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FX MONETARY POLICIES


As Australian economist Steve Keen observes, today the level of private debt is way too high, and that is why so little lending is occurring. But mainstream economists consider the rate of growth of debt to be irrelevant to macroeconomic policy, because lending is thought to simply redistribute spending power from savers to investors. Conventional economic theory says that banks are merely intermediaries, r e c ir c u l a t ing existing money rather


than


creating spending power in their own right. But this is not true, says Prof. Keen. Banks actually create new money when they make loans. He cites the Bank of England, which said in its 2014 quarterly report:


Loans create deposits, and deposits make up the bulk of the money supply. Money today is created by banks as a debt on their balance sheets, and more is always owed back than was created, since the interest claimed by the banks is not created in the original loan. Debt thus grows faster than the money supply. When overextended


to fill this gap. Rather, it has gone to the banks, which have funneled it into the speculative financialized markets. Nomi Prins calls this “dark money” – the trillions of dollars flowing yearly in and around global stock, bond and derivatives markets generated by


central banks when


they electronically fabricate money by buying bonds and stocks. She writes, “Tese dark money flows stretch around the world according


to a


“[B]anks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. . . .


Regular injections of new money are necessary to avoid the sort of “debt deflation” that took down the economy in the 1930s


In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is oſten misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”


26 FX TRADER MAGAZINE April - June 2019


borrowers quit taking out the new loans needed to repay old loans, the gap widens even further. The result is debt deflation – a debt-induced reduction in the new money needed to stimulate economic activity and growth. Thus the need for injections of new money to fill the gap between debt and the money available repay it.


to


However, the money created through QE to date has not gone to the consuming public, where it must go


pattern of power, influence and, of course, wealth for select groups.” She shows graphically that the rise in dark money is directly c or r e la t e d with the rise in financial markets.


QE has worked to


reverse and


debts of the banks


the to


prop up the stock market, but it has not relieved the debts of consumers, businesses or governments; and it is these debts that will trigger the sort of debt deflation that can take the economy down. Keen concludes that “no amount of exhorting banks


to


‘Intermediate’ will end the drought in credit growth that is the real cause of Te Great Malaise.” Te only way to reduce the private debt burden without causing a depression, he says, is a Modern Debt Jubilee or People’s Quantitative Easing.


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