by Alasdair Macleod, Gold Money:
Since the 1980s, markets have had to adapt to a world of infinite credit.
Of course, this credit has not been available to everyone: it has been principally deployed in favour of governments, financial markets, and big business. It amounts to a cartel, planned or unplanned, a partnership between banks and government that dominates and controls previously free markets.
The justification for this arrangement is based on anti-market macroeconomic theories, always sympathetic to central planning. The partnership is between governments, their central banks and the commercial banks, granting them a licence to operate by expanding credit out of thin air.
To this state-sponsored monopoly has been added control of securities markets, inflating them as well. Bank credit and securities markets are on parallel tracks, because bank credit fuels the securities business. We should look at them both to make sense of the implications, and to understand the consequences for the ordinary person.
It has been said not one person in ten thousand understands the process by which banks conjure money out of thin air, but it is a simple process. A favoured customer asks the bank for a loan. The bank credits the customer’s account with the money at a stroke of the keyboard. As the customer draws on the facility, for example to pay his creditors, this creates matching deposits at the creditors’ bank accounts. Their deposits are recycled through the banking system to cover the original loan as it is drawn down.
This is how a loan creates deposits, and from the bank’s point of view it can expand its loan book and deposits to the maximum level related to the bank’s own capital as set by the government regulator. The regulator is usually under the control of the central bank which oversees the system, ensuring the process operates seamlessly. The fact that the state regulates the banks legitimises credit creation, maintaining public confidence, so that whatever their misgivings, people believe the system is controlled in their interest.
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