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If forgery covered quantity as well as quality, the private banking
system would face jail today...
THOMAS McANEA
didn't seem much of a threat to Britain's national security.
A failed businessman who drank too much, and an ex-con freed on
a technicality, he had barely "two pennies" to rub together,
according to the Scottish police.
But McAnea was also an expert forger,
a specialist in faking holograms for official documents. And in January,
'Hologram Tam' – as his underworld clients knew him – was caught
with nearly $1.7 million worth of counterfeit banknotes.
McAnea printed Chinese take-away menus
alongside the fake cash as a cover to look legit. By the time of his arrest,
the police estimate, Hologram Tam and his gang had put almost £700,000 of
fake banknotes – more than $1.3 million – into Britain's
financial system.
All told, according to the trial report in The Times, McAnea's
printing works had the capacity to produce $4 million worth of counterfeit
notes per day, "enough potentially to destabilize the British
economy."
But that $4 million per day would have been peanuts compared to
the money created by the UK's
private banking sector. It's been helping to grow the money supply by more
than $1 billion – each and every 24 hours – for
the last year and more.
Might this flood of legitimate money "destabilize" the
economy? It outweighs Thomas McAnea's threat 250
times over, after all. And if forgery were a question of quantity as well as
quality, the entire banking system might be queuing up to empty its slop
bucket tomorrow morning...right alongside Hologram Tam.
"Modern economists have difficulty in deciding whether they
should define money as M1, currency plus demand deposits," writes
Charles Kindleberger in his classic text, Manias, Panics & Crashes, "or
as M2 – equal to M1 plus time deposits – or M3, consisting of M2
plus highly liquid government securities."
Does the way we define money matter? The US Federal Reserve says
not. It famously ceased publication of its M3 data in March 2006, claiming
that the measure "had not played a role in the monetary policy process
for many years."
But lack of use didn't negate M3's value, however. Private
economists have since pegged its growth rate above 10% per year. At the end
of August this year, M3 growth hit 14% according to analysis by John Williams
at ShadowStats.
"At least we should all be able to rest assured that a
global deflation [a shrinking money supply] is not in the cards," as Rob
Kirby notes for Financial Sense.
But across the Atlantic and here in London, inflation of the money supply
remains on view to the public – and M4 remains the key money-supply
data.
The broadest measure of money supply tracked by any central bank
outside Chile (those crazy Latinos go up to M6), it covers all notes and
coins in the British economy, plus bank deposits – both time and demand
– and Sterling bank bills, as well as all commercial paper, bonds and
floating-rate notes issued for five years or less.
In short, M4 measures what a 1959 commission called those
"highly liquid assets which are close substitutes for money, as good to
hold, and only inferior when the actual moment of payment arrives." And
it has more than doubled in the last decade. M4 has risen by 65% since the
"Deflation Scare" starting in 2002.
Forget for a moment, however, about the supply of what passes
for money – even if it did grow by 13.5% in August from 12 months
before.
Gasp instead at the surge in private-sector lending...
After lagging the outstanding total of M4 money throughout the
1960s and '70s, the volume of private-sector debt first ticked higher during
Margaret Thatcher's deregulation of the financial services industry in the
early '80s.
Then the real jump came, back when the current government took
power in May 1997. The UK's
money supply has very nearly tripled since then.
By the end of summer 2007...and just as the global "credit
crunch" began to bite after the British economy had enjoyed 15 years of
expansion, its longest boom ever in history...total private-sector lending in
the United Kingdom outstripped the sum total of broad money by almost half of
one year's entire economic output.
Put another way, private households and businesses in Britain
now owe the banks 39% more in debt than actually exists in cash, bank savings
and near-cash equivalents added together (August data).
Down there with the devil and his number-crunching detail,
"most banks have advanced more loans to borrowers than they hold in
savers' deposits," as The Telegraph
noted recently. Little does the newspaper know that the situation applies
right across the entire British economy. But the
point is well made anyway.
Halifax Bank of Scotland (HBOS) has lent out £1.74, says The Telegraph, for every £1 it's
taken in from its savers. Standard Life Bank has lent £2.40...Northern
Rock lent £3.21...and Bristol & West, another aggressive mortgage
bank, has turned every £1 kept on deposit into £6.60 of loans!
The scam is simple enough to spot, if not to stop. Lending
£6.60 against every £1 on deposit makes for a tidy
"arbitrage" between the cost of paying bank savers and the income
earned from debtors. And what The
Telegraph's horrified exposé misses, of course, is that
– on the banks' balance sheets – creating credit in this fashion
looks simply beautiful.
Loans are called "assets", but cash-on-deposit is a
"liability". So the more money the banks lend, the greater their
assets. The less cash they accept from savers, the smaller their liabilities!
"The very fact of imitation," writes Glyn Davies of the Roman denarius
in his magisterial History of Money,
"indicated that the demand for money locally exceeded the official supply,
a gap which the counterfeiter exploited directly for his own interest."
Fast forward two thousand years, and Hologram Tam was merely
improving liquidity for his local economy, too – in this case, the
economy of drugs dealers, junkies and pimps in Glasgow.
Britain's
biggest mortgage banks have merely been doing the same, this time helping out
would-be home owners with a flood of liquidity. It pushed the average house
prices up three-fold in the 10 years to July 2007. The proportion of income
going to service and repay the resulting mortgage debt doubled over that
period to a record 32% per month.
Might this surge in "seignorage"
– the profits earned first by medieval kings for issuing money, and now
by the private banks for issuing debt – come to overwhelm the poor
serfs plowing the fields and trying to decorate their newly-built starter
homes (carpets and curtains included)?
It's not just Britain,
of course, where money has been piling up without the bother of taking
physical form as notes, coins or even a line in your banking deposit book.
Prior to its untimely demise, the Federal Reserve's M3 data showed mark
growth compared with the smaller, less inclusive M2 measure.
You'll note the upturn in the gap between M2 and its bigger
cousin, the now-dead M3 money supply figure, right at the same time that Britain
discovered the joys of private money creation in the mid-to-late '90s.
A global stock-market boom followed, and a housing bubble
followed that when the frenzy in equities wore out. But in the Fed's own
words, M3 included all of M2, plus large time deposits of $100,000 or more,
as well as "term repurchase agreements in amounts of $100,000 or more,
certain term Eurodollars, and balances in money market mutual funds
restricted to institutional investors."
Put another way, a big chunk of the private banking sector's
money is not included in M2. Now why would the Fed not want to track what was
happening there?
By : Adrian Ash
Head of Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash
is head of research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
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