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04 Minutes from 27th February 2012

Page history last edited by Peter Verity 8 years, 4 months ago

 

Date  27/02/2012 Chairs Dave
Time  <18:45 - 21:00> Secretaries Jon C
Location  Quaker Meeting House  Type of meeting Meet-up

Attendees

(add yourself if missing)

 

 

Table of Contents

 



 

Talk: Understanding the Money System

presenter: Mike Black

 

Mike Black delivered a presentation that does a very good job of explaining the fundamental underpinnings of our banking system. The videos embedded below are a recording of Mike giving the same talk at the Annual Bromsgrove Conference (a conference for monetary reformers).

 

Key points from the talk

 

  • Mike's background
    • studied mathematics at Oxford University
    • worked at British Steel where he conducted operational research
    • Having become interested in the monetary system, Mike, and an engineer friend of his, directed their combined analytical skills at making sense of the banking system's slight of hand.
  • As mentioned above, Mike's talk was prepared for the Bromsgrove 2011 conference
    • This event was organised by The James Gibb Trust, an educational charity working to reduce indebtedness
    • The Trust sponsored Mike's talk
    • Mike also introduced us to a quarterly publication called Prosperity which is associated with the conference
    • He kindly brought some free copies along for us to take away and peruse.  
  • The talk aims to address a long-standing area of confusion:
    • whether money is cancelled out of existence when a loan is repaid. 
  • Mike stressed that the mechanism by which money is created and destroyed is "like a conjuring trick"...
    • a series of seemingly simple steps that can leave you scratching your head when you realise that wealth appears to materialise out of thin air and disappear again just as quickly.
  • Key insights on what money is or, rather, isn't...
  • the term "money" is rather imprecise as there are actually several types of money-like things, and these have very different properties
    • Coins
      • used to have intrinsic value owing to the use of precious metals
      • now they only have value because we collectively trust that their effective value is reasonably stable 
    • Banknotes
      • started out as IOUs from goldsmiths/banks to customers whose deposits they held, but have since evolved to become currency in their own right - much like coins
    • Current Accounts
      • you might think of money as being "in your account"
      • as we all know, this isn't the case
      • if you "have £100 in your account", you have effectively made a £100 unsecured loan to the bank
      • your £100 of bank account money is actually a £100 IOU from the bank to you
      • unlike coins and banknotes, bank account money cannot be freely exchanged
        • for instance, you can't pay someone by giving them your bank statement!
        • the IOU agreement is between the bank and you alone 
    • Banks' Reserve Balances
      • this is a mysterious type of money that regular people will never come into contact with
      • it is all held by the Bank of England (BoE) in accounts that belong to the banks
      • at the end of each day, money is shifted between these accounts to adjust for inter-bank current account transfers
        • e.g. if the net transfer of Natwest customers' money to Santander customers' current accounts is £1m
        • then £1m pounds of reserve money will be moved from Natwest's BoE account to that of Santander
        • This is necessary because Santander now has £1m of extra liabilities (IOUs to customers)
      • see the second video for more on this...
  • Mike went onto show how each type of money is affected in a simple series of transactions
    • see the videos for the walk-through
    • basically, there are three people and one of them gets a loan, pays one of the other people, and eventually pays of the loan 
    • there is no change in BoE reserve money - and so the bankers can legitamitely claim that they don't create reserve-money
    • however, the example also shows that they DO create current account money
    • thus, Mike unambiguously demonstrated that the country's money supply is at the mercy of private banks - QED

 

Q&A and talking points

 

  • in response to the description of current account money as "unsecured loans from depositors to banks", Sue asked "can we deposit our money in the form of secured loans"
  • Steve Bollom (sorry if name is wrong!) asked why banks aren't lending to consumers
    • John Dixon explained that banks have to make loans to earn money (as interest)
      • and that the more reckless ones (Northern Rock) actually borrowed vast sums of money themselves..
      • so that they could lend it on again for a markup
      • but they have to balance this risk with the chance that some of their borrowers might default
      • Northern Rock lost this gamble in spectacular style
      • But all banks are worried about defaults now because the world's economy is very unstable
      • Consequently, they are reluctant to lend
      • And, in fact, the government is asking them to simultaneously build their reserve ratio while lending more
      • this doesn't make an awful lot of sense, and only serves to highlight how stupid and/or poorly understood the current system is 
    • also, several people pointed out that when they do lend, only 8% goes into "productive" projects
    • the rest goes into assets (like property - i.e. mortgages), meaning another asset bubble is practically guaranteed
  • Dermot made a related, and very interesting point...
    • a lot of criticism of the banks focuses on their reckless gambling... 
    • but the real problem, as he sees it, is that these private institutions are effectively shaping the future direction of our nation
      • their rush to fuel asset bubbles for personal gain...  (previous point)
      • means that they aren't investing in things that would benefit society
      • in other words, by granting them the power to create money and direct it into the economy as they see fit...
      • we have effectively given them the reins of the country :-(
  • A new member (sorry, didn't catch the name) asked how one would describe Quantitative Easing using the framework Mike introduced.
    • Peter explained that QE only adds to the reserve money supply i.e. that held in the Banks' BoE accounts
    • This has grown by nearly £400 billion
    • While current account money, has been reduced by £100 billion
    • So the banks assets/liabilities ratio looks better... (i.e. defaults are less likely to bankrupt them)
    • but consumers and businesses have a shrinking money supply, which is probably why growth is as low as it is 

 

The videos

 

 


 

Other business

 

  • Peter reported that he has looked into the price of a stall at  peace in the park:
    • It's only £20 and so this looks doable
  • Next meeting will be March 26th @ a new venue...

 

 

Central United Reformed Church Sheffield

60 Norfolk St  Sheffield, South Yorkshire S1 2JB
0114 272 1089

 


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