This is almost Murphyesque in the beauty of its misunderstanding

The Shylocks at the IMF, the ECB and the European Commision want their pound of flesh. They are saying that the Greek goverment has to cave in to their demands, or else.

I think it is time to make a few basic facts clear. Between 2013 and 2014, the Greek government cut public sector debt by 0.7% – from €319 billion to €317 billion. Over the same period, Cameron and Osborne increased UK public sector debt by 14.6%, from €1794 billion to €2055 billion. Which Government is being the most irresponsible?

In April 2015, Greece was forced to pay 12% interest on its public sector debt. The Germans only paid 0.56% on their debt – currently the largest in the European Union – no less than €2180 billion at the end of 2014. Amazingly, Luxembourg is only paying 0.06% interest on its public sector debt. Why the difference?

I’ll tell you why. It’s because governments are forced to borrow money from the commercial banking system, and that banking system has the power to blackmail governments who don’t do what they are told.

But the really shocking fact that Alexis Tsipras should bring out into the open, is the fact that the Commercial Banks who lend money to governments don’t actually need to have any money to make those loans. They have a licence to create infinite amounts of “money” that they can lend to governments. If the government in question plays ball, then they get a AAA or a AA- rating from the ratings agencies. (Fitch, Moody’s and Standard and Poors). And if they have a nice high rating like that, the Banks can literally create as much “money” to make loans as they like – because the wonderful Basel Banking Regulations stipulates that lending money to such governments has a risk-weighting of 0%. They therefore need no capital at all – and can create infinite amounts of debt.

In contrast, when the ratings agencies decide to give countries like Greece a rating of CCC, those loans made with fictitious money created out of thin air suddenly have a risk-weighting of 150% – meaning that for every €1 billion in loans, the Banks have to hold capital reserves of something like €150 billion. Since they don’t have that level of capital, a country like Greece will no longer be able to borrow at all.

Dear God….market yields being equated to coupons, the yield on Greek Treasuries being applied to the entire Greek public debt when near all is owed to the IMF, ECB and EFSF on concessionary terms, it’s actually the ECB which determines the capital requirements for holding those Treasuries through the operation of the ELA, being out in capital requirements by two, count them two, orders of magnitude and then starting off with the Shylocks, meaning it’s all the fault of the Joos.

Amazingly, this man has the vote.

And, Oh Boy:

When I’m not writing my blog, my day-job is as the Director of the Brain and Cognition Research Center (CerCo) in Toulouse, France. It’s a lab with about 85 people, many of whom are keen young scientists working for a Masters, a PhD thesis or as a postdoc.

Run for the hills time…..

40 thoughts on “This is almost Murphyesque in the beauty of its misunderstanding”

  1. Where did you find that loon? He’s also calling for an unconditional basic income funded by a financial transactions tax, which is an interesting mix.

  2. Scientists aren’t knowledgeable outside their area of expertise. Most often they rant about the evils of climate change; but credit creation is a close second.

  3. Why is the Greek government borrowing money?

    Instead of carping about the terms, fix the real problem.

  4. So who will pay for let alone produce goods and services when we all carry out our hobbies or artistic passions instead of getting a job.

    It won’t be young scientists trading off not getting a full time job to do science, I’ll take up cricketing and educating myself in academic subjects. I expect others will sack off work and do the same because there would be such competition for those casual jobs in bars that there’s mo point in applying for them.

    Not even staring on why there would be the money and demand for such things paid for the suckers who work full time…..

  5. And Tim Hunt had to ‘resign’ because he said women cry (he didn’t say men didn’t).

    And I bet Prof. Hunt is better in his field than this guy.

    But he’s progressive so it’s OK

  6. Maybe Greece pays a higher rate of interest because the lenders think, unProgressively, that they more likely to default than Germany or Luxembourg?

  7. “Scientists aren’t knowledgeable outside their area of expertise.”

    True. And many aren’t that knowledgeable inside their area of expertise. But, find a man (or woman) with expertise in one field and often you’ll find an unwarranted self-belief of expertise in other areas, and you’ll be amazed at the number of people who defer to those with letters after their name, no matter how dubious their opinions.

  8. @gamecock they’re not norrowing they’re running a small primary surplus. They’re in the shit because they borrowed too much inthe past and then were saddled with additional debt to ensure the survival of the French and German banking secrors. If they had stuck with the drachma, we’d have 8000 drachma to the euro but the greeks could live with that they always have.

  9. Dr Thorpe is proud of his economic thought: it features on his LinkedIn entry.

    St. Catherine’s College, Oxford
    B.A. Hons, Phys!ology, Psychology & Philosophy (P.P.P.), First Class
    1974 – 1977
    Additional Info

    Interests
    Monetary Reform, Music, Ecology

  10. right or wrong it has a beautfull sound to it. Any ambitious politician could grab and run with this – to prove whatever.

  11. “One more thing. Popularizing the need for monetary reform and what is money, is up to scientists, like us. If we do not find ways this becomes simple enough for everyday people to see they are being robbed, they will never now what is the problem and they will try to attack each other.”

    That’s right. Us everyday people, thickest if you like, need these scientists to tell us what to think… if not to write in English.

  12. So Much for Subtlety

    Ironman – “That’s right. Us everyday people, thickest if you like, need these scientists to tell us what to think… if not to write in English.”

    I wonder if science has yet managed to build a tool that could measure the irony in this posting.

    I assume it is someone pretending to be Rusty.

  13. Hi Tim!

    Yes, it’s me. The guy that you obviously love insulting.

    First, let me thank you sincerly for pointing out the obvious error in my blog post http://simonthorpesideas.blogspot.fr/2015/06/a-message-for-alexis-tsipras-tell-your.html

    You are indeed correct that with the Basel Banking regulation stipulating that the risk-weighting for sovereign debt for a CCC country like Greece is set at 150%, the amount of capital required to hold €1 billion of Greek government debt is not €150 billion. I have thus corrected the figure on my blog to €150 million. However, your claim that I was “out in capital requirements by two, count them two, orders of magnitude” is actually wrong too. A billion is THREE orders of magnitude larger than a million.

    Anything else that I got wrong?

    Do you deny that when commercial banks buy sovereign debt for AAA to AA- countries (like the UK, France, Germany etc), they need no capital at all (because the risk weighting specifiied by the Basel rules is set at 0%?

    Do you deny that this is likely to be one reason why Banks like
    Société Généale can have assets worth over 1200 times their capital ($1.7 trillion vs $1.4 billion) – see
    http://www.accuity.com/useful-links/bank-rankings/

    Do you deny that the increase in UK public sector debt from £975 billion to over £1600 billion in the period from end of 2009 to end of 2014 was financed by commercial banks using money that they didn’t actually have to by UK bonds?

    Do you deny my claim in that post (that you neglected to include in your edited version) that UK taxpayers have been paying an average of 4.4% of GDP every year since 1694 in interest payments on public sector debt?
    http://simonthorpesideas.blogspot.fr/2014/11/the-biggest-racket-in-history-how-banks.html

    Do you deny that the money lent by the Rothschilds to finance the Napoleonic wars, and which meant that UK taxpayers were paying over 9.0% of GDP every year between 1815 to 1822 was money created out of thin air?

    Do you deny that the money used to finance the 1st World War was also created out of thin air by Banks, and that this meant that UK taxpayers paid between 8.5% and 9.6% of GDP in interest payments to the banking sector every year from 1922 to 1933 – the roaring twenties for those close to the people with their hands on the money tree that David Cameron claims doesn’t exist?

    (If you do want to deny this, please take the question up with the person responsible for the data set you can find here http://www.ukpublicspending.co.uk/spending_chart_1692_2016UKp_14c1li011lcn_97t#view
    not me).

    I’m looking forward to a real debate on this one, Tim. Like the other debate we had where you finally gave up – the one where you claimed that even a 0.01% tax on the UK’s £2 quadrillion a year in FInancial Transactions would make the sky fall in, and that it is far better to use Corporation Tax, VAT and Income Tax “because corporations don’t pay taxes, only people pay taxes”.

    Come on Tim. Let’s have some real fun.

    But here’s a warning to all the commentators on your Blog. I’m not stupid. I’ve read one hell of a lot in the last 4.5 years. And the detailed and carefully researched arguments on my blog now run to over 300,000 words. You can download the whole thing here http://bit.ly/1NzgKaf

    With very best wishes to all your readers

    Simon

  14. Thick.Racist.Prick

    You just work on your own doctorate, the one where you show Jews are “nerdy little geeks who got beaten up at school”.

  15. Maybe Greece pays a higher rate of interest because the lenders think, unProgressively, that they more likely to default than Germany or Luxembourg?

    Dem Joos are sneaky like that.

  16. TW, Makes more sense than you do, matey, the expert Economist ,so proud of his qualifications, who doesn’t know whether banks create the money or not.

  17. As I repeatedly point out, I am not an economist. On the simple grounds that I don’t have the qualifications to be one.

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  19. Do you deny that the increase in UK public sector debt from £975 billion to over £1600 billion in the period from end of 2009 to end of 2014 was financed by commercial banks using money that they didn’t actually have to by UK bonds?

    I deny that. First of all UK public sector debt is mostly held by overseas investors, insurance firms and pension funds who are nor more able to create money than you or I.

    see here

    http://www.economicshelp.org/blog/1407/economics/who-owns-government-debt/

    secondly, you do not seem to have completely understood the money creation process in fractional reserve banking, like alarmingly many people who grasp half the story, you have forgotten the bit about how banks actually have to finance loan withdrawals or asset purchases (like govt bonds) that they cannot net off within their own operations, either by having cash on reserve (perhaps from retail depositors) or by borrowing that cash from the central bank.

  20. The Meissen Bison

    Simon Thorpe: Do you deny that when commercial banks buy sovereign debt for AAA to AA- countries (like the UK, France, Germany etc), they need no capital at all (because the risk weighting specifiied by the Basel rules is set at 0%?

    Were you feeling quite well when you wrote this, Simon? What do they exchange for the debt obligations they acquire when they “buy” or is there some financial soup-kitchen where the banks pitch up to have some AAA paper ladled out to them?

    Do you deny that this is likely to be one reason why Banks like Société GénéRale can have assets worth over 1200 times their capital ($1.7 trillion vs $1.4 billion).

    Dear me, Simon, I’m fairly sure that you don’t know how to read a bank balance sheet or indeed any other kind. The trick is not to try and square off a big chunk of one side against a small chunk on the other.

    One thing that I learned at Oxford was that if the first two paragraphs of something were twaddle, best to stop reading…

    Another thing is that I went into banking when I came down so never tried to explain the workings of my trade in terms to fit my political preconceptions.

  21. Tim>

    Could I suggest that, unpleasant as it is, you take a little time to read (or at least skim) The International Jew. This chap is simply regurgitating old-fashioned anti-semitic libels. There’s nothing novel at all.

  22. Fear not – I’m not in the least bit antisemetic. It just so happens that Shakespear’s Merchant of Venice has a neat story about a lender (Shylock) insisting on having his pound of flesh. Whether or not Shylock is Jewish is frankly irrelevant as far as I am concerned.

  23. Nonsense, Simon, you’re a neo-Nazi repeating nonsensical old lies about ‘the Jews’. If you’re not aware that’s what you’re doing, then you’re thick as well as prejudiced. But I’m pretty sure you know exactly what virulent hatred you’re spreading.

  24. Luis Enrique
    ” UK public sector debt is mostly held by overseas investors, insurance firms and pension funds who are nor more able to create money than you or I. ”

    Agreed. But, at least in France, the primary purchasers of the bonds are Banks. The list of the 19 primary dealers authorized to purchase French Governmen debt only includes banks – http://www.aft.gouv.fr/articles/primary-dealers-list_810.html

    And the most active ones in 2014 are shown here http://www.aft.gouv.fr/articles/league-table-2014-of-the-most-active-primary-dealers-svt-_12297.html

    Here is the list – no insurance companies or pension funds to be seen.
    1 BNP Paribas
    2 Société Générale
    3 Crédit Agricole
    4 Barclays
    5 HSBC
    6 Natixis
    7 Nomura
    8 Morgan Stanley
    9 JP Morgan
    10 Royal Bank of Scotland

    Again, they are all banks who can create arbitrary amounts of money to buy French Government Bonds since the risk weighting is 0%. Of course, once those Banks have purchased the bonds (with money they create), then can sell them on to pension funds, and even the ECB (when it purchases bonds on the secondary markets).

    I have not been able to find the same details concerning the primary purchasers of the extra £625 billion in debt isseued by Osborne and Cameron in 5 years. Until someone proves to me the contrary, my guess is that in the UK too, it is Commercial Banks that do the buying.

  25. The Meissen Bison
    “Banks like Société GénéRale can have assets worth over 1200 times their capital ($1.7 trillion vs $1.4 billion).

    Dear me, Simon, I’m fairly sure that you don’t know how to read a bank balance sheet or indeed any other kind. ”

    I’m just reading the numbers in the Accuity.com website with the 50 biggest banks in the world http://www.accuity.com/useful-links/bank-rankings/

    I just used their figures to determine that the 50 biggest banks hve $67.6 trillion in assets, but only $772 billion in capital
    http://simonthorpesideas.blogspot.fr/2014/08/the-50-biggest-banks-676-trillion-in.html – an assets to capital ratio of 87.6:1.

    I naively assumed that the people who compiled those numbers know how to read Bank Balance Sheets.

    Maybe I’m wrong but for me the reason that these ratios can be so high lies in the 0% risk weighting of sovereign debt – at least for AAA to AA- rated governments.
    http://simonthorpesideas.blogspot.fr/2014/03/the-biggest-bank-scam-of-them-all-banks.html

  26. Oh Dear Lord.

    Try this

    http://www.investing.com/rates-bonds/greece-10-year-bond-yield

    There’s two things with a bond. There’s the coupon. And then there’s the market yield. These are two very different things.

    So, the Greek 10 year Treasury (to take a real example). Assume that it was issued at par (it won’t have been far off par) of 100. The coupon is the interest rate that is offered. Lend the Greek government €100 and they agree to pay you whatever the coupon was at that date of issue. For the 10 year that coupon was 3%. So, the Greek govt pays €3 each year for every €100 they borrowed.

    The yield is something entirely different. That is the interest rate on the current market price of that bond. So, if the bond falls from par of 100 to, say, 20% of the par price, then the yield goes up by the same factor. Price falls to a fifth of par, yield becomes five times coupon. And that is what has happened to the Greek bonds. As people worry about whether Greece is going to default then the price has fallen. So, the yield rises. But the coupon remains exactly what it was on the day of issue: Greece is still paying €3 a year for every €100 it borrowed.

    The important point here being that the amount of interest that Greece is paying has absolutely nothing at all to do with the yield. And the amount of interest that Greece is paying hasn’t risen like you think it has.

    The larger point we should make about this is that this is one of the really basic things you need to know about bond markets. And it’s something that you obviously do not know. So it would probably be a good idea if you didn’t try to tell us all about bond markets as a result of your not knowing the basics about them.

    For the record, last time I looked at least, Greece was paying something like 1.5 to 2% of GDP in interest on its debts. Can’t remember whether that included capital repayments or not.

    I’m sorry, you’re just wildly off base here simply by not knowing the first thing about the subject under discussion.

  27. The Meissen Bison

    Simon Thorpe:
    I naively assumed that the people who compiled those numbers know how to read Bank Balance Sheets.

    Good for you.

    But if I gave you some data showing the height of a given population of adults and what each of them had for breakfast, would you want to draw inferences from that?

    Still, at least you’ve spared serving me up the AAA financial soup-kitchen theory again and saved that for Gamecock.

    Il faut savoir distinguer son cul de son coude, as we say over here to make our postings bilingual.

  28. @ Simon Thorpe
    I’d be interested to know exactly how this money creation works. An example:

    – Greece, say, wants to borrow 1 million
    – A bank lends Greece 1 million, exchanging 1 million in newly created money for the Greek bond.

    So, what form does this newly created money take? How does Greece use it, say to pay wages in Greece.

    Can you explain this? I would find it very helpful.

  29. Tim Worstall : “For the record, last time I looked at least, Greece was paying something like 1.5 to 2% of GDP in interest on its debts.”

    Data from Eurostat http://appsso.eurostat.ec.europa.eu/nui/submitViewTableAction.do;jsessionid=qUkPujnNq-I0SFP96avr4dNwTq9mHC23F4YCqYSBlB7F81oFuwbo!-1796335516

    Interest payable on Government Debt (%GDP)
    2011 : 7.3%
    2012 : 5.0%
    2013 : 4.0%
    2014 : 3.9%

    For some reason, there are no figures before 2011. The average for the Eurozone for the same period was 3.0%, 3.0%, 2.8% and 2.6%.

  30. Jack C “I’d be interested to know exactly how this money creation works. ”

    When you go to a Bank and ask for a loan (to buy a house for example), the Bank can simply type some numbers in a computer (£500,000 for example). In exchange, you sign an agreement to pay back the sum with interest over say 25 years. In the UK the Banks don’t even fix the interest rates in advance – after a couple of years, you have agreed to pay whatever amount they ask. If you don’t pay, they can repossess your house. The only limit on the banks ability to create money in this way is the fact that the Basel Banking regulations put limits on the amount of capital they have to have to back up loans. Normally, they need to have capital equivalent to around 10% of their assets. However, for mortage lending, the risk-weighting is only about 30%, meaning that they can lend out around 30 times more.

    The remarkable exception is lending to governments. In that case, the risk-weighting is fixed at 0%, which means that the bank can create literally infinite amounts of debt, if they can find some complicit or ignorant politicians prepared to take on more debt. This is what I was denouncing in my post – what Tim describes as Flatulant Tospottery.

    Please allow me to disagree. I sincerely believe that if Europe’s taxpayers knew that they had handed over more that €6.6 trillion in interest payments on public sector debt over the last 20 years, there might just be a little bit of disbelief.
    http://simonthorpesideas.blogspot.fr/2015/04/european-public-sector-interest.html

    And maybe a slight sense that we have all been robbed by the 1% at the top who control the money creation process, and who are so ably defended by Tim on his blog.

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  32. the Bank can simply type some numbers in a computer (£500,000 for example)…
    The information about how the system works is all in the public domain – on the BoE website for example.

    When a bank makes a mortgage loan, it creates (at least) two accounts for you: one, in credit by the £500k, the other in debit by the same amount. So far it’s just button pressing.

    Now you take the £500k and buy a house with it, by transferring it to the seller’s account at another bank. Naturally, the seller’s bank wants the money, and your bank has to pay it to them. This is done by transferring money between the banks’ settlement accounts at the BoE.

    If your bank makes a lot of mortgages, its settlement acount will soon be depleted, and it will have to replenish it with actual money (the BoE will lend it money if necessary, but only if collateral is posted).

    When Northern Rock issued a bunch of mortgages it couldn’t borrow the money to fund, it went bust. How do you explain that?

    In the UK the Banks don’t even fix the interest rates in advance – after a couple of years, you have agreed to pay whatever amount they ask.
    Have you ever taken out a mortgage in the UK? The terms are whatever you agree to. Some mortgages refer to the lender’s “Standard Variable Rate”, which is indeed whatever the lender says, but that’s not compulsory. (Mine is at a modest spread to the BoE base rate.)

  33. SJW

    I’ve moved on to the latest post; join us there.

    Valiant attempt of yours by the way. Valiant but pointless.

  34. Social Justice Warrior : “In the UK the Banks don’t even fix the interest rates in advance – after a couple of years, you have agreed to pay whatever amount they ask.
    Have you ever taken out a mortgage in the UK? ”

    Fortunately no. In France, just about all mortages are fixed rate over periods extending up to 25 years. You can find the best rates here http://www.meilleurtaux.com/credit-immobilier/barometre-des-taux.html

    15 years – 1.50% fixed rate
    20 years – 1.69% fixed rate
    25 years – 1.97% fxied rate.

    Now, I mey be a moron, and incapable of understanding what a percentage is (as claimed by some people on this blog), but I think if you live in the UK, you should start asking yourself why the UK banks can get away with lending you their fictitious money without even having to say what rate they will be charging in 2 or more years into the future.

    Accoding to http://www.moneysupermarket.com/mortgages the best you can get in the UK is 10 years, but the vast majority is only fixed rate for between 2 and 5 years.

    Can you explain that one Tim?.

  35. Social Justice Warrior “If your bank makes a lot of mortgages, its settlement acount will soon be depleted, and it will have to replenish it with actual money (the BoE will lend it money if necessary, but only if collateral is posted).”

    Agreed. But the point of my piece (that Tim describes as Flatulent Tosspottery) was that if Banks make loans to AAA to AA- rated governments, the risk weighting is 0% (thanks for the Basel Banking Regulations), meaning that there is actually no limit at all to the amount of assets that they can acquire. Not surprising therefore that Osborne and Cameron were able to find Banks prepared to lend them £625 billion betwen the end of 2009 and the end of 2014. Since they don’t even need any capital to back the loans, it’s a fantastic deal for the banks…
    And yes, I do realize that the banks don’t have to hang on to the bonds they purchase with their non-existent money – they do indeed flog them to pension funds etc.

  36. Fortunately no. In France, just about all mortages are fixed rate over periods extending up to 25 years. You can find the best rates here http://www.meilleurtaux.com/credit-immobilier/barometre-des-taux.html

    I have a mortgage in France, with BNP. They offered me a fixed rate at 2.36% and a variable rate, fixed for 3 years and then adjusted on the basis of the ECB rate, which would have initially given me a lower rate. I took the fixed rate, but they also offered me a variable rate which they couldn’t specify there and then.

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