Monday, January 24, 2011


You don’t need to understand how a semiconductor works to use a computer. Likewise, you don’t need to fully understand how the credit system works to realise that our economic woes have something to do with these numbers.

Lets analysis these figures;
· Over the past 10 years the money supply has expanded by between 90% and 136%
· Since November 2007 the rate of expansion has decreased (but was still growing)
· M0 shows a growth rate of 1% in the past 4 months. M1 & M2 has decreased and M3 is flat.
· House prices grew at the same rate as M1until they peaked in the last quarter of 2006. They are up less than 10% over the decade.
· HICP was steady at 2% most of the past 10 years

Some Questions;
· How does the amount of money increase?
· Where does it come from?
· How does more money in the system affect me?
· Is it good or bad for me if there is a reduction in the amount of money in the system?
· If the ECB has an inflation target of less than 2% why did they allow the money supply to expand by over 4 times that? Can they not control this through interest rates and capital requirements? Did they not know it may be causing bubbles in Irish and Spanish property?

The above money supply data resembles a 4 carriage train going up a steep hill slowing as it peaked. Is it about to go down the other side? Here is what Steve Keen, the economist that I think best understands the flow of money says;

“The initial borrowing by the shadow banking sector from the banks creates both money and debt;
The money onlent by the shadow banking sector to other sectors of the economy creates debt to the shadow banking sector, but not money
I frequently get the argument that debt within the financial sector can be netted out to zero, but I think this ignores those two factors above: the creation of additional debt-backed money by the initial loan, and the creation of further debt to the financial sector—most of which has been used to fund asset bubbles rather than productive investment.” Steve Keen