Montag, 10. Dezember 2012

A strange view on money, banking and the economy (part 2)

In the first part of this paper I explained a model capable to explain the actual economic calamaties. With this second part I would like to show some evidence supporting the model and the theory behind it. At the same time I would like to point to some really odd observations, which are in my view a direct result of running the economy in the way described by the model.
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The US is the largest economy on this planet. The US$ is/was the money of the world. When Ben Bernanke took over from Alan Greenspan he almost immediatly started a cycle of interest hikes. This let to a decrease of money created by new credit and an increase of money destroyed by debt repayment. When the growth of M1 approached zero because of that, the collaps started and Ben Bernanke couldn't get money into the economy fast enough. This is documented by the following picture of the M1 development.(*)


An economy with the capacity to "produce" world money squeezes out its real economy, because it is easier to produce money compared to real products. An economy short of money production capacity will pick up that easy produced money and will deliver real products for it.
The examples here are the US vs. Japan and China or the so called PIIGS vs. Germany. The difference between ease of money / shortness of money appears to be deeply rooted in the culture of the economies. There are obviously economies obsessed by the idea of M-C-M'. In other words people there believe, to make money they have to produce something real first. This is nonsense. Money is made by the banks, when they give credit. On the other side, economies, where people are aware of the ease of money creation, like in the US or in the UK for instance, tend to develop into empires where people let other people work and produce real products which then are traded in for money.
Economies, where the concentration processes have created an extreme unequal distribution of wealth, have a strong tendency to try to escape the consequences out of that extrem unequal distribution of wealth by excessive money creation, which doesn't solve the problem, but just gives more time to grow it further.
Every time when the difference between money creation and money destruction approaches zero or becomes negative, economies get into serious trouble. This was the case when money creation was limited by  the gold standard and it is obviously the case when all sectors of an economy approach an debt to GDP ratio of 100% or an total debt of 400% of GDP. This seems to be a mental barrier and/or a real barrier, because the burdens introduced by interest on that enourmous debt caeses the real part of the economy. At the same time it becomes clear, that interest accelerates the progress of wealth concentration by a postiv feedback loop of the kind that highly concentrated money creates highy concentrated interstflows towards that money and away from already money starved debtors.

Sapere Aude!

Georg Trappe

(*)For clarification. The stagnation of M1 let the desaster start in the banking industry because banks need central bank money to participate in the interbank market. Money transfers between banks are solely done with central bank money, which is far less then the money created by the banks themself. This works in normal times, because the outflow and inflow of central bank money out of and into a bank during a nomal day is about equal. If there are a lot of money transfers in the outward direction without compensating transfers inward from other banks and this situation continues over days or weeks the bank runs dry of so called reserves, which is central bank maoney. The interesting thing here, banks do not accept the money they created when they deal with each other. They use only central bank money, which is consider the safest money, because a central bank can not go bankrupt, to get rid of the counter part risk.

Acknowledgements:
I would like to thank Dr. Stefan L. Eichner for all the Email conversations we had on these and various other topics and his encouragements and hints.
I also thank Steffen for running his Querschuesse Blog, which provides well prepared data illustrating the calamities we are in in a very factual way.
Many thanks also to Steve Keen, the renegade economist from down under, whos dynamic approach to economic thinking is well in line with the methods an engineer like me is used to.
And I would also like to thank the readers and commentators of my blog for sharing their insights with me. Especially the discussions with Dr. Rene Menendez, RealTerm and AlienObserver  helped me to gain deeper insights into the various topics of money, banking and the economy as whole. Last but not least I am very thankful to the group of economists running the real world economics review blog. A source of constant inspiration and innovative economic thinking.

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