Your savings sitting in a bank deposit simply give the bank cheap capital.
That’s just so appallingly wrong that I cannot bring myself to believe that even Spud thinks that is right. But he does appear to believe it.
Deposits are capital? It’s just so insane….
What’s worse is that I grasp how he got here.
This is about how banks create money and the banking system explained honestly. When a bank makes a loan, it doesn’t lend your deposits — it creates new money from nothing. Your savings sitting in a bank deposit simply give the bank cheap capital. They don’t fund wages, they don’t fund taxation, and they certainly don’t fund productive investment in the UK economy. The same applies to the stock market — well over 99% of share transactions are secondhand shares, meaning your money in stocks and pension funds investment doesn’t reach companies either.
This matters because savings vs investment is the key question for UK economic growth. We spend £80 billion a year of public money subsidising saving when we should be subsidising productive investment. Understanding how money works, how banks work, and why fractional reserve banking means your deposits are actually at risk is essential financial education. If we shifted incentives from dead money to real investment, we could build a fairer, more productive economy.
He wants to be able to insist that all of that – shares, the markets, deposits, the banking system – is just dead money. At which point he’s got a cunning plan about how to use all of it better. But, for th cunning plan to be valid he’s got to show it’s all dead money.
To insist that it’s all dead money he says that deposits are capital – which they aren’t, they’re the financing for the loans made. Further, all that second hand shares stuff means shares don’t aid anything. But you eat the capital in your savings in your pension. So, it must be possible to sell your assets to another investor so that you can eat your capital. Which means a constant flow of second hand paper into the market – to be bought by those beginning to save for their pensions. The stock of investment turns over in the generations as the young start to save and the old eat their savings.
New investment is only ever the excess of new savings over old ones being cashed in. Spud’s thinking that it’s the entire stock.
Sigh.
Isn’t there also a churn from high-risk to low-risk investors?
Private Equity invests in hopefully growing company; once it gets big enough to float, PE flogs the shares to a pension fund – and then reinvests that cash in another smaller business.
So even the churn indirectly funds investment.
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Perhaps he believes Harry Potter is real? His view of it looks very much like Gringott’s Bank with hoards of gold doubloons sitting in vaults.
I call it the McDuck fallacy:
Does he believe it? Who knows. If he doesn’t at least pretend to believe it then the magic trick doesn’t work. No fat controller and no stealing people’s money.
It’s a front for his aim of grabbing power and money, what we could maybe call Project Heil Murphy.
He believed it when he wrote it…His statements are creatures of the current objects of his hatred and anger, and those objects vary.
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This means the only useful trade in 2nd hand shares is buybacks, and this must be the only form of trade allowed by taxing normal share trades. So shares are destroyed, they aren’t much use in existence anyway, and eventually the number in circulation reduces to 1, which then vanishes in a big puff of mind sewage.
Isn’t is amazing. The government doesn’t use tax money to pay for its costs (sorry, investments), it creates it every time it spends it. And banks, they don’t use your deposits to make loans, they create money too. And yet, whenever I see someone, let’s say Polly Toynbee or Zac Boob-Hypnotiser, writing that we need more taxes to pay for government investment, I applaud like a performing seal.
It’s the accountancy language that confuses even accountants here. If you swap the term “deposit” for “credit line” then this whole system makes intuitive sense. We’re all just swapping IOUs until someone actually needs to be paid back in cash. You give the bank some pound notes and they give you a credit line for the same amount. There is no “deposit” and no one is using “your” money for anything else… you swapped it for a credit line. The bank needs to keep reserves based on its liabilities… limiting how many credit lines can be issued. There is no “money creation” required in this model either removing another thing that sounds like something it’s not.
“This is about how banks create money and the banking system explained honestly. When a bank makes a loan, it doesn’t lend your deposits — it creates new money from nothing.”
Sheesh! How many times?!
‘Money’ is a credible, legally-enforceable promise to hand over stuff of real value at a future date. When you go to the bank for a loan, you make a promise to repay it. You sign a mortgage contract promising to pay £x cash per month for so many months. Signing it turns the contract into money, and it goes to sit in the bank’s vault, in exchange for them giving you money you can spend right now. The bank is net neutral on the transaction. They pay you more or less the same amount of money that you give them. It is you, the borrower, who makes new money up out of nothing, by making a promise to repay the loan.
Banks are all about trading liquidity – which is the property of money that it can be spent right now. And this is what banks need deposits for. Depositors deposit liquid money (like cash). Borrowers exchange illiquid money (loan contracts) for liquid money obtained from the deposits (e.g. cash, or immediately-spendable credit in your account). The bank needs deposits not because it needs money (in the sense of financial value) to loan, but because it needs liquid money to loan.
Fractional reserve banking works because only a fraction of the money in circulation is actually moving at any given time. Only the money which is moving needs to move. Only the money which is being spent right now needs to be the sort of money that can be spent right now. So we can shuffle this pool of liquid money around to cover the transactions that are taking place, and all the rest of the money just sits there, doing nothing.
The problem with a run on the bank is that while the bank has enough money to cover all its customers deposits, it’s mostly in the form of loan contracts where someone has promised to pay £x/month for the next 20 years. It’s genuinely worth £240x. The problem is, you won’t be able to spend it for 20 years. So if there’s a run on the bank, the bank has to sell its vault full of loan contracts to another bank that has liquid money. But if it has to do so in a rush, it will pay a premium. The other banks is going to give them £0.80 liquid money for every £1 of illiquid loan contracts. The difference is what sends the bank bankrupt.
The reason you can’t seize the ‘dead money’ sat in a bank is that it is illiquid. You can’t spend it. The liquid money is constantly busy participating in transactions, is not dead, and the machinery of trade would grind to a halt if you remove its lubricating oil.
The government, like everyone else, can ‘make money’ as easily as it can make credible promises to repay it with something real later. The amount you can borrow is limited only by your credibility, record of honesty, and demonstrable ability to repay. The problem with all these schemes is that they transparently have no intention of ever repaying it. Thus, it isn’t money, and isn’t worth anything.
Spud’s a moron – film at eleven.
A little more care in differentiating your comments from quotations from Chairman Spud would be helpful, Timmy
To the man in the street, or in Ely or wherever, ready cash is often known as working capital. In the better days gone by when the economy was mostly cash, I used to tell my clients that if you own a shop, before you could sell anything you needed change in the till. Even real economists use capital in this sense sometimes.
A quick google of Barclays situation in the UK suggests they have customer deposits of c. £585bn and a ‘liquidity pool’ of highly accessible assets to cover calls on those deposits of c. £63bn. If all deposits are just sat there doing nothing, then the deposits column and the liquidity pool column would be largely equal. Where does Spud think the rest of the money went?
He should probabaly read a ladybird accountancy book
Assets – Liabilities = Capital
A deposit is a matched pair Asset (the dosh) and Liabilty (owing the dosh). No Capital there.