FX MONETARY POLICIES
colonists and Abraham Lincoln during the Civil War.
But the current conservative Congress is likely to balk at that solution. A more acceptable alternative in that case could be to borrow from banks. Ideally, this would be the central bank, since the loan would be interest-free and could
be rolled
over indefinitely. But borrowing from private banks would since
also work, they
simply money on
create they
their lend books.
(See the Bank of England’s 2014 quarterly report.) Krasiel writes:
[L]et’s assume that
the new
government bonds issued to fund new government in f ra s t r uct u r e spending are purchased by the depository institution system (commercial banks, S&Ls and credit unions) and the Federal Reserve. In this case, the funds to purchase the new government bonds are created, figuratively, out of “thin air”. This implies
that no other entity need
cut back on its current spending on goods and services while the government increases its spending in the infrastructure sector.
50 FX TRADER MAGAZINE January - March 2017
Stimulate the economy by expanding the bank lending that expands the money supply. This is what the Fed tried but failed to do with its quantitative easing policies.
central banks that adopted the term did not follow his policy advice. Tey tried to expand credit creation by padding the reserve accounts of banks; but the banks did not follow through with new lending into the market. Werner’s suggestion was for the banks to lend directly to governments.
In a July 2012 research paper titled
Most New Money Is Created by Banks
Richard Werner, Professor of Economics at the University of Southampton in the UK, agrees. Werner invented the term “quantitative easing,” but the
too the
“How to End the European Crisis – At No Further Cost and Without the Need for Political Changes,” he noted that a full 97% of the UK money supply is created by ordinary commercial banks. Tat makes banks far superior to the bond market in their ability to create the credit necessary to stimulate the economy. To the objection that banks don’t have sufficient money to fund governments, he wrote:
Tat may be true in one sense. But this is true for any loan granted by a bank. Which is why banks do not lend money, they create it: banks are
allowed to
invent a deposit in the borrower’s a cco u n t (although no new deposit was made by anyone fom outside the bank) and since they
function as the settlement system of the economy, nobody can tell the difference between these invented deposits and “real” ones.
Werner lists other advantages of governments funding themselves by tapping bank credit lines rather than issuing bonds. One is that the borrowing rate is substantially lower. Basel banking
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