When Credit is Flowing

Here we will try to show the facts that the Global Financial Crisis was due to monetary and credit expansion gone mad and dispel the idea that it is the savings of other nations that has caused it. In our previous blog “Get Credit Flowing” http://vimtrading.blogspot.com/2010/04/get-credit-flowing.html we claimed that LOANS CREATE DEPOSITS WHICH CREATE LOANS WHICH CREATE DEPOSITS. Figure one shows just how much this expansion has happened. Whether we look at just the paper money in circulation or broad credit the expansion has been between 6.8% P.A. and 8.8% P.A. Exactly how this happens is not as important as to what the consequences are. We got to keep in mind that the ECB has a target for inflation of under 3% and this inflation figure (CPI in Ireland & HICP in Euro Zone) is what is used to calculated wage and pension increases and now decreases.

Figure 1. Euro Money Supply in Billions of Euro

Figures from www.ecb.int/pub/mb/html/index.en.html
M0: Currency in circulation
M1: Currency in circulation + overnight deposits M2: M1 + Deposits with an agreed maturity up to 2 years + Deposits redeemable at a period of notice up to 3 months M3: M2 + Repurchase agreements + Money market fund (MMF) shares/units + Debt securities up to 2 years

To keep this as simple as possible we will look at M0 which is all the Euro currency in circulation. From the beginning of the Euro in 1999 there was €343.8 billion in circulation and 11 years later there was €806.2 billion which is an increase of €462.4 billion or 8% per annum. If it had increased by just 3% PA the total amount would be €475.9 billion.

So we will say wages increased by 3% PA in line with CPI or a total compound increase of 38% over 11 years but the amount of Money in circulation increased over 3 times faster. Some may argue that we need more money in circulation because the euro zone has expanded and has a larger population. This may be true but the population has only expanded by 13 percent. The per capita increase of currency in circulation has been 108%. So for ever €100 you were earning in 1999 you should be getting €208 just to be keeping up with per capita currency printing. This does not include that one has 11 years more experience under their belt.

By just looking at figure 1. and reflecting on ones own situation it is easy to see that something just doesn’t add up. For most the thought may be “the amount of money per capita has gone up by 108% but I am not getting my share.” Also, if I’m not getting it, who is? We have answered some of the question one may have in previous blogs.

Henry Ford stated “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” This system can only work with continuous expansion. By allowing write off of debts the above figures would contract. While it looks bad for Governments to bail out the main culprits they know the alternative of a total collapse would lead to revolution. In simple it is a pyramid scheme and the majority of us are on the bottom leg. Because not enough of the money has fallen to the bottom we can’t sustain the scheme and government will try to “get credit flowing”. Bailout may work this time, but in the end it will go the way of all pyramid schemes.