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How you & your bank create money

A money creationCHRIS OVERLAND

ADELAIDE - History can be used to justify all sorts of things - if you select the bits of it you want to reference, that is.

Selective quotation is a tactic used by both the left and the right of politics to justify their positions on a range of issues.

Sometimes the same facts are reinterpreted to justify diametrically opposed things.

History almost never offers a clear and simple explanation of events and is subject to constant revision as new facts come to light.

The historic truth is invariably much more complicated and nuanced than most people understand or even want to accept.

This gives ample scope for people like Vladimir Putin – the Beast of Ukraine - to put their desired ‘spin’ upon historic events.

In this era, where ‘alternative facts’ (also known as lies) are stock in trade of ruling elites, what Putin is doing is neither unusual or original.

It is a sad to note that Australia’s political class, especially the conservatives, have been exceedingly successful in presenting ‘spin’ as fact.

I see no difference in the approach to truthfulness in most parts of the Papua New Guinean political elite.

In Australia, the entire political class, right across the spectrum from crazy left to lunatic right, has contrived to persuade the Great Australian Public that governments actually ‘manage’ the economy.

Economists know this is not true, and even have a term for it – ‘bullshit’.

At best, governments can influence the economy by the way they handle matters like budgets, taxation and major infrastructure spending.

When we look for other significant players in our economy, we notably see the banks (which have the ability to create money through the extension of credit), the export sector and, probably of greatest importance, what is happening in the economies of related overseas economies

An institution of great eminence, the Bank of England, long held the view that banks do not create money, now concedes that they do.

It is even willing to explain how that works: ‘If you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account’.

So, whenever a bank lends you money, it simultaneously creates a matching deposit in your bank account, thereby creating new money.

The belief that banks can only lend money if they have enough deposits to lend from is, in fact, a myth.

If you want to know more about money creation, Wikipedia has a good explainer here.

Another myth:  the persistent comparisons by politicians of the national budget as like the family budget are false and misleading.

Unlike you and me, governments never die and can ‘print’ as much money as they like, the only proviso being that they need to stop once inflation takes off.

Which is exactly where the world, and soon Australia, is right now.

“It is well enough that people of the nation do not understand our banking and monetary system,” said Henry Ford. “For, if they did, I believe there would be a revolution before tomorrow morning.”


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