Where did all the money go?...

... Asks Icelandic film director Gunnar Sigurdsson.  Never likely to win an Oscar, this short film - Maybe I should have – possess a question that needs to be taken rather more seriously than any Hollywood jamboree.  

For most of the past decade, banks seemed to be rolling in money.  Now, as any small business looking for a loan can tell you, there's much less.

Why?

Because a lot of what we thought was money was really credit.  What they call “fractional reserve banking” means that a lot of the liquidity in our economy is really a loan piled upon a loan. Piled upon on loan. Upon a loan. And so on.  This credit pyramid dwarfed real money by more than 30 times at the time of the crunch.

So much for monetarist economists controlling the money supply.  Most of the time they can't even calculate it, let alone control it.

Once the credit bubble unravels, as it always does, what seemed like money disappears into thin air.  Worse, it takes real money, put aside by real savers and hard working folk, with it.

If bogus money is the problem, what is the solution? 

The one thing that won't get us out of this monetary mess - in Iceland or anyplace else - is yet more thin-air money. That's what got us into it.

Yet money-out-of-nothing is precisely the Bank of England's remedy.  Rather than solve the problem caused by the disappearance of bogus money, printing more money and pumping in more credit will just wreck the worth of what sound money still remains.

Perhaps our central bankers actually want to destroy the purchasing power of the pound? What other plans does the British state have to meet it's obligations to existing bond holders, future pensioners and bloated statism? 

Posted on 8 March 2010 by Douglas Carswell

Comments

Spot on. Not only are you one of the very few politicians to understand the statist reality of modern monetary and banking arrangements but you also rightly criticise the monetarists. I really like this: "Most of the time they can't even calculate it, let alone control it"! Again, your critique of the evils of central banking are spot on.

Posted on 8 March 2010 11:04 by Tim Evans

Spookily enough, the amount of quantitative easing (replacement credit) matches almost entirely the gilt issuance needs of HM treasury.

The contraction of credit to the private sector is being replaced with credit to the government - yet another net/net transfer of economic capacity from the private sector to the state.

How this is supposed to get us out of our problems I do not know.

Posted on 8 March 2010 11:09 by James Tyler

FROM: Ian Pennell, Nenthall, ALSTON, Cumbria. CA9 3LQ

8th March 2010

Dear John Redwood

Excellent diagnosis of this country's problems, Sir!

Whilst I agree that the Conservatives have some great policies on helping the economy in this country, whilst the direction of travel over spending restraint by government has been broadly mapped out by the Conservatives; specifics are what is needed. I have said this before, but the Conservatives are terrified of spelling out the specific cuts that are needed to fund the tax cuts, the reductions in debt and other existing policy commitments; for fear of alienating the electorate.

What is infact going to alienate the electorate is Labour making headway by suggesting that the Conservatives will pay for their policies by cutting spending on frontline services; and with nothing concrete to refute such accusations Labour's nasty allegations will stick. David cameron DOES need to take on VERY QUICKLY that he cannot be "all things to all men"!! Bellow at him to make him realise this, if need be!

Borrowing must be cut, the economy is not in a healthy state; so in order to provide tax cuts to help the economy and provide other electorally-appealing policies to the masses (some policies like a referendum on EU Membership actually cost very little to enact!), we must be prepared to state something like "£100 billion, identified by the Taxpayers Alliance as waste will be eliminated over a Parliamentary Term", or "we will cut all quangos and Whitehall Depts to a quarter of their present size" to pay for tax cuts, reduce borrowing and improve front-line services".

YES, IT MEANS A MILLION QUANGOCRATS AND CIVIL SERVANTS (AND THEIR FAMILIES) WILL HATE THE TORIES! BUT IT ALSO MEANS TENS OF MILLIONS MORE WILL HAVE A STRONG REASON TO VOTE FOR US AT THE FORTHCOMING ELECTION. Do the maths, if we are prepared to displease a million by sacking them, in order to please 20 million we are going to appeal to the electorate as a whole! It's a simple law; to win the Election we must offer the biggest cherries to the largest number of voters! We must grasp this simple fact, and Sir David Cameron must, as many Conservatives have been calling for, be more courageous in spelling out policies. We don't have much time left.

Labour winning the forthcoming Election will be a huge catastrophe for Britain; and I don't simply mean the economy. We have a EU President who, under the auspices of the Lisbon Treaty, wants to have all Europe as one giant Superstate. Labour's track record in Government, in capitulation to the EU, fills me with a sense of dread. What do you think Gordon Brown is likely to do if Herman van Rompuy snaps his fingers and demands Britain abolish its Police and Army to make way for the new EU-wide authorities. We know that the political Left wants to cosy up to the EU because it provides good cushy numbers for all of their failed politicians, and because the Left generally approves of the giant EU State with its socialism! This is a disaster waiting to happen.

Labour staying in office will cost Britain her sovereignty- totally! WE CANNOT LET THAT HAPPEN! We must wake up, smell the coffee and really jump about- BEFORE ITS TOO LATE!!!

Ian Pennell

Posted on 8 March 2010 13:41 by Ian Pennell

Section 1. Yep. Gresham's law working overtime. "Bad money drives out good - if it is at the same price".

Section 2. Sound money. But what's the best way of achieving that?

Section 3. Your ultimate question. Answer inflation or default.

Posted on 8 March 2010 14:23 by Lola

You make a great point at the end of your post, inflation is one of the only ways left to pay for the never ending welfare programs.

Of course, it will not work. Many people predicted this years ago. It's good to see more and more people catching on though.

Posted on 8 March 2010 14:40 by Tyler

Very astute post Mr C. Iceland crashed merely because it was at teh tipping point of the Western banking liquidity crisis. As the smallest country with a developed banking system and its own currency when the music stopped Icelanders were financially annihilated.

Posted on 8 March 2010 14:43 by Gordon Kerr

I particularly enjoyed Nobel Laureate James Buchanan's comments on this at the Mont Pelerin Society, 2009:

"The market will not work effectively with monetary anarchy. Politicization is not an effective alternative.
...
Let us not waste this set of crises by exclusive recourse to jerry-built efforts to patch up the failed monetary anarchy we have witnessed.'

Posted on 8 March 2010 16:09 by Steve Baker

You ask what the British State will do to meet it's obligations.
But what are the odds that the debt will last longer than the British State?

Posted on 8 March 2010 20:05 by Joe Moran

where did all the money for the gold reserves go and why did a criminal mayor loose his chain of office in the same time

Posted on 9 March 2010 13:09 by neil

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