Economic Reform Australia

Vol. 3 No. 53 May - June 2011 ERA Newsletter 1

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Economic Reform Australia

For a just and sustainable society.

ERA NEWSLETTER ISSN 1324-5929

Vol. 3 No. 53 May - June 2011

IN THIS ISSUE Page

D. Phelps The Worship of Economic Growth 3-5

G. Jukes A plea for brevity in understanding Economics 5

J. Hermann Do banks lend out their depositors funds? 6-13

D. Dorney Debt Sinks Revisited 13-14

ERA Media Release Nuclear energy fails the cost effective test 15

L. Manning & R Manji A New Financial Deal for Christchurch 16-17

D. Keane Recent Australian Economic Trends 18-20

W. Mitchell Limits of public assistance 21-22

C. Hamilton Tackle Big Coal at your own risk 22-24

J. Coulter The cost of nuclear generated electricity 24

D. Elliot Fukushima Fallout 25-27

R. Buckley Resilience and global financial governance 28-32

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Disclaimer: The views expressed in these articles are the sole responsibility of their authors and do not necessarily reflect those of Economic Reform Australia.

Editor Co-Editor

Peter Lock, 4/20 Everard Street, Frances Milne, 14 Gallimore Av.

Largs Bay SA 5016. Balmain NSW 2041.

Phone-Fax 08 - 8242 0566 Phone-Fax 02 - 9810 7812

Email Email

ECONOMIC REFORM AUSTRALIA

ERA is a non-party-political organization, formed in 1993 as a union of the Economics Review Association and other economic reform groups. Its long-term goal is to achieve a socially, environ-mentally and financially sustainable economic system. ERA’s commitment to economic sovereignty seeks to return control of the economic and financial system to the people. This requires full public scrutiny and accountability for all economic processes and a recognition that economic systems must serve the people for the global good.

Membership of ERA is open to all who agree with its objectives and overall philosophy, and may be effected by sending A$20.00 per annum to the Treasurer (address below), together with address, telephone and fax numbers, and email address. It would be appreciated if new members would calculate the part of the year remaining and remit the appropriate pro-rata amount, or alternatively pay for the following year as well. All members are entitled to receive the regular 32-page ERA newsletter, and are entitled to vote at monthly meetings and participate in organized activities.

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ERA Patrons : Professor Stuart Rees, Professor Frank Stilwell, Professor Michael Pusey, Associate Professor Evan Jones, Associate Professor Steve Keen, Professor David Shearman, Dr. Ted Trainer, Dr. Shann Turnbull.

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ERA (NSW DIVISION) Inc.

We are committed to maintaining our links and meet twice a year. All Meetings are normally held at 14 Gallimore Avenue, Balmain 2041. Details : Frances or Bruce Milne Ph. 9810 7812

ERA (SA DIVISION) INC.

Meetings are held on the last Saturday of the month at the Conservation Council Centre, Level 1, 157 Franklin Street Adelaide. Meetings start at 2pm with the policy recommendation forum before official business begins. Details - John Hermann Ph. 8264 4282

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ERA Web Site Home Page:

EMAILnetwork editor: Dr John Hermann:

Postal address: PO Box 505, Modbury, SA 5092, Australia

National Treasurer and Membership Officer: Victoria Powell :

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The Worship of Economic Growth

Doris Phelps ERA SA

Economists and politicians hold up "economic growth" as an ideal to be aimed at, but this worship of growth leads to some contradictions. One is that we welcome the invention of labour-saving devices, and yet governments go to great lengths, and brag about, the number of jobs they have `created'.

Another contradiction is that while most of us can see that many of our resources are finite, the need for economic growth means that they are being used up faster and faster, instead of being saved up for the use of future generations.

"But", we are told, "If we don't have growth, there will be a recession. There won't be enough money in the community to keep business and government supplied." Apparently there is no way in which we can have a steady-state economy. We must always seesaw between "growth" and recession.

What is overlooked is that the reason we must have growth in order to keep the money flowing, is the way in which our money supply comes into existence. It comes into existence when it is issued through the banking system to businesses for all forms of production (manufacturing, retailing, farming, mining, etc.) as an interestbearing debt. It is not issued by governments as many people believe, and as the populace is encouraged to believe.

Those who believe that our money supply is created and issued by the Government, need to answer some relevant questions. First, how is this money then distributed into the community? Second, why then do governments ever need to borrow and get into debt? Third, why do governments need to tax their citizens to raise money for necessary expenses?

When, as an adult, in an effort to understand the economic system, I studied high school economics and sat for the exam, I obtained a number of previous exam papers. I noticed that not one of them asked the question, "Explain where our money supply comes from and how it comes into existence". And yet the answer is there in the text books, "Bank advances create bank deposits".

When I said to a young man who had studied economics as one of his uni subjects, that banks create our money supply in the process of lending, he refused to believe me. He believed, as most people do, that banks lend money which has been deposited with them, so I told him to look up his text books and read the chapter on credit creation. The next time I saw him, I said "Well?", and he said, "That's incredible!" What really is incredible is that thousands of economics students have gone through their courses without the significance of this fact being explained. (No doubt because it is not included in exam questions!)

When America issued trillions of dollars to save its financial institutions from collapse, anyone who talked about it, referred to the American Government "printing money". Did they really have visions of trillions of printed banknotes? How many FortKnoxes would have been needed to store them? The bulk of money these days is not even figures in bank books. It is just electronic figures somewhere in a computer, and can be created or transferred with the click of a computer key. The important point is to realise who has the privilege of clicking the key, and an even more important point is that the institutions who click the key and create this money and lend it to businesses and governments, have the added privilege of charging interest. So, if a bank creates and lends $10 000 at 5% interest in one financial period, the only place the repayment of the loan plus the interest ($10500), can come from, is from the next round of borrowing. Because, as money (credit) is being borrowed into existence all the time, it is also being paid back and cancelled all the time. This is the reason that there is a necessity for continual economic growth. Each round of borrowing must be a little larger than the previous one in order to repay the loan plus interest. But this does not apply to just one bank. It describes the whole private banking system and the creation of our money supply. (In this respect, our economic system could be regarded as a giant Ponzi scheme, needing ever more injections of credit to prevent the whole house of cards from collapsing.)

Early forms of money came into use as a convenient means of exchange to replace barter, and eventually came to be issued by rulers and governments. If money were still to be issued by governments (as, ironically, many people believe it is) it could be issued interest-free, and the need for continual "growth ", could be eliminated.

There have been some attempts by members of governments to regain control of the money supply, such as Abraham Lincoln with his issue of greenbacks, and Australian politician, King O'Malley, in conjunction with the then Governor of the Commonwealth Bank, Sir Dennison Miller, in financing the 1914-18 war effort (see D.J. Amos "The Story of the Commonwealth Bank" or Peter Lock "The Saga of the People's Bank"). But these sensible measures were nipped in the bud by those whose interests they threatened.

It is just amazing when you think of all the brilliantly clever things that man can do in the way of electronics and medicine and space exploration, that the short-comings and the contradictions of the money system, which, after all, was invented by man, have not been sorted out. The reason cannot be that man is not clever enough to sort them out. The reason is, of course, that it suits some very powerful people to keep things the way they are.

During the past 100 years the flaw in the system, and possible ways to remedy it, have been pointed out in numerous books and pamphlets, but unfortunately the above-mentioned powerful people have control of the media. One early advocate who received much publicity and then dropped right out of the news, referred to it as a conspiracy of silence.

In recent times we have seen things happen that we would never have believed possible. They have happened because individuals now have the ability to communicate with thousands of other individuals without depending on the controlled and controlling media. The conspiracy of silence is now not so easy to impose. Perhaps there is hope that, before all our finite resources are used up and our world laid waste in this passion for "growth", voters will learn that there is a way to avoid the need for extravagant growth, and will insist that their politicians put it into practice.■

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A plea for brevity in understanding economics.

A quote from "Critics of Henry George" by Robert V. Anderson. Professor of Philosophy Auburn. U.S.A.Quote. A book should be so written that it's message can be presented in a single sentence, The argument of "Progress and Poverty" may be stated thus "That the natural land ought everywhere to be regarded as a community, rather than as a private resource and that it's rental value should be recaptured as public revenue by the Community, thereby eliminating the need of any taxes upon productive enterprise.”

The root cause of so much of the world's misery, poverty, war, unemployment and famine, can be traced directly back to this same single abuse, i.e. the unlimited individual appropriation of the fixed resource of land, the sole source of all life.

Henry George said."I do not say that Justice is the greatest quality in the Moral Hierarchybut it is the FIRST."■

From George Jukes ERA SA

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Do banks lend out their depositors’ funds?

John Hermann ERA SA

There is a large amount of misunderstanding and confusion in the minds of both the general public and the business community about the nature, operational status and legal status of banking deposits. And it is my contention that much of this misunderstanding has been created by the banking industry itself, as a by-product of its ongoing (and largely successful) attempt to obfuscate and mislead others about the mechanics of banking in the modern world.

Make no mistake that financial economists fully recognise the role of commercial banking institutions in introducing new credit money into the economy. This is money which is created out of nothing when depositories expand their portfolio of financial assets. Most of the money supply (money accessible to and used by the non-bank community) is bank credit money - that is, it has no tangible existence and only takes the form of entries in the accounts of bank customers. In the modern world those entries are digitized using computers.

The role of reserves

Most of the reserve funds used within the banking system also take the form of entries in creditary accounts - but in this case the accounts are those of commercial banks with the central bank. Currency (coins and notes) in the hands of the public make up only a small fraction of the money supply, while currency in the hands of bankers usually make up only a small fraction of their supply of reserves.

In practice reserve funds are required for (a) net exchange settlements at the end of each day (either by the central bank or by a check-clearing agency answerable to the central bank), and (b) maintaining sufficient liquidity to allow for spending, advancement of loans, and withdrawals from banking institutions in the form of legal tender (both "normal" withdrawals and withdrawals under a stress scenario). None of these require, as a necessity, a one-to-one correspondence between reserves and deposits.

There are never enough reserves in existence (under a normally-operating fractional reserve banking system) to allow for an exchange of bank credit money with legal tender. If a major run on banks occurred, then the shortage of liquidity could only be addressed by the rapid injection of a large quantity of new reserves into the banking system, insofar as this is possible. And that would amount to a complete abandonment monetary policy, probably for a considerable time-span.

Reserve funds in Australia

Whenever money is exchanged between two commercial bank accounts via cheque or electronic transfer, an equal quantity of reserve funds is transferred. This transfer is manifested as an exchange of reserve funds in the accounts of those banking institutions with the central bank.

The U.S. maintains a statutory requirement, meaning that commercial banking institutions are obliged to hold reserves equal to a prescribed fraction of their deposits. Australia, New Zealand and Canadahave no statutory reserve requirement. However they do possess reserve funds, in the form of cash held in their tills and vaults in conjunction with positive balances maintained in their accounts at the central bank.

In Australia the balances with the Reserve Bank of Australia are not called reserves, they are called exchange settlement funds. In the process of implementing liquidity and risk management practices, each Australian commercial banking institution effectively determines the matching ratio - between reserve funds and demand deposits - which is perceived to best meet its needs.

The Australian institutions authorised to create credit money, known as ADIs (authorised deposittaking institutions), are the registered banks, credit unions and building societies. All of these are legally authorised to describe themselves as "banking institutions" and their business as "banking".

What is "bank funding"?

The bankers' use of the term "funding" in regard to deposits is often misinterpreted. The term "funding" more properly applies to an ordinary intermediary, e.g. a finance company, which borrows in order to lend at a profit. If the word "funding" is to be used at all in the context of banking, I believe it should be applied either to the acquisition of funds from financial markets (which funds are subsequently used to purchase financial assets at a higher rate of return) or to the acquisition of excess reserves. My objection to the use of the word "funding" in the context of deposits is that it can give the impression that commercial banks on-lend their customers' deposits. However neither deposits nor reserves are ever loaned out to the retail customers of banking institutions.

In regard to fractional reserve banking, commercial banks obtain a substantial part of their stock of excess reserves from the acquisition of interest-bearing deposits (that is, reserves are usually freed up whenever credit money is transferred from a demand account to an interest-bearing account). This is a strong incentive for banks to retain those deposits, since by doing otherwise they would lose the excess reserves.

Assets and liabilities

A bank's financial assets are its loans, investments and reserve funds, while its financial liabilities are its deposits and its borrowings. The difference between the two categories are the bank's net worth, or capital.

The essential requirements for an expansion of bank lending are (a) adequate capital, (b) adequate reserves, (c) a willingness to lend and (d) a willingness to borrow. "Adequate capital" refers to an excess of capital over that required to accommodate the bank's existing loans. "Adequate reserves" refers to an excess of reserves over that required to accommodate the bank's existing deposits.

Neither borrowing from the financial markets nor the acquisition of deposits change a bank's capital (because in each case the assets and liabilities acquired are equal), however by expanding a bank's capability to advance new financial assets - resulting in new interest income - they indirectly generate the growth of new capital.

Security of deposits

Deposits are "secure" in the sense that they are a special class of liability which - unlike funds borrowed from the wholesale markets - must be held securely by the depository for the sake of the stability of the payments system and the workability of the prevailing monetary model. Banks also have an incentive to do so in their own self-interest, because they would like to retain the excess reserves which they obtain with interest-bearing deposits.

However, under a fractional reserve monetary system, deposits are not necessarily "secure" in the sense of protecting depositors from the risk of a bank's default on its obligation to pay all of its depositors legal tender on demand -- unless adequate insurance and/or government guarantees on deposits are implemented.

Is a deposit a borrowing?

Some arguments advanced for the proposition that bank deposits are borrowings rely on a scenariowhere a customer walks into a branch of a bank carrying either legal tender (cash - coins/notes) or a precious metal like gold (coins/bars) with the intention of making a deposit. Firstly, that is not howmost deposits are made in the modern world. Overwhelmingly, deposits take the form of (a) credit money transferred between two bank accounts, or (b) newly created credit money, placed in ademand account of a bank's customer when the bank advances a loan to that customer. And secondly, for the small component of bank deposits which involve the transfer of something tangible,currency is the accepted form - not bullion. Moreover, after that currency has been handed over to the custody of the bank, it is no longer regarded by the central bank as being part of the moneysupply. Any currency (coins and notes) held by a depository forms part of its stock of reserves.