Ritchie explains investment to us

The difficulty in all this is multifold. First, cash saving is essentially a negative act. In times of low inflation it is a safe act and, with deposit guarantees, broadly secure but it yields next to nothing and, as importantly, does nothing for the economy. Saving in cash effectively takes money out of active use. It is a loan to a bank that then forms part of its capital (it no longer remains your money: it does belong to the bank once deposited and all you own is a loan recorded in a bank statement) but what we now know is that banks do not then lend this money on: all the loans they create are made out of new money created for the purpose. They do not therefore, effectively, need deposits to make loans.

That’s just fascinating, isn’t it? So no bank can ever suffer a run, can never go bust, can never have a mismatch between deposits and loans. It’s a wonder that Northern Rock ever went under actually.

Or, alternatively, Northern Rock did go under because it needed deposits to fund its loan book and couldn’t do so. And thus banks do need deposits and Ritchie is wrong.

Tough one to decide over really, isn’t it?

Gilts are a surprisingly hard to access savings mechanism for the average person

Really? You fill out a form and send off a letter. And payment, of course.

But why are we doing that? This stock market trading is almost entirely about redundant money: almost as useless as cash in its economic impact. When you buy a share it is almost invariably a second hand piece of paper you are acquiring: someone else sold a property right in a company to you and (although many people seem to think otherwise) the company that created the share that has been sold gains or loses not a penny in the process. In the case of many companies it is also many years since they created any new shares: the stock market in shares is now rarely used as a mechanism for raising money for investment, which is a process undertaken almost entirely through corporate bonds, which few smaller investors have any knowledge of, and which are almost entirely institutionally owned. So, the truth is that the stock market, and saving in it, does not produce new investment funds. It is almost as hopeless in this regard as saving in cash.

So, lessee. The stock market is returning the profits being made to investors, rather than raising new cash for investment. This makes the stock market a really bad place for them to stick their money, because all that happens is that they get a share of the profits currently being made.

There might even be a bifurcation of the Trousers of Time where this makes sense but it ain’t this one.

But having made these points let me be clear. What they reveal are three things. The first is the difficulty people have with understanding savings. Very few people have any real understanding of the mechanisms they use to save or what the impact of those mechanisms on the real economy is. This leads to serious errors of judgement, mismatched expectation and to exposure to mis-selling, loss and even fraud.

Quite so, but I think we might want to ponder whose errors of judgement.

Second, most ‘saving’ is unrelated to any investment activity, meaning that little economic gain arises from it.


Third, saving in these largely economically useless ways allocates vast amounts of energy to supporting this activity when in many cases little or no return is actually generated as a result of that activity.

Whose errors?

Last, and perhaps most important, given that the most important reason for saving is, without doubt, to provide for old age, the fact that many of these savings mechanisms cannot actually generate the returns needed to support people in their old age means that in large part they are unsuited for that purpose. There is massive market failure as a result.

That the market isn’t miraculous does not mean that there is market failure. If you save 10% of your income and the market doesn’t let you finance a 20 year retirement on that it’s not a market failure. Maybe you should just have been saving 15% of your income?

And so let’s go back to the China problem. China’s boom was caused by people seeking to save in mechanisms of which they had little understanding with outcomes that were uncertain, risks hard to calculate and a likely mismatch with their real need.

Hahahaha…..snigger. Jeez. China’s savings problem has been caused by China’s financial repression. And if you don’t get that then you’re really no business commenting…..

Then he suggests his Peoples’ Pensions again. And still missing the point that he’s got no equity slice there. Meaning that there’s no risk takers there.


30 thoughts on “Ritchie explains investment to us”

  1. Dear god, he really does seem to think that saving means that all your cash is left in piles in a vault.

    And that the banks allocate vast amounts of energy to doing so (yet don’t directly charge for the privilege).

    Where to begin? Tim, you’re a braver man than I for fisking this nonsense.

  2. I am yet to discover anything of interest in MMT, other than the point banks can lend first and finance later, which doesn’t require a whole new theory and really isn’t the bombshell to mainstream econ some imagine. I mean it only takes a minutes thought to realise that banks aren’t sat there waiting for new deposits to come in before authorising loans.

    But what’s certain is that MMT has spawned legions of fools spouting rubbish like this all over the internet with messianic fervour

  3. Tim

    Credit to you for going through that post – I can recall the late, great Lord Peter Bauer, when interviewed would use a similar style in terms of ‘I have only six points to make (or some other unexpected number) but there the similarity ends. Whilst Bauer’s vision was a work of sheer genius, especially when set in the light of the intellectual climate of the time. What Murphy provides is simply nonsense that I would mark as ‘E’ grade if it were submitted for a GCSE exam.

    ‘Small business saving does, I think, fall into a wholly different category. I am going to ignore it.’

    WTF? So saving to invest in future capacity, upgrade infrastructure, seek out new markets and otherwise build for the future is not worthy of this scion’s attention?

    ‘How would returns be paid? Three ways. First, by way of interest payment: that’s hardly surprising. The government is used to paying interest on its borrowing.’

    So this ‘People’s pension’ is basically an adapted form of GILT? One to be used for a specific purpose, directed by a Unionised bureaucracy paying a certain retired accountant in Norfolk I shouldn’t wonder?

    ‘Second, there would be a real current return on the investment: I think it would be entirely appropriate to designate local funds or sector funds so people could see that the money they were investing was linked to a real economic output. Nothing could make investment more comprehensible than that.’

    WTF? So you invest in a school and become what, a governor? Does the school start paying out dividends? Are they to start churning out products which can be sold on? (nice – Murphy advocates the return of child Labour – back to a traditional Britain with Corby) Can this utterly ignorant thug explain exactly what monetary form a ‘current return’ would take on a hospital or school?

    Third, there is, of course, in the long term a return to be paid as a state backed pension based on contributions. ‘The mechanisms would need refinement, but given that government bonds have for decades underpinned the annuities used by private pension funds such an arrangement is completely normal. The important point to make though is that this pension could be economically justified precisely because the assets underpinning it would still be in use: this is a pension contract that reflects the inter-generational agreement that must underpin such arrangements with real assets.’

    So in a country with a huge pensions deficit, investments which do not yield a monetary dividend (normally) will somehow provide a means of filling the gap. Seriously, how on earth is this guy treated with even a scintilla of credibility?

    The stark truth is, despite the idiotic protestations of dbc reed, this is what the Hard Left’s control of the education system has reduced us to – an intellectual climate where this is seen as either radical or intellectually coherent.

    The last word must go to the ‘Anti-Murphy’ , Lord Bauer whose summary of some Guardian nonsense back in the late 70s could apply with ease to Murphy’s entire output.

    ‘Such ridiculous statements could be multiplied many times over. Their profusion in the so-called ‘quality press’ tells us much about the contemporary intellectual scene.’

  4. Oh dear. Deposits are liabilities of a bank, not capital. Indeed the principal reason why banks are under pressure to raise capital ratios is to protect depositors from loss.

    Tim, strictly speaking banks don’t need deposits. They need funding. Deposits usually form part of a bank’s funding mix, but they don’t have to. They could fund themselves with, for example, covered bonds and wholesale funding.

  5. He wants your pension and savings. He thinks the decisions made by literally millions of UK citizens are wrong and misguided. He alone has seen the true path.

    The man is a megalomaniac. A gigantic, absurd ego riding on the back of a tiny brain.

  6. If I understand the very first paragraph correctly it’s saying that banks don’t make money on savings or need them for funding.
    Yet they run savings accounts and pay interest.
    That seems remarkably generous of them. I didn’t know they were so philanthropic.

  7. @Frances Coppola:

    What exactly do you understand by wholesale funding? I imagine that you could be thinking of interbank lending but these are recorded as deposits by the borrowing institution.

    Amusingly, when I was involved in the eurocurrency depo market, it was normal not to accept short term deposits at short notice from banks for whom one didn’t have a credit limit because of the risk of repaying the deposit before confirmation that it had arrived by reconciling the position with one’s correspondent bank in, say, New York or Frankfurt aM.

  8. it’s incredible – it’s just completely wrong to think of cash being taken out of use. The amount of cash in the economy is equal to reserves + notes and coins. Saving does not take cash out of the economy. You could I suppose say that the expansion of bank balance sheets, which implies increase in both assets (loans) and liabilities (deposits) causes reserves to increase, but of course also causes broad money to increase (but a larger amount) so still utter garbage.

    Every now and then he writes something which really reveals how little he understands.

  9. It’s quite simple:

    Saving money in a bank takes it out of use. But banks can and do create money at the push of a button.


  10. :@MB
    “What exactly do you understand by wholesale funding? I imagine that you could be thinking of interbank lending but these are recorded as deposits by the borrowing institution.”

    Wholesale funding is a general term for short term liabilities that are not created by “retail deposits”, although exactly where you draw the distinction between the two is not clear

  11. bloke (not) in spain

    That bit about “savings mechanisms cannot actually generate the returns needed to support people in their old age ” is nothing to do with market failure. Just investing money in the stock market would easily generate returns t support people in their old age. It’s the slice the pension fund managers take out of them for management fees, reduces pension fund growth.
    Regulatory capture, maybe. Not markets.

  12. “It is a loan to a bank that then forms part of its capital (it no longer remains your money: it does belong to the bank once deposited and all you own is a loan recorded in a bank statement) but what we now know is that banks do not then lend this money on: all the loans they create are made out of new money created for the purpose.”

    Jesus wept. What does he think a banknote or a coin is? All you did when you banked your cash was to exchange a promissory bearer note (or metal token) issued by a bank (usually a central bank) for some value in a (possibly interest bearing) bank account.Just as useful in either form, and probably easier to use in a bank account because of anti-money laundering regulations that can make cash transactions a little tricky.

  13. Murphy – the bastard child of Lewis Carroll and Samuel Taylor Coleridge.

    Without any of the good bits…

  14. Every now and then he writes something which really reveals how little he understands.

    I would suggest that he’s not keeping up to date with his basic CPD (book keeping, even?), but I don’t think that even begins to explain his first paragraph.

    abacab has it with his first comment: “braver man … fisking this nonsense”.

  15. Saving is not wasting money and allowing it to be used (i) later when you need it and/or (usually “and” but not always) (ii) by someone else who does need it now.
    Saving started with keeping back some grain and planting it to get another crop next year.
    Murphy thinks saving is a negative act.
    So he wants us all to go back to being hunter-gatherers, living in caves or sheltering in hollow trees, clad in skins..

  16. Luis

    This is a regular Murphy failing. He keeps banging on about the trillions that disappear into tax havens – and he seems to think that this money just sits there – taken out of circulation. How he believes banks make a return on this basis is beyond me.

  17. @Alex:
    Yup, there’s a slight problem of definition but however you choose to define wholesale funding, I can’t think of a way that the receiving institution could view this as anything other than a deposit.

  18. this excellent history of Northern Rock, which is commonly described as being reliant on wholesale funding, uses term “non-retail” which it calls “a combination of short-term borrowing in the capital markets and securitized notes
    and other longer-term funding sources” and later goes into detail, if you are interested.


  19. @LE

    Thanks. For me short-term borrowing in the capital markets is an oxymoron. Maybe it’s just me.

  20. I thought there was a lot of short-term lending? repos “commercial paper” and what not.

    (I am not sure- this is getting beyond my realms of competency*)

    * now wouldn’t it be nice to see Richie write that once is a whlle

  21. @MB

    They are usually very different from deposits in the form of the legal agreement, although they might both be reported as short/term deposits or similar. If I hold money in an account at a bank, I can instruct the bank to make a payment by debiting my account and crediting someone else’s account, but if I hold a 90 day CD or similar instrument, all I can do is either sell the CD and get the proceeds paid into my account by the purchaser or wait until the CD matures and have the proceeds paid into my account.

  22. @Alex

    Term deposits or accounts with fixed notice periods are sometimes offered to retail customers and these operate in very much the same way as the interbank market though the latter are for a fixed term rather than with a fixed notice period.

    The equivalent of current accounts (where funds are moved in and out) are of course the effective bread and butter of correspondent banking relationships.

    Obviously term deposits are treated differently from money at call and short notice but these are all deposits. I was doing this stuff when the onite swissy rate was negative some decades ago. Nothing new under the sun.

    @DBC Reed

    She surprised me with her intervention which is why I wanted to clarify what exactly she meant but I rather conclude that she may have been making a distinction where in reality none exists.

  23. DBC Reed

    For once I agree. Frances is what Murphy aspires to be – authoritative and usually correct in her interpretation of issues relating to Banking and the money supply in general. Where she differs from him is being unfailingly polite, highly informative and open to rational argument.

    On this occasion I do think the MB’s point was one worth raising, and no doubt if Frances does revisit us she can clarify (She tends to spend her time increasingly on Forbes where her expertise gets a broader audience and I believe she receives proper recompense for her informative discourse)

  24. Bloke not in Cymru

    He seems to have a very odd definition of ownership going by the opening paragraph.
    It sounds like he wants to replace PFI funding with savings/pension money, though he doesn’t seem to consider that funds may be investing in that already. Also the govt still has to collect taxes to pay this investment back just as it does PFI and of course the elephant in the room is current pension deficit.

  25. @ Frances
    I was waiting for someone to say this, but it seems that they are all too young – banks can be wholly funded by shareholders’ capital.

  26. @john77

    When was the last time (if ever) that happened in the UK and was it in your lifetime, old chap?

  27. I always thought that Walter Scott copped out when he did not show the accounts of Isaac the Jew in Ivanhoe. Haul him in front of the Select Committee

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