What is money, and where does it come from?

One thing I can tell you for sure – it doesn’t grow on trees! But that doesn’t really answer the question. An article in the New Zealand Herald today caught my eye:

Show me the money: Reserve Bank reveals the ins and outs of printing cash

There is about five and a half billion New Zealand dollars circulating at the moment – in the country and offshore – and hundreds of thousands of notes being destroyed every week.

In 2016, the Reserve Bank destroyed 43 million notes, with a value around $1 billion.

The money is “granulated” down into “very small sort of confetti-sized bits of bank notes” then sent away to a specialised company that recycles them into plastic items one might find at home.

All this money being transformed into plastic on a weekly basis must be replaced.

print money

Thank God for Canada!

New Zealand money is printed much less frequently than it is destroyed, and it’s done overseas.

The notes are printed in Canada because it is not financially viable to run a printing factory in New Zealand. With money only ordered once a year at most, such a factory would lie unused much of the time.

Despite the increased use of Eftpos cards and online banking, the amount of New Zealand cash circulating here and overseas is growing, something that “around the currency world gets discussed a fair bit”.

There are a few “industry theories” on why the around $5.5b in cash is growing. One is that low interest rates means it doesn’t “hurt as much” to hold on to cash.

“You’re not losing interest revenue by holding it to any extent.”

Other reasons could include that New Zealand money was popular overseas, people using cash to avoid taxation, and using cash in the “dark economy” for illegal dealings.

But another thought was simply that increased spending led to increased needs for cash.

One way or another, the Reserve Bank has so far always had enough to circulate, and didn’t have “masses of unused notes sitting around”.

_____________________________

Well, I don’t know about you, but for me, this article raised more questions than it answered.

moneypig

Everyone needs something to believe in

First of all, millions of dollars in “legal tender” are created and destroyed every year – so clearly those paper notes have no intrinsic value. In fact, they’re not worth the paper (or plastic) they’re printed on.

Second, NZ money is printed in Canada – and if that money factory is working all year round, I guess those Canadians must be printing money for a few other countries as well, yeah?

“New Zealand money is printed much less frequently than it is destroyed, [but despite this, and] “Despite the increased use of Eftpos cards and online banking, the amount of New Zealand cash circulating here and overseas is growing.” How so? Was there more cash in the past? And are people hoarding old banknotes? But the government keeps issuing new designs and the old ones become obsolete, so that can’t be true.

The Reserve Bank doesn’t have masses of unused notes sitting around but always has enough to circulate even at Christmas time when demand increases, and the “around $5.5b in cash is growing” all the time.

Smells fishy to me! Obviously, there’s something they’re not telling us. And it could be this:

It’s been estimated that notes and coins in all the world’s currencies represents about 8% of the total world money supply. What? Yes!

If you think you know what money is, and you’re happy now that you know it comes from Canada, I’ve got bad news for you. Even the best economist brains in the world can’t agree on what money is. But one thing I’m sure they will agree on – It doesn’t come from a printing factory in Canada.

What they’ll tell you, if you insist on a definition, is that there is a mysterious algebraic thing they call “M”. There used to be three of these things, M1, M2 and M3 – but now it seems another has been added: M0. Well, actually I think that was a con, because M0 is notes and coins, and all those other “M”s have actually been moved further up into the realms of virtual reality – bank overdrafts, credit card limits, futures, toxic mortgages, quantitative easings, and other stuff we mortals earning normal wages or salaries have no concept of.

How-to-Have-an-AWESOME-Marriage-when-drowning-in-debt

Borrow money from your friendly local banker 🙂

Let me give a simple example. Just before a big commercial shopping event like Christmas, my bank texts me to say there is $20,000 waiting for me. All I have to do is send a text reply to a four-digit number, that $20,000 will magically appear in my account, and I can get on with the business of spreading good cheer to relatives and friends.

I never ask for it – but I can’t help wondering: Is that $20,000 sitting at the bank in a bag waiting for me, or do they give it someone else? What if I change my mind later and ask for it? Do they say, “Sorry, buddy, we gave it to Joe Bloggs”?

And I also wonder, how many other people around the world got the same offer from their banks? A thousand? Ten thousand? A million? What if we all take up the offer? What if we all don’t? Will they print more? Or shred the unclaimed millions?

Then there’s the small matter of debt. The United States of America is proud possessor of the world’s largest economy. It also happens that they are the world’s largest debtor nation. According to Wikipedia, on November 7, 2016, US total gross national debt stood at $19.8 trillion (about 106% of the previous 12 months GDP). I checked the US online debt clock at 10.23 last night, and found that their figure is nearly $70 trillion. Clearly it depends who’s measuring, and how they measure it. Whichever figure you decide to run with, it’s a sizable heap of money!

Well, the next question that arises is, who do they owe it to? I asked a mate at work who seems to know a lot about politics, economics and world affairs. “China,” he asserted confidently, “and Japan.” So, I checked them out.

Turns out that China’s “national debt” as of March 2016 (the most recent figure I could find) stood at the equivalent of $4.3 trillion. The same source informed me that Japanese “public debt” in 2013 passed the quadrillion yen barrier in 2013 (about $10.5 trillion at that time).

Debt

Looks like a tricky situation – and he’s not alone.

Government debt in the UK (ie not counting private and commercial borrowings) amounted to £1.56 trillion, or 81.58% of total GDP, and the annual cost of servicing (paying the interest on) this debt amounted to around £43 billion. The Conservative government pledged in 2010 that they would eliminate the deficit by the 2015/16 financial year. However, “the target of a return to surplus at any particular time was finally abandoned by the then Chancellor of the Exchequer George Osborne in July 2016”. And sad to say, until they start running a surplus, that debt’s only going to get bigger.

Evidently none of the world’s biggest national economies is in any position to lend money to their insolvent neighbours. Fortunately, we have banks that can come to the rescue. Fractional-reserve banking is the current form of banking practised in most countries worldwide. In a nutshell, this system allows banks to lend up to 90% of the money they have in deposits.

The beauty of the system, from the banks’ point-of-view, is that they don’t have to apologise to you when you go to make a withdrawal: “Oh, sorry, we loaned your money to John Doe.” You can have yours, and he can keep his – and the bank can collect interest on the new money it created.

Rolling_Stone_Banksters

Happy bankers 🙂

But what if we all go and demand our deposits at the same time? Luckily every country has an LOLR – which apparently stands for “Lender of Last Resort”, not “Laughing Out Loud, Really”). This is normally the country’s central bank eg the US “Fed”, or the Bank of England, which guarantee to bail out the too-big-to-fail banks when they get caught out, as in 2008.

And since we are assured that those central banks don’t have large stocks of money in their cellars, and tax-payer dollars are already insufficient to balance their government’s books, I guess that means they have to borrow more money from the private banks.

Either that or go cap-in-hand to the money printing factory in Canada. Think about it.

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Who is that economist working for?

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If you believe that . . .

Economics has been called the dismal science. Well, “dismal” it may be, certainly in the way it is used to justify the gross inequalities in the distribution of our planet’s wealth – but “science”? Possibly a “human” science, ranking with other notoriously imprecise fields of human knowledge such as psychology and sociology.

I have noted previously that Alfred Nobel did not include economics in his list of prizes. Not only did he think it unfit to sit alongside the true sciences (physics, chemistry, physiology, medicine), he didn’t even consider it as objectively assessable as Literature and Peace!

Bearing that in mind, then, it seems to me that I have as much right as anyone to have my ideas on the subject taken seriously. It could even be argued that the views of a high profile rugby player in New Zealand have greater validity than those of a former Governor of my country’s Reserve Bank.

We are all aware that high-level sport these days is mostly about money, and economics has inserted its dismal finger so that honesty, fair play, clean living and sportsmanship now rank well down the list of priorities. The home ground of Istanbul’s Beşiktaş football club, formerly commemorating the republic’s second president and close friend of Mustafa Kemal Atatürk, has recently been rebuilt and reopened as the Vodafone Arena, commemorating . . . the power of money.

banksters-300x199It’s a brave sportsman or woman these days who can cite moral principles to his or her paymasters as Sonny Bill Williams has done in New Zealand. Williams has the advantage of being an extremely valuable property, moving seamlessly between two rugby “codes” (league and union) in a way that would once have been frowned upon. So, when he announced that he would not wear a team strip emblazoned with the logo of the Bank of NZ, he opened a can of worms. Williams is, apparently, a Muslim, and follows that religion’s injunction against usury – the lending of money at interest.

A columnist for the NZ Herald, Brian Gould, picked up on Williams’s moral stand, writing an opinion piece entitled “Banking should be under closer Government control”. Supporting the Muslim rugby player’s position, Gould said, Most people believe, and it is a belief assiduously promoted by the banks themselves, that the banks act as intermediaries between those wishing to save and those wishing to borrow, usually on mortgage. . . But this benign view of their operations is inaccurate and misleading. The banks do not lend you on mortgage money deposited with them by someone else. They lend you money that they themselves create out of nothing, through the stroke of a pen or, today, a computer entry.”

The next day, the Herald published a reply from a gentleman by the name of Don Brash insisting that both Williams and Gould were wrong.

“Mr Gould is not alone in peddling this nonsense, but that certainly doesn’t make it correct.

How the Fed works

How the banking system creates MONEY. Money is not wealth, especially if you have to borrow it at commercial interest rates. (Source: Time Magazine)

“The banking system does create money. When Bank A lends money to one of its customers, the customer may use those funds to buy something from somebody who banks with Bank B. Bank B then finds itself with an additional deposit, a part of which it can lend out to its customers (keeping some of the additional deposit as a liquidity reserve). So an initial loan may end up considerably increasing the total lending by the banking system.

“If individual banks really could create money by “the stroke of a pen or a computer entry”, as Mr Gould contends, why do they bother paying interest on deposits, why do they borrow funds from parent banks overseas, why do they borrow funds in the international market, why do they need to hold some funds in government securities as a liquidity reserve, why do some banks occasionally run out of money when customers lose confidence in them?

As well as being a former Governor of the Reserve Bank, I now chair the small New Zealand subsidiary of the Industrial and Commercial Bank of China, the largest bank in the world. It would certainly make life very much easier if we could, “by the stroke of a pen or a computer entry”, simply create the money which we lend out to New Zealand borrowers. Unfortunately, we can’t.” (My highlighting)

Pinocchio

Would I lie to you?

So, according to Brash, Gould and Williams are wrong – but the banking system does create money. Huh? Look at the weasel words in the last sentence. OK, that’s not how they do it exactly, Don. And Bill Clinton did NOT have sex with that woman.

As I hinted above, Don Brash was Governor of New Zealand’s Reserve Bank from 1988 to 2002. He has held academic positions at several universities at home and abroad, sat in big chairs in large offices in several well-known banks, and even been involved in politics at the highest level. Clearly he, and the editor of the NZ Herald, and other naïve souls too for all I know, believe his words carry the power of gospel truth in matters of economics.

Look closer, though, and ask yourself if a guy who works at the upper levels of banking administration can possibly express publicly an unbiased view of the workings of the banking system.

Check the guy’s record, and you’ll see that he is a loser from way back. His first foray into politics was in 1980 as National Party candidate for the “safe” National seat of East Coast Bays. He lost, not to the main opposition Labour Party, but to an opponent representing Social Credit, a party whose main platform was exactly the view of banks expressed by Messrs Williams and Gould. That was a by-election. He failed to win the seat back in the General Election of 1981 and was dumped.

es514f00bfSomehow he managed to get himself elected as leader of the parliamentary National Party, despite his inability to actually win an electoral seat – holding the position from 2003 to 2006, then resigning from Parliament in 2007 to take up another academic post as economics guru.

He returned to politics in 2011 as leader of the right wing ACT Party, holding the post for seven months before resigning again after failing to make any impact in that year’s General Election. Clearly the average New Zealand voter is more perceptive than those who appoint general managers in banks or professors of economics at universities.

Brash is a hired lackey of the capitalist establishment, and a loser whenever he has offered his services to the New Zealand public. I’m not going to stoop to discussing his private life. If you’re interested you can get an overview on his Wikipedia page.

WTF? – Some thoughts on money, banking and global slavery

swiss-bankingHats off to the Swiss! I never thought I’d see the day when an initiative to reform money and banking originated in in that little haven for the world’s mega-rich to stash their ill-gotten gains! Just goes to show how much things have changed/are changing!

I hope and pray promoters of the move can get the message across to enough of their fellow citizens before the referendum is held – and I imagine they will have plenty of opposition. The Swiss have this nifty system whereby, if a petition carrying enough signatures is presented to their parliament on any issue, it automatically triggers a national referendum.

vollgeld-banner-de

Working for sovereign money

The Vollgeld Initiative did just that – and the government is now committed to asking their people whether they want to remove from private bankers the right to create money. Well, you can bet those bankers won’t let that happen without a hell of a fight! If our experience in New Zealand with the referendum on electoral reform is any indicator (and I’m sure it is), the forces of established finance and capitalism will focus all their considerable might on retaining their inalienable right to rip off their fellow earthlings to feed their own greed.

No date has as yet been set for the referendum – and no doubt large sacks of Swiss francs will be expended by interested parties on mounting a huge propaganda campaign to persuade Swiss voters that supporting the Vollgeld Initiative will herald in the end of the world as we know it. Others might argue that would not be altogether a bad thing!

Up until the 1980s we had a political party in New Zealand committed to doing exactly what those Vollgeld people want to do. The Social Credit movement won twenty-one per cent of votes cast in our 1981 General Election, but was denied fair representation in parliament by the ludicrously undemocratic electoral system operating in those days. Nevertheless, shocked out of their complacency by the strength of public support, the forces of reaction combined to deprive Social Crediters of even their minimal parliamentary representation and effectively wiped out the party as a voice for change.

homeless

NZ today – Paradise lost

According to Knight Frank Research, New Zealand now has “the world’s most frenetic property market”, with houses in Auckland selling for an average of $NZ 1 million. Young New Zealanders starting out in life are naturally unhappy they can’t afford to buy a house – something that previous generations took for granted. They are blaming, with some justification, foreign (and local) “investors” for driving up prices. But check this out: an article in the NZ Herald finance section noted, more or less as an aside, that “banks are having to borrow more money on the international market to fund their lending because of a slow-down in retail deposit growth.” So, can someone please explain why banks in New Zealand have to borrow US dollars (I suppose) from abroad and convert them into NZ dollars to lend to people in their own country?

Point One: Banks do not lend the money deposited in accounts to other borrowers. They actually create new money for lending by means of the fractional reserve system (see below).

Point Two: I understand that, if I want to import goods from abroad into New Zealand, I will probably have to use some internationally accepted currency – or work out some kind of bilateral agreement (see below). I totally fail to see, however, why I should have to borrow foreign currency from an offshore bank, and convert it into NZ dollars for spending on something, such as a house, that already exists in my country.

dollars_ap

Good as gold?

The United States government is currently holding in custody an Iranian gentleman with Turkish citizenship, Reza Zarrab, on charges of money laundering. The charges relate to transactions that came to light in December 2013. It seems that Zarrab was facilitating a deal involving the Iranian and Turkish governments, a major Turkish bank, and a large amount of gold, with the aim of circumventing a United States trade embargo on Iran.

Well, certainly it’s not a nice thing to go behind your friend’s back and make deals to his detriment – but let’s look at the background. The United States slapped trade sanctions on Iran in 1979 after an Islamic revolution ousted the Shah, a US puppet who had ruled the country since a CIA-sponsored coup overthrew the democratically elected government of Mohammed Mossadegh in 1953. The revolution came after 26 years of misrule during which the rights of most Iranians were subordinated to the interests of the United States oil lobby and a local elite. The Ayatollah Khomeini came to power, 52 American diplomats were taken hostage and held for 444 days, President Jimmy Carter’s reputation was irreparably tarnished, and anyone who wanted to remain friends with America was obliged to cut ties with Iran.

Turkey and Iran are next-door neighbours. They are Muslim countries and their people have a history of close ties going back millennia. They are natural trading partners, and both have goods and services the other needs and wants. Turkey complied with the US’s trade embargo for decades, at considerable cost to its own economic well-being. It’s not always easy, however, for America’s allies to know what they have to do to keep Uncle Sam happy, since his government has a record of switching allegiances and stabbing former allies in the back to suit the short-term interests of its financial backers.

Increasingly, sovereign governments are looking at ways of implementing bilateral deals with trading partners to avoid having to use American dollars and comply with self-seeking American restrictions. Russia, China, and now Turkey all seem to be looking into this very sensible strategy.

Nevertheless, they have to be careful. It may look like common sense, but the present world financial order was set up for a reason – and it wasn’t just to facilitate international trade, and certainly not to improve the lot of the common man and woman in every corner of the globe. The international financiers who control most of what goes on in the world have ways of enforcing compliance with their will, or at least of punishing governments that fail to comply.

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Migrant workers in Saudi Arabia. Spot the Arab

The United States government propped up financially and militarily the despotic 29-year regime of Hosni Mubarak in Egypt. When an Arab Spring uprising forced Mubarak’s removal, and Egypt’s first democratic election chose a Muslim to replace him (as you might expect an overwhelmingly Islamic country to do), the mavens of global finance withdrew their support, precipitating an economic crash that led to Mohammed Morsi’s ousting and the reinstatement of a military junta.

Venezuela, possessor of the world’s second-largest oil reserves, is currently experiencing a disastrous economic crisis largely as a result of plunging oil prices. Global oil prices are at their lowest levels for fifteen years, primarily because of the US transforming itself from an importer to an exporter of crude oil. Why would they risk the enormous long-term environmental damage of the oil fracking process? The US has a long history of interfering to ensure the failure and collapse of socialist governments in Central and South America. US-friendly Saudi Arabia can see out a period of low oil prices. Most of their labour force are indentured workers from impoverished Asian nations – unlike Venezuela, whose government has been trying for years to improve the lot of its own poorest citizens.

Turkey’s currency has taken a hammering in recent months on international “money markets”, losing more than 25% of its value since September. My theory is foreign interests opposed to Turkey’s President Tayyip Erdoğan supported local factions in their coup attempt on 15 July. Frustrated by its failure, the attack has turned to a slower but possibly surer method – attacking the nation’s currency to create economic hardship and strengthen local opposition to the AK Party government. For his part, Mr Erdoğan has encouraged citizens to show faith the Turkish Lira and sell off any stockpiles they may have of Yankee dollars.

forex

F*** the government and the country – buy dollars!

Interestingly, soon after the presidential appeal, a large advertising hoarding appeared in a major thoroughfare near us, urging people to do the opposite, to buy foreign currency! I did my civic duty and complained to the metropolitan council – and the ten-metre billboard has now been removed.

But to return to the Swiss banking reform movement. The people behind the Vollgeld Initiative have set up a website providing answers to crucial questions. Here’s a brief summary:

What is sovereign money?

Most people believe that the money they have in their bank accounts is real money i.e. real Swiss Francs (or pounds Sterling etc). This is wrong! Money in a bank account is only a liability of the bank to the account holder, i.e. a promise the bank makes to provide money, but it is not itself legal tender. 

What would change with the Swiss Sovereign Money Initiative?

The way the money system works today doesn’t comply with the intention of the Swiss Constitution (Article 99: “The Money and Currency System is a matter of the State”). 

What are the fundamental advantages of sovereign money?

Sovereign money in a bank account is completely safe because it is central bank money. It does not disappear when a bank goes bankrupt. Finance bubbles will be avoided because the banks won’t be able to create money any more. The state will be freed from being a hostage, because the banks won’t need to be rescued with taxpayers’ money to keep the whole money-transaction system afloat i.e. the “too big to fail” problem disappears. The financial industry will go back to serving the real economy and society. The money and banking systems will no longer be shrouded in complexity, but will be transparent and understandable.”

housing-crises

I admit it – It was me!

A recent article in The Economist, while predictably coming out against the proposed monetary reform, nevertheless does provide a delightfully simple analogy to illustrate how the present system works:

“Children are sometimes reassured that new siblings arrive via friendly storks. The reality is messier. Money creation is much the same. The ‘stork’ in this case is the central bank; many think it transfers money to private banks, which act as intermediaries, pushing the money around the economy. In reality, most money is created by private banks. They generate deposits every time they make a loan, a process central banks can influence but not control. That alarms some, who worry that banks use this power heedlessly, thereby stoking disruptive booms and busts.

Campaigners in many rich countries want to strip private banks of the power to create money. In Switzerland members of the “Vollgeld Initiative” presented the government with enough signatures in December to trigger a national referendum on the subject. Bank deposits, they point out, make up some 87% of the readily available money in Switzerland, vastly exceeding notes and coins. Since money creation is the main fuel of both inflation and growth, they argue, it should not be in private hands, let alone entrusted to institutions that are prone to binge and purge.”

Simple enough, huh? If I were you, I’d cut and paste those two paragraphs into my next blog post so that all my readers could learn the truth.