UNISONActive is an unofficial blog produced by UNISON activists for UNISON activists. Bringing news, briefings and events from a progressive left perspective.

Thursday, 17 May 2012

The money illusion is in a Greek crisis

There aren't many words in economics that provoke as much fear and unease as a bank run. That spectre looms in Europe, as we learned yesterday that depositors in Greece withdrew almost $900 million from the country's banks on Monday.

That giant pile of withdrawn cash comes from regular Greek citizens, as well as buys orders from Greek banks for German bunds, according to Greek President Karolos Papoulias. Papoulias also warned of "a great fear that could develop into a panic".

When ordinary citizens start pulling money from banks, it is cause for concern, not just for the banks but for the whole economy. That's because confidence is the whole game in economics, no matter where you live: Consumers need it to spend. Employers need it to employ new workers and buy new equipment.

Investors need it. We all need it.

But we citizens have good memories even when it comes to complex matters like banking and economics. We know that banks can, do and have shut their doors on us when they run out of money, the money we deposited with them and yet once we do it no longer belongs to us.

Bank runs first appeared as part of credit expansion and its subsequent contraction. In the 16th century onwards, English goldsmiths issuing promissory notes suffered severe failures due to bad harvests, plummeting parts of the country into famine and unrest. Other examples are the Dutch Tulip manias (1634–1637), the British South Sea Bubble (1717–1719), the French Mississippi Company (1717–1720), the post-Napoleonic depression (1815–1830) and the Great Depression (1929–1939). http://en.wikipedia.org/wiki/Bank_run

The problem for banking is this, it is a confidence trick, since banking was created bankers have lent out more than they had in the deposit vaults. That means if we all turn up at once to get our money it just isn’t there because more money is on their books than is actually in the safe.

Think on this for a moment…only 3% of money in our economy is actually cash and coins, the rest is simply numbers held in a computer. This is the situation for most economies now. http://www.neweconomics.org/publications/where-does-money-come-from

It’s fairly straight forward then to realise that because banks created the other 97% of our money out of thin air as debt, loans, mortgages etc, then we are 97% short of the cash required to get it all out of the bank.

The UK government covers our bank accounts to the tune of £85,000 if the bank goes under. http://www.direct.gov.uk/en/Nl1/Newsroom/DG_193322 Why do they need to do that?

They do it because they know the banks never have enough money in their accounts to pay us all out. So those with more than £85k in an account watch out!

The money illusion is under threat from the potential default from the EURO by Greece as their citizens rush to take out the money they think they have in the bank, but really isn’t there.

The process by which banks create money is so simple that the mind is repelled!
Banking is a conjuring trick. They agree to give you a loan. If you borrow £10,000 they mark your current account as having £10,000 in it. You’re now free to spend that however you like.

They also mark your loan account as having £10,000 in it. You now owe that to the bank.

So long as people believe the banks will pay out they don’t need money immediately. They can just pretend they have it. When people don’t have that confidence they do need money right now under the mattress.

Trouble is, banks always lend far more money than they actually have. That’s the risk in a ‘run on the bank’ of the sort Northern Rock suffered and now the Greek banks are suffering.

But now that risk has been taken somewhat as the government has said it will cover it. So the banks can lend more money at limited risk to themselves.

And so they make more interest on something they have created out of thin air.

Are you surprised that banks are the biggest companies in the world? After all, their basic product really does not cost them anything to make. Amazing, isn’t it?

You don’t believe it? Actually, you wouldn’t be alone. When explaining this one of the last century’s great economists (J. K Galbraith) said:

The process by which banks create money is so simple that the mind is repelled (John K. Galbraith, in “Money: Whence it came, where it went”, p. 29.)

He was right, because it’s true: the process is so simple that we’re repelled by the idea that we pay for it. We pay for something created out of nothing.