on the independent commission on banking, put it bluntly, saying in the Financial Times that "the essence of the contemporary monetary system was the creation of money, out of nothing, by private banks' often foolish lending".
Here's how it works. When you ask the bank for the money to buy a one-bedroom box in London, the money that appears in your account isn't borrowed from some prudent grandmother's life savings. In fact, the bank simply types those numbers into your account, creating brand new money that you can now spend. As other banks do exactly the same, the amount of money in the economy grows and grows. Every new mortgage creates new money, which pushes up house prices just a little more and forces the next buyer to borrow even more from the banks. (A more detailed and fully-referenced explanation of this process is given in the book Where Does Money Come From? published by the New Economics Foundation.)
Through this process of creating money, banks have been able to inflate the money supply at a rate of 11.5% a year, pushing up the prices of houses and pricing out an entire generation.
Of course, the flipside to this creation of money is that with every new loan comes a new debt. This is the source of our mountain of personal debt – not money that had been prudently saved up by pensioners, but money that was created out of nothing by banks and lent to anyone and everyone. Eventually the debt burden becomes just too high, and we see the wave of defaults that triggered the start of the ongoing financial crisis.
But how did something as important as money become privatised? How did the power to create money fall into the hands of the same banks who caused the crisis, with such devastating consequences for millions of ordinary people?
Incredibly, the law that makes it illegal to print your own tenners at home has never been updated to apply to the electronic money that is now created by banks. As we began to use electronic money to make the vast majority of payments, cash became less important and the power to create money shifted to the banks that caused the crisis. Without anyone noticing, the power to create money was privatised by stealth.
So while criminal gangs manage to create about £2.5bn of fake cash each year, the banks collectively create more than £100bn a year without breaking a single law. Their reward for doing so is the interest that is currently being collected on nearly every pound in existence. The cost to the rest of us is a lifetime in debt.
This brings us to a very simple solution to the financial crisis. Many of the current protesters might be surprised to hear that the answer to our current crisis comes from a former Tory prime minister. Back in 1844, Sir Robert Peel realised that metal coins, which at that time were the only legal form of money, had been superseded by new paper notes issued by banks. These paper notes were lighter and more convenient, and therefore much more popular. Peel's 1844 Bank Charter Act took the power to create paper money away from the banks and placed it back under control of the Bank of England. We should now do exactly the same with the power to create electronic money. My own organisation, Positive Money, has even drafted the legislation that would be required to do this.
By reclaiming this power, we can ensure that new money is not used to blow up house price bubbles and fund risky speculation. Instead, newly created money can be put in at the roots of the economy, through ordinary consumers. It will then end up with shops, businesses and factories, who can use it to invest, grow and create jobs. Simply "getting banks lending again" won't help when the public are already saddled under a mountain of debt. What we need is more money, not more debt. This is impossible while all money is created by banks when people go into debt.
Of course, we need to shelter this power to create money from vote-seeking politicians. But the power to create money is far too dangerous to leave in the hands of the banks who caused the crisis. Taking this power away from them is our best hope of both ending the current crisis, and preventing the next one.

Xat. Org

Search XAT3 & History of Money

XAT3 THE HISTORY OF MONEY PART 1 Let's Go FORWARD Tell someone you are going to a convention of accountants and you might get a few yawns, yet money and how it works is probably one of the most interesting things on earth. It is fascinating and almost magical how money appeared on our planet. Unlike most developments we enjoy, which can be traced back to a source, civilisation or inventor, money appeared in places then unconnected all over the world in a remarkably simular way. Consider the American Indians using Wampum, West Africans trading in decorative metallic objects called Manillas and the Fijians economy based on whales teeth, some of which are still legal tender; add to that shells, amber, ivory, decorative feathers, cattle including oxen & pigs, a large number of stones including jade and quartz which have all been used for trade across the world, and we get a taste of the variety of accepted currency. There is something charming and childlike imagining primitive societies, our ancestors, using all these colourful forms of money. As long as everyone concerned can agree on a value, this is a sensible thing for a community to do. After all, the person who has what you need might not need what you have to trade. Money solves that problem neatly. Real value with each exchange, and everyone gaining from the convenience. The idea is really inspired which might explain why so many diverse minds came up with it. BUT ALL IS NOT WELL "History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance." President James Madison Money, money, money, it's always just been there, right? Wrong. Obviously it's issued by the government to make it easy for us to exchange things. Wrong again! Truth is most people don't realise that the issuing of money is essentially a private business, and that the privilege of issuing money has been a major bone of contention throughout history. Wars have been fought and depressions have been caused in the battle over who issues the money; however the majority of us are not aware of this, and this is largely due to the fact that the winning side became and increasingly continues to be a vital and respected member of our global society, having an influence over large aspects of our lives including our education, our media and our governments. While we might feel powerless in trying to stop the manipulation of money for private profit at our expense, it is easy to forget that we collectively give money its value. We have been taught to believe printed pieces of paper have special value, and because we know others believe this too, we are willing to work all our lives to get what we are convinced others will want. An honest look at history will show us how our innocent trust has been misused. Let's start our exploration of money with: JESUS FLIPS (many coins) 33 A.D. Jesus was so upset by the sight of the money changers in the temple, he waded in and started to tip over the tables and drive them out with a whip, this being the one and only time we ever hear of him using force during his entire ministry. So what caused the ultimate pacifist to become so aggressive? For a long time the Jews had been called upon to pay their temple tax with a special coin called the half shekelshekel. It was a measured half ounce of pure silver with no image of a pagan emperor on it. It was to them the only coin acceptable to God. But because there was only a limited number of these coins in circulation, the money changers were in a buyers market and like with anything else in short supply, they were able to raise the price to what the market would bear. They made huge profits with their monopoly on these coins and turned this time of devotion into a mockery for profit. Jesus saw this as stealing from the people and proclaimed the whole setup to be. "A den of thieves". 1 Once money is accepted as a form of exchange, those who produce, loan out and manipulate the quantity of money are obviously in a very strong position. They are the "Money Changers". 1. King James NT, Mt 21:13, Mr 11:17, Lu 19:46 MEDIEVAL ENGLAND (1000 - 1100 A.D.) Here we find goldsmith's offering to keep other people's gold and silver safe in their vaults, and in return people walking away with a receipt for what they have left there. These paper receipts soon became popular for trade as they were less heavy to carry around than gold and silver coins. After a while, the goldsmith's must have noticed that only a small percentage of their depositor's ever came in to demand their gold at any one time. So cleverly the goldsmith's made out some receipts for gold which didn't even exist, and then they loaned it out to earn interest. A nod and a wink amongst themselves, they incorporated this practice into the banking system. They even gave it a name to make it seem more acceptable, christening the practice 'Fractional Reserve Banking' which translates to mean, lending out many times more money than you have assets on deposit. Today banks are allowed to loan out at least ten times the amount they actually are holding, so while you wonder how they get rich charging you 11% interest, it's not 11% a year they make on that amount but actually 110%. THE TALLY STICKS (1100 - 1854) King Henry the First produced sticks of polished wood, with notches cut along one edge to signify the denominations. The stick was then split full length so each piece still had a record of the notches. The King kept one half for proof against counterfeiting, and then spent the other half into the market place where it would continue to circulate as money. Because only Tally Sticks were accepted by Henry for payment of taxes, there was a built in demand for them, which gave people confidence to accept these as money. He could have used anything really, so long as the people agreed it had value, and his willingness to accept these sticks as legal tender made it easy for the people to agree. Money is only as valuable as peoples faith in it, and without that faith even today's money is just paper. The tally stick system worked really well for 726 years. It was the most successful form of currency in recent history and the British Empire was actually built under the Tally Stick system, but how is it that most of us are not aware of its existence? Perhaps the fact that in 1694 the Bank of England at its formation attacked the Tally Stick System gives us a clue as to why most of us have never heard of them. They realised it was money outside the power of the money changers, (the very thing King Henry had intended). What better way to eliminate the vital faith people had in this rival currency than to pretend it simply never existed and not discuss it. That seems to be what happened when the first shareholder's in the Bank of England bought their original shares with notched pieces of wood and retired the system. You heard correctly, they bought shares. The Bank of England was set up as a privately owned bank through investors buying shares. Even the Banks resent nationalisation is not what it at first may appear, as its independent resources unceasingly multiply and dividends continue to be produced for its shareholder's. These investors, who's names were kept secret, were meant to invest one and a quarter million pounds, but only three quarters of a million was received when it was chartered in 1694. It then began to lend out many times more than it had in reserve, collecting interest on the lot. This is not something you could just impose on people without preparation. The money changers needed to created the climate to make the formation of this private concern seem acceptable. Here's how they did it. With King Henry VIII relaxing the Usury Laws in the 1500's, the money changers flooded the market with their gold and silver coins becoming richer by the minute. The English Revolution of 1642 was financed by the money changers backing Oliver Cromwell's successful attempt to purge the parliament and kill King Charles. What followed was 50 years of costly wars. Costly to those fighting them and profitable to those financing them. So profitable that it allowed the money changers to take over a square mile of property still known as the City of London, which remains one of the three main financial centres in the world today. The 50 years of war left England in financial ruin. The government officials went begging for loans from guess who, and the deal proposed resulted in a government sanctioned, privately owned bank which could produce money from nothing, essentially legally counterfeiting a national currency for private gain. Now the politicians had a source from which to borrow all the money they wanted to borrow, and the debt created was secured against public taxes. THE HISTORY OF MONEY PART2 BACK TO HOME PAGE

Monetary Reform Party

 

 

 

 

 

If you have ever wondered why the world is in the state it is in; why the environment is being destroyed, why the first world has so much and yet is in debt, the third world has so little and is also in debt. Then this site is for you.
How many times have we been told that this school, or that hospital can't be built unless we raise taxes? Or you perhaps you can't afford to take a cut in wage, to take the job you really want, because you have a mortgage and rising debts that you took out, to get money in order to support yourself and your family. Isn't it odd that we buy products that during their manufacture have destroyed forests, polluted seas and contaminated the air we breathe because we can't afford to pay for the better alternative.
Money is at the heart of all our lives. It is time to understand what money is and how it works.
The things you will read, will appal you. You have been deceived for a long time.
Please read the information on this site. It is imperative that we understand the true cause of our world's problems so that we can solve them.
By understanding how money really works you will be joining a growing movement of socially and environmentally conscious people who want to make a positive difference to our world and our own financial well being.
The Money Reform Party has been set up to address these problems
Now is the time.

Is the Governor of the Bank of England a secret money reformer?

One of the questions frequently asked of money reformers is the likelihood of their objective ever coming to fruition.
We live in an age of cynicism. With bankers expecting to cream off fat bonuses whilst their customers struggle to avoid bankruptcy, and with politicians of all the major parties failing to inspire with a noble vision of the future and pocketing ill-gotten 'expenses' whilst the economy crumbles, perhaps such cynicism is entirely justified. 'The great and the good' of our society and economy, 'they' who run things, have proved to have feet of clay.
Thus it is that when money reformers attempt to spread the word for their policy, explaining the fundamental faults inherent with the debt/money upon which our economy currently depends, and further expounding the myriad benefits that will flow from reform – the lifting of the debt burden from society at all levels, an easing of the cost of living for old and young, rich and poor, and a move towards a fairer, more stable and more sustainable future – it is easy for cynics to sneer and declare that 'they' will never let it happen.
Who 'they' are is rarely explained. 'They' remain largely unidentified, but 'they' are the people who run things. For many people, perhaps most, 'they' are corrupt politicians, greedy bankers, stifling bureaucrats, cost-cutting businessmen, myopic journalists, and maybe, even, the complacent 'haves' and the ignorant 'have-nots' of the rest of us.
Almost undoubtedly, amongst this number, the Governor of the Bank of England is likely to be accorded a prominent position, yet perhaps such a judgement is misplaced. The present Governor, Mr Mervyn King, set out his views of the banking systems of Britain and America in a speech given in October 2010, the text of which is repeated below.
This speech was given in terms that would be familiar and acceptable to an academic and business audience, with many laborious references to history, and to long dead economists (about which, at least, Keynes was right) and their theories, but there is much within it to suggest that Mr King is not at all antipathetic towards the aims of the money reform movement.
He rather dismisses the recent increase in capital requirement of Basel III as entirely inadequate. He refers favourably to the prevention of fractional reserve banking and calls the current system of banking (and presumably of money creation, as they are inseparable processes) the worst possible.
From a background where once the raising of an eyebrow was used to convey the deepest concern over a bank's practices, this is strong stuff. Read the speech yourself and decide.        

Read Positive Money's submission to the Independent Commission on Banking

Positive Money, nef (the new economics foundation), and Professor Richard Werner of the University of Southampton, have just made a joint submission to the ICB (Independent Commission on Banking). The Commission will be reporting back in September 2011, and the government should - in the absence of lobbyists - be prepared to accept and implement their proposals.

What Have We Recommended?

We've recommended the implementation of full-reserve banking for the UK, with power over the issue of the nation's money supply kept out of the hands of both vote-seeking politicians and profit-seeking banks. It is a proposal that could be implemented quickly (comfortably within 12 months) and that would have huge benefits for the economy as a whole. It may not be perfect, but it would be many times better than any banking system that we have had in the last 500 years. Download the submission below and let us know what you think.
Download the ICB Submission here (PDF, 1.1mb)

A Chance to End Debt as the Basis of the UK Money Supply

On 20th October 2010, the Government announced its Comprehensive Spending Review. It wishes to reduce its high level of debt. The National Debt now stands at over £900 billion.
Their desire is understandable. Debt is expensive. It costs money to be in debt, even for the Government, which is charged the lowest interest rates available commercially.
Unfortunately, there is a fundamental problem with the Government's plans. Almost the entire UK money supply consists of someone else's debt, whether that someone else is a private household, a business or the Government.

Total UK Money Supply and Debt

The total UK money supply (according to the Bank of England's Monetary and Financial Statistics) is £2,200 billion. Of this total, a mere £57 billion is in the form of notes and coins, and a whopping £1000 billion consists of what the commercial banks owe to each other – interbank debt.
This money supply is supported by nearly £1,500 billion of household debt - mostly mortgages, about £500 billion of corporate debt, over £900 billion of government debt - the National Debt, and, of course, £1000 billion of interbank debt.
If one removes the interbank debt from both sides of the equation, then the money available to the productive part of the UK economy - £1,200 billion - is supported by nearly £3,000 billion of private and public debt.

Paying off debt

Over the next four years, there will be cuts in public spending of £81 billion and an increase in taxes by £29 billion. This will amount to a reduction in the UK money supply of £110 billion, which is a significant proportion of the sum in circulation.
When a debt to a bank is paid off, that much money disappears from the money supply. For example, suppose you owe your bank £1000, in say a separate loan account, and suppose you earn or otherwise receive £1000 which you put into another account - a current account or a savings account, say. You still owe your bank £1000, but now also your bank owes you £1000. With money in a bank account, all you really have is an IOU from the bank for the sum involved. Effectively, you are each holding IOUs issued by the other.
If you decide to use your £1000 to pay off your debt, you are effectively just returning the two IOUs to their issuers. You would no longer have a debt, but the £1000 owed to you by the bank and which, hitherto, formed part of the UK's £2,200 billion money supply would cease to exist, because the bank would no longer owe it to you.
So if the Government pays off £110 billion of its £900 billion debt, it will reduce the UK money supply by £110 billion, out of an effective stock held by the productive economy of £1,200 billion, but that is not all.
The £3000 billion or so collectively owed by households, corporations and the Government (and owed mostly to the banks) has to be serviced. That is to say, interest must be paid and a slice of the principal should also be paid off each year. Assume an interest rate of 5% and £150 billion of interest has to be paid each year. Assume an average lifetime of the above debts of !5 years, and £200 billion of principal has to be found each year.
In both cases, the payment of interest and of principal, the withdrawal of these sums from bank accounts to pay the banks will result in a further reduction in the money supply, unless compensating new sums are borrowed into existence.
In a nutshell, about £350 billion of new borrowing is needed each year to pay off old loans whilst keeping enough money in existence to enable the economy to function, and this figure needs to grow exponentially year on year as the debt rises inexorably. Whilst for the economy to grow, the growth of the money supply will have to be even greater.

What scope for private borrowing?

If the Government is not going to borrow this money into existence, then it will be up to the private sector. Over the past two years, private sector borrowing has flat-lined, declining slightly if anything, borrowing barely enough to cover the repayment of past principal. Only the massive Government borrowing of the past two years has kept enough new money coming into the economy to prevent a worse recession than we have so far experienced.
For much of this period (19 months to date), base lending rates have been at the record low rate at 0.5%. They can hardly go any lower, yet private sector borrowing shows no signs of increasing. There is a reason for this. Of those able and willing to borrow, most are already borrowed up to the hilt. Few people and few businesses are in a position to borrow the hundreds of billions of pounds that are needed simply to prevent a deeper recession, never mind grow the economy.
The Government might think that it is driving down a slip road onto the motorway, but the sad reality is that it has driven ever more deeply into the cul-de-sac that was waiting for us all.

The Financial Services (Regulation of Deposits and Lending) Bill

Riding to the rescue, to save us all from the impasse in which we find ourselves, come a couple of back-bench Conservative MPs, Douglas Carswell and Steve Baker with their above named bill.
The Bill proposes ending the privilege currently held by the retail banks whereby they may create credit based solely on their borrowers' debts. In the future, bank lending will be limited to the amount deposited with them by their savers (as many people wrongly suppose to be the case at the moment).
Read the full text of the bill here
This will prevent the further expansion of the money supply over and above the amount created by the Bank of England. It will therefore permit the Bank of England to move towards increasing the amount of positive, debt-free money within the economy without fear of inflation.
As the Bank of England is a government agency, this money will be available for the Government to pay off its debts without the need for public spending cuts, tax increases, reducing the nation's money supply or for more households or businesses to go ever more deeply into debt.
Despite it being a private member's bill, this piece of legislation could prove to be the most important ever passed during anyone's lifetime. We need to give it as much support and publicity as possible.
You can contact your MP and ask him or her to support this bill by writing to them at 'House of Commons, London, SW1A 0AA' or by emailing them or telephoning them. For contact details see www.theyworkforyou.com
An Extract from HANSARD
15 Sep 2010 : Column 903
Financial Services (Regulation of Deposits and Lending)
Motion for leave to bring in a Bill (Standing Order No. 23 )
1.33 pm
Mr Douglas Carswell (Clacton) (Con): I beg to move,
That leave be given to bring in a Bill to prohibit banks and building societies lending on the basis of demand deposits without the permission of the account holder; and for connected purposes.
Who owns the money in your bank account? That small question has profound implications. According to a survey by Ipsos MORI, more than 70% of people in the UK believe that when they deposit money with the bank, it is theirs-but it is not. Money deposited in a bank account is, as established under case law going back more than 200 years, legally the property of the bank, rather than the account holder. Were any hon. Members to deposit £100 at their bank this afternoon or, rather improbably, if the Independent Parliamentary Standards Authority was to manage to do so on any Member's behalf, the bank would then be free to lend on approximately £97 of it. Even under the new capital ratio requirements, the bank could lend on more than 90% of what one deposited. Indeed, bank A could then lend on £97 of the initial £100 deposit to another bank-bank B-which could then lend on 97% of the value. The lending would go round and round until, as we saw at the height of the credit boom, for every £1 deposited banks would have piled up more than £40-worth of accumulated credit of one form or another.
Banks enjoy a form of legal privilege extended to no other area of business that I am aware of-it is a form of legal privilege. I am sure that some hon. Members, in full compliance with IPSA rules, may have rented a flat, and they do not need me, or indeed IPSA, to explain that having done so they are, in general, not allowed to sub-let it to someone else. Anyone who tried to do that would find that their landlord would most likely eject them. So why are banks allowed to sub-let people's money many times over without their consent?
My Bill would give account holders legal ownership of their deposits, unless they indicated otherwise when opening the account. In other words, there would henceforth be two categories of bank account: deposit-taking accounts for investment purposes, and deposit-taking accounts for storage purposes. Banks would remain at liberty to lend on money deposited in the investment accounts, but not on money deposited in the storage accounts. As such, the idea is not a million miles away from the idea of 100% gilt-backed storage accounts proposed by other hon. Members and the Governor of the Bank of England.
My Bill is not just a consumer-protection measure; it also aims to remove a curious legal exemption for banks that has profound implications on the whole economy. Precisely because they are able to treat one's deposit as an investment in a giant credit pyramid, banks are able to conjure up credit. In most industries, when demand rises businesses produce more in response. The legal privilege extended to banks prevents that basic market mechanism from working, with disastrous consequences.
As I shall explain, if the market mechanism worked as it should, once demand for credit started to increase in an economy, banks would raise the price of credit-interest rates-in order to encourage more savings. More folk would save as a result, as rates rose. That would allow banks to extend credit in proportion to savings. Were banks like any other business, they would find that when demand for what they supply lets rip, they would be constrained in their ability to supply credit by the pricing mechanism. That is, alas, not the case with our system of fractional reserve banking. Able to treat people's money as their own, banks can carry on lending against it, without necessarily raising the price of credit. The pricing mechanism does not rein in the growth in credit as it should. Unrestrained by the pricing mechanism, we therefore get credit bubbles. To satisfy runaway demand for credit, banks produce great candy-floss piles of the stuff. The sugar rush feels great for a while, but that sugar-rush credit creates an expansion in capacity in the economy that is not backed by real savings. It is not justified in terms of someone else's deferred consumption, so the credit boom creates unsustainable over-consumption.
Policy makers, not least in this Chamber, regardless of who has been in office, have had to face the unenviable choice between letting the edifice of crony capitalism come crashing down, with calamitous consequences for the rest of us, or printing more real money to shore up this Ponzi scheme-and the people who built it-and in doing so devalue our currency to keep the pyramid afloat.
Since the credit crunch hit us, an endless succession of economists, most of whom did not see it coming, have popped up on our TV screens to explain its causes with great authority. Most have tended to see the lack of credit as the problem, rather than as a symptom. Perhaps we should instead begin to listen to those economists who saw the credit glut that preceded the crash as the problem. The Cobden Centre, the Ludwig von Mises Institute and Huerta de Soto all grasped that the overproduction of bogus candy-floss credit before the crunch gave rise to it. It is time to take seriously their ideas on honest money and sound banking.
The Keynesian-monetarist economists might recoil in horror at the idea, because their orthodoxy holds that without these legal privileges for banks, there would be insufficient credit. They say that the oil that keeps the engine of capitalism working would dry up and the machine would grind to a halt, but that is not so. Under my Bill, credit would still exist but it would be credit backed by savings. In other words, it would be credit that could fuel an expansion in economic capacity that was commensurate with savings or deferred consumption. It would be, to use the cliché of our day, sustainable.
Ministers have spoken of their lofty ambition to rebalance the economy from one based on consumption to one founded on producing things. A good place to begin might be to allow a law that permits storage bank accounts that do not permit banks to mass-produce phoney credit in a way that ultimately favours consumers and debtors over those who create wealth. With honest money, instead of being the nation of indebted consumers that we have become, Britons might become again the producers and savers we once were.
With a choice between the new storage accounts and investment accounts, no longer would private individuals find themselves co-opted as unwilling-and indeed unaware-investors in madcap deals through credit instruments that few even of the banks' own boards seem to understand.
Question put and agreed to.
Ordered,
That Mr Douglas Carswell and Steve Baker present the Bill.
Mr Douglas Carswell accordingly presented the Bill.
Bill read the First time; to be read a Second time on Friday 19 November and to be printed (Bill 71).

The Proposed Bank of England Act

This is a reform that could prevent a future financial crisis, clear the national debt, and restart the economy.
It cures the sickness in our economy and financial system by tackling the root cause of the problem, rather than just the symptoms.
It would make the 'inevitable' cuts in public services completely unnecessary, reduce the tax burden by up to 30% and allow us to clear the national debt. It takes control over the UK's money supply out of the hands of the commercial banking sector and restores it to the state, where it can be used to benefit the economy, rather than providing a £200 billion annual subsidy to the banking sector.
For more information see http://www.bankofenglandact.co.uk


Ref http://www.moneyreformparty.org.uk/money/index.php