On the subject of „productive credit creation“

Money creation via debt has consequences, especially when the „level of private debt grows faster than income“ and the financial markets see „an increase in the share of speculative loans in the total volume of credit“. What about the benefits of „productive credit creation“ instead?

By Lars Schall

In order to understand features of the current crisis in financial markets, we should take a look at the most elementary ingredient of those markets: money. Also, let’s take a step back by examing the causes for the financial crisis of 2007/08. The structural phenomenon that will get discussed in this respect is still all around us – and arrives now due to “COVID2020“ at a certain limit.

Some people see it coming, while others are blind to it

Many so-called financial „experts“ were caught on the wrong foot by the outbreak of the financial crisis in 2007/08. Among the contemporaries who were by no means caught on the wrong foot, but quite the opposite: the ones who had predicted the outbreak of the financial crisis before it arrived, are economists and financial analysts who are devoting their attention to the work of Hyman P. Minsky (1919-1996), in particular his theory of crisis, which he had developed during the 1960s and 1970s. The focus is on the relationship between the production and financial sectors and their influence on overall economic development. Minsky created a theory of cyclical economic development that systematically includes cash flows, speculative transactions, investments, banks and financial interrelationships. For Minsky – in contrast to many of his colleagues – money is not neutral, economic cycles are mainly the result of ups and downs in private investment, and hierarchically the financial sector is the primary factor in the capitalist economic system, which according to Minsky (a student of Joseph Schumpeter) is inherently unstable.

Into the category of economists, whose work is explicitly based on the work of Hyman Minky, falls Australian finance scholar Steve Keen. From 2006 onwards, Keen, based on Minky’s crisis thesis, predicted an economic crisis caused by excessive debt as a proportion of gross national income, followed by deflation or, more precisely, debt deflation. That is what actually happened. For his prediction, Keen received the Revere Award for Economics from the Real-World Economics Review.

In an interview for Asia Times Online, Keen explained to me the „causal deterministic function“ behind the whole thing that enabled him to predict the crisis: “(I)t’s the level of private debt growing faster than income.“

Lending in the United States has been irresponsibly managed over time, there is no doubt about that; however, the problem with debt “was endemic in the American system anyway, and if you simply looked at the level of debt to GDP you could see that something very dangerous was going on, the only way you could not see it was by ignoring that particular indicator.“

Even without the irresponsible, often fraudulent lending operations, „the debt crisis is still there inherently because if you go back to 1987 for example, when we had the first stock market crash, the level of debt to GDP back then was already approaching levels of the Great Depression.“ This level was exceeded in 1995/96 and has continued to rise since then.

Steve Keen: So any time in the last 15 years, we could have said, “hang on, this level of debt’s too high, we have to stop this behaviour at this point now.“ Even if we’d done it back then, we still would have had a mini-depression; the only difference is this crisis is far worse. Now, it is not so easy to rob a factory, you know, things can fall off the back of a truck so to speak, but it’s much, much easier to police that and much, much harder to make large amounts of money out of theft of commodities. The theft of money is very easy, and of course banks are put in a position of judiciary responsibility towards the rest of society when they’re given the capacity to create debt and therefore create money and that requires them to behave in the most responsible of fashions, but of course the way society develops over time, the most reckless of people get allowed to run banks and of course fraudulent behaviour is only a step away from that particular opportunity.

So it then means that what happens ends up being worse than what I’d predict in my models, because on top of irresponsible behaviour you get fraudulent behaviour and money that’s supposed to be there is not there; financial assets that are supposed to be backed by real assets aren’t backed by those assets; multiple ownership claims exist; outright stealing occurs; and that of course means that the shock that the system feels is far worse and of course it’s allowed to continue because we don’t actually prosecute that behaviour.

LS: But it is deepening the crisis, that the criminal aspect of it isn’t punished.

SK: That’s right, if some of these people spent their entire life behind bars rather than on the Cayman Islands, then we might finally get a strong barrier to this sort of behaviour, at least for a while, because that experience gets seeded into the minds of others who might consider indulging in a career of fraud later. But if you actually reward them by rescuing them as we’re beginning to do right now and punish the people who were innocent bystanders in the whole crisis thing, the people who are, you know, on public pensions or low paid jobs, depending upon state welfare, if they are in Greece and so on, you’re rewarding fraudulent behaviour. You’re being told being honest and being poor is not sensible, be dishonest and rich; that’s the last message we want to send to society, but that’s the one we are sending right now.

When confronted with the popular view that no one could have seen the financial crisis of 2007/08 coming, Keen said: “The ‚No one could have seen this coming‘ mantra is almost the exact opposite of the truth: the only way that one could fail to see this crisis coming was to be seriously misled by a naive view of how banks operate. Unfortunately economic theory is dominated by precisely such a naive view, which led those who believe that theory to a denial of reality as profound as that of those who pretended they could see clothing on The Naked Emperor. Politicians who repeat this mantra help economics hide from its own weaknesses, when what we need is a revolution in economic theory and an overthrow of the bank-dominated politics of today.“

As the “most important thing“ about capitalism, “which most economists do not understand,“ Keen emphasized in conclusion the fact “that banks are not merely passive warehouses for storing money, but actively produce money, and can destabilize capitalism if they do this badly – which, left to their own devices, they always do.“ (1)

The hypothesis of financial instability

A scholar, who would certainly not have been surprised by the financial crisis of 2007/08, if he had lived to see it, was Hyman Minsky. He predicted such events as a regular feature of the financial system: That financial instability and financial crises are realities of economic life, was one of his convictions. Reason enough to take a closer look at what Minsky called the „hypothesis of financial instability“.

This theory is often summed up in three words: „Stability is Destabilizing.“ In more detail, Minsky’s insight is: “Stability – or tranquillity – in a world with a cyclical past and capitalist financial institutions is destabilising.” He assumed “that capitalism is inherently flawed, being prone to booms, crises, and depressions. This instability, in my view, is due to char­acteristics the financial system must possess if it is to be consistent with full-blown capitalism. Such a financial system will be capable of both generating signals that induce an accelerating desire to in­vest and of financing that accelerating investment.” (2)

As Steve Keen notes: “That’s a strong statement: capitalism is inherently flawed, and this is because of characteristics the financial system must have: the causes of instability are not an ‘optional extra’ that careful regulation or institutional design might eliminate.“ (3)

From a paper that Hyman Minsky published in Challenge magazine in 1977, we can infer the basic idea behind the concept of “financial instability“.

In his paper, Minsky puts us more or less inside the executive branches of corporations. He then argues that “(t)he natural starting place for analyzing the relationship between debt and income is to take an economy with a cyclical past that is now doing well.“ The debt that exists in this scenario “reflects the history of the economy, which includes a period in the not too distant past in which the economy did not do well. Acceptable liability structures are based upon some margin of safety so that expected cash flows, even in periods when the economy is not doing well, will cover contractual debt payments.“

But now that the economy is doing well and this phase is lasting longer, „two things become evident in board rooms. Existing debts are easily validated and units that were heavily indebted prospered; it paid off to lever.“ This leads to the conclusion that the “margins of safety built into the debt structures“ can be reduced – in any case, “over a period in which the economy does well, views about acceptable debt structure change.“ At the same time, “the acceptable amount of debt to use in financing various types of activity and positions“ is increasing in transactions between banks, investment bankers and businessmen. “This increase in the weight of debt financing raises the market price of capital-assets and increases investment. As this continues the economy is transformed into a boom economy.“

However, stable growth is incompatible with the way “in which investment is determined in an economy in which debt-financed ownership of capital-assets exists and in which the extent to which such debt-financing can be carried is determined by the market. It follows that the fundamental instability of the capitalist economy is upward. The tendency to transform doing well into a speculative investment boom is the basic instability in a capitalist economy.“

Minsky considers innovations in financial practices as “a feature of our economy“, particularly “when things go well“, and new institutions and instruments are developed. In the field of “new instruments“, Minsky mentioned negotiable Certificates of Deposit as an example at the time. “(E)ach new instrument and expanded use of old instruments increases the amount of financing that is available and that can be used to financing activity and taking positions in inherited assets.“ This results in an increase in the price of financial assets compared to the current production output prices – and this, in turn, “leads to increases in investments.“

Here Minsky sets forth: “The quantity of relevant money, in an economy in which money conforms to (John Maynard) Keynes‘ definition, is endogenously determined. The money of standard theory – be it the reserve base, demand deposits and currency, or a concept that includes time and savings deposits – does not catch the monetary phenomena that are relevant to the behavior of our economy.“

Minsky makes a distinction between hedge finance transactions and financial speculation: “Hedge finance takes place when the cash flows from operations are expected to be large enough to meet the payment commitments on debt. Speculative finance takes place when the cash flows from operations are not expected to be large enough to meet payment commitments, even though the present value of expected cash receipts is greater than the present value of payment commitments. Speculative units expect to fulfill obligations by raising funds by new debts. By this definition, a ‚bank‘ with demand and short-term deposits normally engages in speculative finance.“ In the time period when the economy is doing well, “private debts and speculative financial practices are validated.“ And this is where the difference between hedge finance transactions and financial speculation comes into play, because while “units that engage in hedge finance depend only upon the normal functioning of factor and product markets, units which engage in speculative finance also depend upon the normal functioning of financial markets. In particular, speculative units must continuously refinance their positions. Higher interest rates will raise their costs of money even if the returns on assets may not increase.“ As long as hedge financial transactions are dominating the scenery, “a money supply rule may be a valid guide to policy“; however, “such a rule loses its validity as the proportion of speculative finance increases. The Federal Reserve must pay more attention to credit market conditions whenever the importance of speculative financing increases, for the continued workability of units that engage in speculative finance depends upon interest rates remaining within rather narrow bounds.“

The units engaged in speculative finance show weak spots on “three fronts“, namely: “First, they must meet the market as they refinance debt. A rise in interest rates can cause their cash payment obligations relative to cash receipts to rise. Second, as their assets are of longer term than their liabilities, a rise in both long- and short-term interest rates will lead to a greater fall in the market value of their assets than that of their liabilities. The market value of their assets can become smaller than the value of their debts. The third front of vulnerability is that the views as to acceptable liability structures are subjective, and a shortfall of cash receipts relative to cash payment commitments anywhere in the economy can lead to quick and wide revaluations of desired and acceptable financial structures.“

If things go well, “experimentation with extending debt structures can go on for years“, gradually testing “the limits of the market“; if things go wrong, “the reevalution of acceptable debt structures … can be quite sudden and quick.“

Minsky makes a further distinction between hedge and speculative finance on the one hand, and the method of Ponzi finance (resp. snowball system finance) on the other. Ponzi finance represents “a situation in which cash payments commitments on debt are met by increasing the amount of debt outstanding. High and rising interest rates can force hedge financing units into speculative financing and speculative financing units into Ponzi financing.“

Yet, units that persue pyramid schemes are not able to “carry on too long.“ If the financial vulnerability of some units becomes public, this will have consequences regarding “the willingness of bankers and businessmen to debt finance a wide variety of organizations. Unless offset by government spending, the decline in investment that follows from a reluctance to finance leads to a decline in profits and in the ability to sustain debt. Quite suddenly a panic can develop as pressure to lower debt ratios increases.

What we have in the financial instability hypothesis is a theory of how a capitalist economy endogenously generates a financial structure which is susceptible to financial crises and how the normal functioning of financial markets in the resulting boom economy will trigger a financial crisis.“ (4)

Money – where does it come from and where does it go to?

So much for the hypothesis of financial instability according to Hyman Minsky.

Recent studies undertaken by German economist Richard Werner also show that numerous crises on the financial markets have indeed been preceded by “an increase in the share of speculative loans in the total volume of credit“. (5)

The creation of money by commercial banks through lending, which is often directed into speculative transactions, “has enormous practical relevance“ when it comes to economic theories. as was made clear in a scientific paper written by Michael Kumhof (Bank of England) and Zoltan Jakab (International Monetary Fund): “When bank money creation is fed into a model of the economy, the result is much greater fluctuations in lending, which have a much greater effect on the economy than when the intermediation hypothesis or the loanable funds theory is used, they show. According to them, the inability of central banks and others to foresee and prevent the financial crisis was also due to their misunderstanding of the monetary system.“ (6)

The wheat gets ultimately separated from the chaff when it comes to the question of the purposes for which the loans that lead to the growth in money supply are granted. There are essentially three types of credit creation: First, those loans “which are used for productive investment (‚productive credit creation‘). They contribute to inflation-free economic growth. Secondly, there are credits that are used for consumption expenditure (‚consumer credit creation‘). They foster inflation, but not real economic growth. And finally, credits outside the goods economy are used for transactions on asset and real estate markets (’speculative credit creation‘). They contribute to speculative bubbles in asset markets.“ (7)

The reasonable idea behind „productive credit creation“ is the following basic insight: “Investment loans to companies are the best loans. The granting of credit creates demand and puts more money into circulation. At the same time, the investments financed with it ensure that more goods can be produced in the future. So there doesn’t need to be inflation of either consumer prices or assets.“ (8) Or put another way: “This kind of credit sows a seed from whose harvest it can be repaid with interest. In this sense, however, only expenditure on the expansion of production capacities, i.e. expenditure on machinery and farm buildings, and in a broader sense also the pre-financing of wages, leases and other production costs are counted as investment. … If the entrepreneur resp. the company makes a profit with the new or expanded production, they can also repay the loan with interest.“ (9)

For arguments in favour of guiding money creation to benefit productive purposes, see this transcript of a lecture given by Richard Werner, “Shifting from Central Planning to a Decentralised Economy: Do we Need Central Banks?“ (German translation here.) In it, Werner refutes, for example, on the basis of his own empirical research, the notion that private commercial banks are pure financial intermediaries; by virtue of lending they are instead creators of new money and thus contribute significantly to the money supply in circulation.

The absolute majority of the money we use is in fact created out of nothing by private commercial banks via debt and used for non-productive purposes.

In essence, the process amounts to commercial banks using a credit creation system in which money is placed in ledgers when banks extend credit. In return for a loan, the borrower gives the bank a promissory note; the promissory note is a bank asset, while the account balance given to the borrower is a bank liability. And these bank balances make up the majority of the money we use. (10)

The creation of money through debt depends essentially on abundant energy sources (especially deriving from crude oil), which allow for industrial-style economic activity. Without energy, money and what is possible with it becomes worthless or impossible, because: „the money and the oil both represent the same thing: the ability to do work. Both are useless if there is nothing to buy, drive or eat. And yet our economic system, what we call capitalism but which is really something else, is predicated on debt, fractional reserve banking, derivative financing, and fiat currency. Therefore it requires that there must be limitless growth into infinity for it to survive. Growth is not possible without energy.“ (11)

This is the case, even though a small correction is needed nevertheless: banks do not (as is often assumed) resort to the fractional reserve banking system to create money through lending; it is rather an ex-nihilo process. (12)

Marshall Auerback, a research associate at the Levy Institute in the United States, explains: “Bank loans create deposits and are made without reference to the reserve positions of the banks. The bank then ensures its reserve positions are legally compliant as a separate process knowing that it can always get the reserves from the central bank.” (13)

The deposits, which are created through loans without being dependent on bank reserves, correspond to newly created money. In quantitative terms, this money represents the largest part of the total amount of money in circulation. The state creates the rest of the money that we use, in a similar way to commercial banks, except that the creditor here is the state itself. In the case of the United States, the Treasury issues bonds, which are ultimately on the asset side of the Federal Reserve balance sheet, while reserves and cash enter the economy as Fed liabilities (through the 12 regional Federal Reserve banks, which are semi-private entities). (14) Instead of issuing debt securities separately, the government could basically also issue the money directly (insofar as both are equally liabilities). The acceptance of this money – which is (unlike gold bullion) subject to counterparty risk (15) – rests on the elementary power of the state to levy taxes. The currency of a nation is based upon the willingness of the state to accept the currency it issues for the payment of taxes; this step makes the currency a legal tender and creates a direct demand from the outset, as the citizens need the currency in order to pay their taxes. The use of this money is not optional, it is by force.

The unproductive use of money

Unfortunately. „productive credit creation“ is largely neglected. Instead, priority is given to “the unproductive use of money to buy securities (especially stocks and shares), real estate and other assets“ – which is the core of what happened in the U.S. until 2007. „Overall, real estate prices in the US more than doubled between 1993 and 2007, while the general price level in the US increased by less than 50 percent over the same period. The M2 money supply also more than doubled during this period. Mortgage lending growth was even much stronger among commercial banks. These quadrupled between 1993 and 2007 and increasingly became a major source of income for the banks. However, the real estate bubble was not made possible simply by an increase in traditional mortgage loans, which then led to corresponding money creation. Innovations were added, which enabled a significant and systematic expansion of lending to borrowers with low credit ratings (sub-prime loans) and once again significantly boosted demand for real estate.“ (16)

For the banks, this meant excellent business: “The money creation process is normally a very lucrative operation, as a lot of money (interest) can be earned with little effort (money creation from nothing). This explains in part why the financial sector, and banks in particular, are so economically successful, even though they do not produce anything that can be used directly. If a large part of the newly created money now flows into the financial markets or the real estate market, the financial sector benefits once again, because the corresponding transactions are usually also handled by banks and commissions are incurred accordingly. (17)

Alan Greenspan’s nearly 20-year term as chairman of the Federal Reserve, which began on 11 August 1987 and ended on 31 January 2006, can be summarised as a period of increasing exploitation of the debt options available to changing U.S. administrations for the sake of short-term success and returns. The crisis of 2007/08, which Greenspan helped engineer on the Fed board, was only the culmination of ever-increasing amounts of credit – to the point where the financial system was on the verge of collapse. Too much credit was haunting the economy in terms of real growth. This has not changed, quite the contrary: it is only thanks to a new flood of “cheap money“, accompanied by an unprecedented policy of low interest rates and a series of market interventions, and further indebtedness of US consumers for private consumption, that the crash of the system has been averted so far.

In any case, the consumption-driven U.S. economy continued to be driven more by credit than by a rise in income. While average incomes in the United States rose by around 4 percent between the bankruptcy of Lehman Brothers and 2015, loans taken out for consumption increased by a whopping 28 percent. Moreover, U.S. stock companies took advantage of the phase of “cheap money“ in the United States mainly to buy back their own shares with funds borrowed at low interet rates, so that the share price and profitability increased. (see, for example, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here). Of course, this boosting of their share prices beyond outside investor demand had effects on the overall appearance of the stock market.

One function of Wall Street is the process known as Initial Public Offerings or IPOs: promising new companies are brought to market so that „the U.S. remains competitive in new industries and good jobs and innovation“. But this function of a “locomotive for new business launches“ is more myth than reality, as Ron Chernow made clear as early as 2001. Writing in the New York Times at the time, he analyzed how the Nasdaq stock market, the primary market in the U.S. for tech startups, had served the country. Chernow wrote: “Concern has centered on the misery of small investors maimed in the tech wreckage. But what happened to all the money they squandered in the I.P.O.’s? Think of the stock market in recent years as a lunatic control tower that directed most incoming planes to a bustling, congested airport known as the New Economy while another, depressed airport, the Old Economy, stagnated with empty runways. The market has functioned as a vast, erratic mechanism for misallocating capital across America.” (18)

The serial production of bubbles – like the dotcom haunt with its IPO fever – through the unproductive use of money was emphasised by U.S. economist Guido Preparata, when I asked him during an interview for Asia Times Online: “The financial crisis of 2008-09 is said by many to have its origins in the sub-prime mortgage crisis in the United States. What is your opinion?“

Guido Preparata: Not at all. The subprime lever was, locally, just the magnifying device that triggered a collapse that was logically in the making ever since this last bubble was visibly and massively inflated, that is, in the spring of 2002. … Ever since the Neo-Liberal swerve of 1979-1981 under the chairmanship of Paul Volcker at the Fed, the US empire, which had been at a near loss for nearly a decade to find a proper replacement for its postwar shattered gold-scheme, shifted gears and switched to the current purposeful procedure of inflating speculative bubbles. The one that popped in 9/2008 is, in historical succession, the third of such engineered financial expansions / implosions.

The logic behind them is always the same. The first speculative swell covered the quinquennium of 1982-1987, marking the beginning of an era, Yuppyism: sparked under Reagan, it was eventually daisy-chained to Alan Greenspan’s great dot-com bubble of 1994-2001. This last, too, a defining epoch, which is still conditioning us, rose to feature the sublime absurdity of the IPO of the internet company, i.e. the booster fire-sale of virtual outfits, such as Google, and now, the even more preposterously inconsistent and moronic Facebook — “things” devoid of any economic tangibility. By the time the dot-com was losing steam in March 2001, not to lose momentum, the financial markets began pumping real estate, which, as a proximate, diffusive effect of the dot-com bubble, had already begun to overheat. There followed another mini-cycle of 5 years, driven in part by the subprime sellout, and, then, crash.

Why all this? In the past — that is, up to 1968-1971— the US was able to pay for its budget and military expenditures (the cost of imperium) by foisting on its trading partners, who eventually lost their appetite to accumulate them, reams of dollars. The dollar was (and still is) the world’s reserve currency, but Bretton Wood’s gold redemption clause was eventually broken by America’s loss of manufacturing competiveness. Thereafter, in order to preserve America’s capacity to pay for empire by printing dollars, Nixon set out systematically to browbeat industrial rivals with the joint threat of devaluations, protectionism, and price wars. The vicissitudes of the seventies chronicled the tortuous, thorny sup-optimality of such a progression, whose unmanageability under Carter became such that, as said, at the turn of the new decade, the system was entirely overhauled: de facto, America came to dismantle once and for all its once-glorious manufacturing system, all the while converting itself into a full-fledged service economy, turbo-driven by finance.

It was a masterstroke: the (affordable) industriousness of the Far East came to pick up the manufacturing slack, while the serial bubbles proceeded to attract world capitals to Wall Street, procuring thereby the extra resources needed for diffuse imperial administration. This has been recognized: Germany and China, for instance, owe their exporting success to their privileged access to, and partnership with, the US, for which, on the other hand, they pay handsomely by investing in US securities, wherewith, in turn, the US feeds, among other things, its military bases all over the world (including Germany, and all around China, of course). It’s fantastic. (19)

What we have witnessed in recent years has been the successful attempt by central and commercial banks to persue the renewed boosting of asset markets. This has meant that the level of debt in the economy has not been reduced. They postponed any solution to the problem, bought time and expanded the height of the ultimate fall. No more, no less. And now, due to “COVID2020“, the fourth and biggest bubble in that particular series of deliberate asset price inflation has to pop. The system reaches its limits. Fasten your seatbelts, our next stop: Great Depression 2.0.


(1) Compare Lars Schall: “Who saw the economic crisis coming and why?”, published by Asia Times Online on March 8, 2013 under: http://www.atimes.com/atimes/Global_Economy/GECON04-080313.html.

(2) Steve Keen: “Instability may not be optional”, published by Business Spectator on April 23, 2013 under: https://www.theaustralian.com.au/business/business-spectator/news-story/instability-may-not-be-optional/647a296a9df23d46680b5c26e20c4a19.

(3) Ibid.

(4) Hyman Minsky: “The Financial Instability Hypothesis: An Interpretation of Keynes and an Alternative to ’Standard’ Theory”, in “Challenge“, March-April 1977, pp. 20-27.

(5) Compare Gerald Braunberger: „Spekulationskredite sind das Grundübel“, published by Frankfurter Allgemeine Zeitung on November 25, 2009 under: http://www.faz.net/aktuell/finanzen/aktien/hedge-fonds-spekulationskredite-sind-das-grunduebel1881698.html.

(6) Norbert Häring: „Gestern gaga, heute Mainstream: Geldschöpfung aus dem Nichts“, published at Norbert Häring – Geld & Mehr on May 25, 2015 under: http://norberthaering.de/de/27-german/news/377-geld-aus-dem-nichts#weiterlesen. Häring refers to “Working Paper No. 529” by the Bank of England: “Banks are not intermediaries of loanable funds – and why this matters”.

(7) Gerald Braunberger: „Spekulationskredite sind das Grundübel“, lit.cit.

(8) Norbert Häring: „Kreditlenkung wird bei Zentralbankern hoffähig – langsam“, published at Norbert Häring – Geld & Mehr on April 18, 2015 under: http://norberthaering.de/de/27german/news/347-likkanen#weiterlesen.

(9) Norbert Häring: „Zinsen kann nur zahlen, wer Kredite produktiv verwendet“, veröffentlicht auf Norbert Häring – Geld & Mehr on May 16, 2014 under: http://norberthaering.de/de/27german/news/87-zinsen-kann-nur-zahlen-wer-kredite-produktiv-verwendet#weiterlesen.

(10) On the topic of money creation through commercial banks see also Lars Schall: “Money lies disquise banking truths“, Interview with Norbert Häring, published at LarsSchall.com on April 17, 2013 under: https://www.larsschall.com/2013/04/17/money-lies-disguise-banking-truths/. Incidentally, it is difficult to define what money actually is, as even researchers of the Federal Reserve in the USA admitted when they stated in 1990 that regarding all final applications there was still no definitive answer to the question: “What is money?“ See Richard A. Werner: „New Paradigm in Macroeconomics – Solving the Riddle of Japanese Macroeconomic Performance“, Pelgrave Macmillan, New York, 2005, page 132. Werner refers to Michael T. Belongia and James A. Chalfant.

(11) Michael C. Ruppert: “Crossing the Rubicon – The Decline of the American Empire at the End of the Age of Oil“, New Society Publishers, Gabriola Island, 2004, page 19.

(12) Compare Richard A. Werner: “Can banks individually create money out of nothing? – The Theories and the empirical evidence”, International Review of Financial Analysis, Volume 36, December 2014, pp. 1-19, online under: https://www.sciencedirect.com/science/article/pii/S1057521914001070, “How do banks create money, and why can other firms not do the same? An explanation for the coexistence of lending and deposit-taking”, International Review of Financial Analysis, Volume 36, December 2014, pp. 71-77, online under: https://www.sciencedirect.com/science/article/pii/S1057521914001434, “A lost century in economics: Three theories of banking and the conclusive evidence”, International Review of Financial Analysis, Volume 46, July 2016, pp. 361-379, online under: https://www.sciencedirect.com/science/article/pii/S1057521915001477.

(13) Compare Pauline Skypala: “Pre-school lessons for bankers“, published by Financial Times on January 20, 2013 under: https://www.ft.com/content/29fe03a0-5f41-11e2-be51-00144feab49a.
(14) Regarding the question, how the money portion of the state gets into thze economy, see “How Currency Gets into Circulation“, published by Federal Reserve Bank of New York under: https://www.newyorkfed.org/aboutthefed/fedpoint/fed01.html.

(15) In fact, every financial asset is subject to counterparty risk – with one single exception: physical gold bullion. See on this topic James Turk: “What Did J.P. Morgan Mean?“, published at Goldmoney on August 17, 2016 under: https://www.goldmoney.com/research/goldmoney-insights/what-did-jp-morgan-mean.

A while ago I talked with gold analyst Jan Nieuwenhuijs (resp. Koos Jansen, KJ) about the topic:

LS: … The Germans intend to leave roughly half of their gold position in New York and London. This is now the official position of the Bundesbank that they want to leave it there so they are able to react to a real currency crisis if that happens. Do you have to have the gold in London and in New York for such a purpose?

KJ: I would say no. I mean, if there would be a currency crisis, people would rush to gold and your gold would become more valuable and you would like to have it at home, not in England or New York. Only if there was a crisis and you want to sell gold, you would like to have gold in London, but how I look at it, I think it’s better with economic turmoil up ahead to have your gold at home than in England.

LS: Yes, and the IMF says that gold, monetary gold, physical bullion gold is the only financial asset with no counterpart risk.

KJ: Yes, with no counterparty risk. This was stated in the balance payments manual number six.Yeah, yeah. I think those things are really significant and, you know…

LS: Yes, but in order to be such a financial asset, you really need to have it in your own possession, on your own soil, right?

KJ: Right. You’re absolutely right. If you talk about gold and gold is the only asset with no counterparty risk, you’d need it at home, and of course it does have a counterparty risk if it’s in London or in New York. It’s as simple as that. Yeah, you’re right.

(16) Mathias Binswanger: „Geld aus dem Nichts: Wie Banken Wachstum ermöglichen und Krisen verursachen“, Wiley, Weinheim, 2015, page 214.

(17) Compare Lars Schall: „Die Geldschöpfung aus dem Nichts ist nicht neutral“, Interview with Mathias Binswanger, published at LarsSchall.com on September 1, 2015 under: http://www.larsschall.com/2015/09/01/die-geldschoepfung-aus-dem-nichts-ist-nicht-neutral/

(18) See Pam Martens / Russ Martens: “Evidence Grows Showing Wall Street as a Negative Economic Force”, published at Wall Street on Parade on January 27, 2015 under: https://wallstreetonparade.com/2015/01/evidence-grows-showing-wall-street-as-a-negative-economic-force/.

(19) Lars Schall: “The Business As Usual Behind The Slaughter“, Interview with Guido Preparata, published by Asia Times Online on June 10, 2012 under: http://www.atimes.com/atimes/Global_Economy/NF30Dj03.html. For an analysis / synthesis that outlines how the U.S. actually manages empire financially (70 years of intl political economy consistently explained using just one variable: the Balance of Payments), see furthermore Guido Giacomo Preparata / Domenico D’Amico: “The Political Economy of Hyper-Modernity – A Tale of America’s Hegemonic Exigencies Recounted Through the Undulations of the US Balance of Payments (1946–2015)“. in Guido Giacomo Preparata (Edit.): “New Directions for Catholic Social and Political Research – Humanity vs. Hyper-Modernity“, Palgrave Macmillan, New York City, 2016, pp. 255-301.

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