Coppola Comment

In my previous post I explained how the Western world's debt money system works.  Currently, in our system, all money is created as debt. Debt precedes savings: it is lent out by financial intermediaries and becomes someone else's savings when it is spent. Therefore, contrary to popular opinion, for someone to have savings it is  necessary for someone else to have debt. And because debt (in its widest sense, so including corporate equity) and savings are equally balanced over the economy as a whole, when debt is paid off savings are reduced by an equal amount. In a debt money system the value judgements so frequently applied to debt and savings are unhelpful and can lead to completely inappropriate courses of action being taken by individuals, corporations and - particularly - by governments and supra-governmental organisations such as the IMF . Popular morality, particularly in the Anglo-Saxon world, has it that debt is a BAD thing and savings are a GOOD thing. These mo...

This post is a long overdue response to Richard Murphy's post " I believe in belief" , which directly criticises comments I made about another of his posts and makes false and unjustified assertions about my beliefs and my background. I thought long and hard before writing this post. I don't want to be seen as someone whose aim is to discredit another writer: frankly, life's too short to expend much time on such a fruitless task, and I have far more interesting things to do. But this post touches on some fundamental issues. And that is my real reason for writing this post. I reproduce here the comments I made on the Liberal Conspiracy blog regarding this post from Richard Murphy: Can I comment on two quotes:  Quote number 1: “A Courageous State is populated by politicians who believe in government. They believe in the power of the office they hold. They believe that office exists for the sake of the public good. They know what that public good is.”  Quote no...

This post is sparked by the debate that there has been in the last few days around Positive Money's proposals for reform of the monetary system in the UK. You can read their proposals here .  I'm not in this post aiming to debunk Positive Money's ideas so much as to clarify for people's benefit the nature of our debt money system and how fractional reserve banking works in practice. If more people understood how things REALLY work (rather than what the textbooks say) we would be better able to have a sensible debate about how we want it to work in future. The matter I want to address in this post is relationship between debt and savings. Positive Money correctly describe the way bank lending works, but they ignore the impact on savings, and therefore tell only half the story. And in the course of the debate it became apparent that there are many people who simply don't understand the relationship between debt and savings. Yet the relationship between debt and savi...

There has been much discussion recently about the austerity measures being imposed on Greece, Italy and others in the Eurozone in the interests of returning their budgets to balance and implementing much needed structural reforms. The question is not whether these measures are necessary, but whether in the current economic situation they are achievable. Firstly, some basic economics. If a country runs a trade surplus it is a net exporter of goods & services and an equivalent net importer of capital. Conversely, if a country runs a trade deficit it is a net importer of goods & services and an equivalent net exporter of capital. If a country runs a fiscal surplus it means that the government's income is greater than its spending. Conversely, if a country runs a fiscal deficit it means that government spending is greater than its income. There is of course a relationship between trade surplus(deficit) and fiscal surplus(deficit). If the domestic private sector is balan...

After a tense few days, EU leadership have finally come up with a draft proposal for easing Greece's debt problems, recapitalising banks and helping other debt distressed countries to finance their debt more easily. The full text of the EU leadership's statement is here (downloadable pdf). The devil will be in the detail, of course, which is pretty sketchy at the moment. But my initial impression of the report is that it contains far too much magical thinking. External agents will apparently willingly provide money to distressed Eurocountries when the ECB won't; growth will somehow appear in highly-indebted countries despite severe spending cuts and lack of inward investment; countries with uncompetitive business sectors and large trade deficits will somehow balance their budgets. And financial conjuring tricks will create the amount of money the report says will be available. How these will work in practice remains to be seen. Media interest in this r...

From the FT this evening (26th October 2011): Is the European bank recapitalisation a done deal? Not if you ask the Germans and Spanish. A broad agreement on raising the capital bar for banks has been announced this evening. But some technical details — that make a big difference to some banks – have been left open. Berlin and Madrid are mounting a last-ditch bid to lower the bar by allowing a broader range of capital to be used as part of the “temporary buffer”. German and Spanish banks in particular will have a lot more work to do to reach the new, 9 per cent core tier one capital ratio if they are not allowed to count some hybrid forms of capital. This is reopening a highly-charged (and tremendously technical) debate that overshadowed the European Banking Authority stress tests last summer. After a long fight, the EBA overruled the Germans and Spanish and imposed a relatively narrow definition of capital that excluded so-called convertible debt. This time around, there is a ...

On Friday 21st October 2011, a group of economists working for the so-called Troika produced a devastating report. This report was leaked to the press, notably the FT, which promptly produced an article analysing it , and the BBC. Paul Mason, BBC Newsnight's economics editor, gave a 10-point analysis of the report on Twitter which I reproduce here . And the Telegraph released the full text of the report the following day. European politicians have been fighting ever since . Germany's Merkel and France's Sarkozy had an argument loud enough to be heard in the EU concert hall. The Belgian finance minister left early and refused to attend the press conference. Merkel and Sarkozy jointly turned on Italy's Berlusconi , demanding that he implement fiscal reforms he has so far failed to deliver. And Sarkozy slapped down the UK's Cameron when he complained about the lack of any credible resolution plan for the Eurocrisis. Entertaining though the politicians' anti...