Donnerstag, 3. März 2016

Mervyn King explains banking and its consequences in one sentence

The Telegraph is promoting a new book written by the ex head of BoE Mervyn King. In a recent articel King was cited saying:
"Unsustainably high and low spending around the world led to large trade surpluses and deficits, creating a “disequilibrium” between major economies."

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This describes the business model of banks in just one sentence, because high spending is promoted by banks with giving credit = creating money and low spending is promoted  by encouraging savings at the same time. The difference between interest on credit and savings is the source of income for the banks. So banks have a strong incentive to grow the base of this business, which is the size of the bank balance sheet. To do so, they create a mismatch between the rate of credit/money to be repaid (destructed) and the rate of money released by savers and fill this gap with new created money / credit. This leads to an ever growing bank balance sheet = record of out of balance trade and therefore a ever growing income for bankers out of interest differentials on money created out of nothing. If banks stop growing their balance sheets / the credit = money supply, the economy goes into a deflationary downward spiral, because it is starved of liquidity by savers aka "investors" who still achieve a growing pool of savings=extraction of liquidity, thanks to a stochastic multiplicative process called "investing" which is also heavy promoted by banks as a major playground aka financial casinos for "investors" since it is an other important source of income for banks.


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By the way, this result of gods work = bank business = unsustainable and very destructive disequilibrium does not only exist between major deficit economies like the US, the UK and surplus economies like China, Japan, Germany but also inside economies between a few extremly cash rich mega companies and debt burden smaller companies as well as with a few extreme cash rich individuals aka 1% and hugh pool of cash starved individuals relying on social wellfare and charity.

It is astonishing that it took Mervyn King his entire Career to discover this problem just now. It became very obvious, when the US FED under Volcker made it the basis of its business model in the early 80s. And it is not that new at all. Merkantilism (e.g. East India Company) is probably the most prominent example of its destructive powers in history.

Sapere Aude!

Georg Trappe

P.S.: By the way, it is not known, how Mervyns message is received by the phalanx of high paid economists not only at the BoE, who justified and are still justifying the disequilibrium maximizing policy decisions of central bankers with absurde General Equilibrium Theories;-).
May be they consider it an "external shock", that drives things to the next new equilibrium  Mervyn is talking about in his latest articel, which he is concluding with the following sentence:

"The underlying challenge is to move to a new equilibrium in which new debts are no longer being created on the same scale as before."
Holy Moly!

The Evidence of Disequilibrium
The Root Cause
Fair Game Rigged Results
Fraud 
Rethinking what an investment really is
Financial Tsunami 1
Financial Tsunami 3
Living On The Expense Of Others
Fettaugensyndrom
An other strange look

world-economy-stands-on-the-cusp-of-another-crash-warns-lord-mer/ 
-mervyn-king-forgive-them-their-debts-is-not-the-answer/


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