The Bathtub Economy
Scroll down for notes on the 6 bathtub economy illustrations.
In May 2022, as part of a presentation I made to a group in Woodville, Ontario, I shared some printed information and requested feedback on what the audience had, or had not, understood. I distributed copies of a paper by fellow monetary reformer Adam Smith, Money and Inflation, and a link to the April 8th Tish Talk Zoom podcast: What is happening with our money? (13 mins to 20 mins)
Over the following weeks, I compiled all of the responses.
Happily, without exception, it was the same idea that people did not understand:
The BIG question (to paraphrase) was:
“How could the Bank of Canada 'print' billions of dollars without this causing the inflation we're experiencing today?”
I discussed this in a follow up presentation (with the same audience) on June 27th, but I now have some working graphics to explain, step by step, the reason why the Bank of Canada's pandemic 'monetary financing' (Central Bank Money creation) is not the cause of the inflation we are experiencing today.
The six illustrations below are inspired (at least in part) by Margot Robbie's bubble bath explanation of economics, from the 2015 film, The Big Short. Please scroll down to see the accompanying notes. Also see (below these notes): How the Commercial Banks Create Most of the Money in Circulation (In the Central Banks' Own Words).
W. David Ward July 12th. 2022
PRIOR TO MARCH 2020, ALMOST ALL MONEY IN CIRCULATION (as much as 97%) WAS CREATED WHEN BANKS MADE LOANS. Also see the accompanying: 'How Commercial Banks create most of the currency in circulation.'
Bank money (which isn't money at all really, but 'credit') is created 'out of nothing' when a loan is made (ex nihilo) - THE FAUCET Bank money disappears from the economy (THE BATHTUB) with each subsequent loan payment -
THE DRAIN (WITHOUT A PLUG).
Money, therefore (bank credit at least), is not a fixed thing. It is the true fiat currency (Latin for: 'let there be' – money). It is created out of nothing, as an entry on the bank's balance sheet, after which it flows continual into, and out of, 'current' accounts (hence the term 'currency') performing the function of money. Oddly, bank credit is not actually defined as 'legal tender,' and yet it represents most of the 'money' we use on a day to day basis.
IT IS EXTREMELY IMPORTANT TO UNDERSTAND:
WHOEVER CREATES THE MONEY, PROFITS FROM THE MONEY.
HERE WE SEE THE FAUCET HAS BEEN TURNED OFF (In this case, because of the Lockdowns) AND THE LEVEL OF CURRENCY IN THE ECONOMY STARTS TO DROP. Business activity virtually stops, and banks cannot (or will not) make new loans. Banks cannot 'force' money into circulation, as we will see future in an explanation of 'Quantitative Easing' (QE).
With each loan payment back to the bank, money disappears from the economy; it is written off the books (as entries on each side of the ledger cancel out) and is literally gone. Like matter and anti-matter meeting, the two 'annihilate' and a metaphorical 'spark' of energy is released – energy for the bank that is, in the form of interest. The 'principal' vanishes (because it didn't exist in the first place) but the bank retains the interest. I'm reminded again, of the former Governor of the Bank of England, Sir Mervyn King, and his book: The End of Alchemy.
The problem is, the extra money to cover this interest wasn't created when the loan itself was made, so from the start, there is insufficient cash in the system (this is why there is a constant scarcity of cash for everyday people). The interest the banks will claim as their own, after they perform their alchemy, must be drawn from the larger economy; and ever more new loans must be made to ensure future repayment of old loans, with interest. The end result of course, over time, all money and all assets eventually transfer to the banks and their owners. Ever wonder why the banks (and the people behind them) are SO wealthy? We literally 'rent' our money from the banks, and pay them for the privilege. We are quickly moving back into a 'neofeudal,' 'rentier economy.'
The 'alchemy' of '0% reserve' banking (more on this later) is precisely the structure of a Ponzi Scheme, because eventually inflows of cash (new loans) will not cover repayments of existing loans, plus the interest banks are adding to these loans. The banks, don't forget, cannot 'force' money into circulation (See the notes for 5 and 6 for the clever solution to this problem).
Also see: The Legalized Crime of Banking 1958
HERE WE SEE THE LEVEL OF CURRENCY IN THE ECONOMY CONTINUES TO DROP. Cash doesn't stop flowing out of the bathtub (through the open drain) as loan payments are still made back to the banks (though new loans are not being issued). Cash and coin created by the Bank of Canada (essentially debt-free money), continues to circulate, despite attempts to discourage the use of physical cash. This money does not disappear from circulation; it is continually recycled (and thus, it is also known as 'everlasting money'). As a percentage of money in circulation, sovereign money created by the Bank of Canada increases as the commercial banks' debt-based 'interest-bearing' currency disappears..
THE TUB BEGINS TO REFILL AS NEW SOVEREIGN MONEY FLOWS INTO THE ECONOMY.
The Bank of Canada is called upon (as lender of last resort) to create new money (This process will be described in greater detail later). When the BoC FAUCET is turned on, money flows into the economy in the form of CERB, and various other benefits, grants and loans. The government (and BoC) can 'force' money into circulation, in ways banks cannot. In an emergency, especially, this is critically important.
Though almost all of this money is electronic, importantly, just like cash and coin, it is essentially debt-free, since the bonds issued to back this money are owned by the BoC. Interest paid on these bonds (moving forward) is transferred to the national treasury (rather than to the commercial banks), and can return to the economy as future government payments, pensions and such.
People speak disparagingly of the government 'printing' money. This physical cash is tracked on the BoC website, and updated every two weeks. This number has increased 31% since March 2020 (and 44% since 2018). Interestingly, the use of case was already increasing, and this is the same worldwide (although the global increasing is much more dramatic than in Canada). This is a most encouraging development. In Canada, the amount of cash in circulation now stands at $116.634 billion (See the BoC website below: 'Notes in circulation'). More money was printed however, but it remained stacked on pallets (under lock and key), in case there was a old-style run on the banks. This extra 'printed' paper money was not required though, and it never entered circulation. Bank of Canada - Assets and Liabilities
THE TUB IS FILLED AND THERE IS SUFFICIENT MEDIUM OF EXCHANGE IN CIRCULATION TO KEEP THE ECONOMY FUNCTIONING. Unless the amount of money required to maintain economic activity is exceeded, there will be no Consumer price index (CPI) inflation (as a result of excess cash) – that is, no increase in the price of those commodities we typically consume on a daily basis. 'ASSET INFLATION' however (real estate and stock market primarily), is a separate issue, tied to Quantitative Easing, and we will examine this next time. We will also look at inflows of 'rent seeking' capital from outside the country: Real Estate Investment Trusts (REITs), Public Private Partnerships (P3s) and the like.
IMPORTANTLY, we can see the proportion of Bank credit vs. sovereign money, is changing. In reality, as things open up, the banks will have returned to putting more loans out into the system (as illustrated with a small flow from the bank's faucet). BoC bond purchases, though still significant, have declined from a high (Dec 22nd 2021) of $435 billion, to a current level of $397 billion (July 6th).
ALSO IMPORTANT: THIS REAL MONEY REPLACED A LARGE AMOUNT OF THE BANK CURRENCY THAT DRAINED AWAY SINCE MARCH 2020 (AS LOANS WERE PAID BACK). WE MIGHT CONSIDER THE BOC's SOVEREIGN MONEY A KIND OF 'MAGIC MONEY,' AS IT DOES NOT FLOW OUT THROUGH THE BANK'S DRAIN (EVEN THOUGH THERE'S NO STOPPER). NEVERTHELESS, THE BANKS WILL EXTRACT A LARGE CHUNK OF OUR SOVEREIGN MONEY IN THE FORM OF INTEREST.
DEBT-FREE SOVEREIGN MONEY CONTINUES TO MAINTAIN A SUFFICIENT LEVEL OF MONEY IN THE ECONOMY (and can be maintained indefinitely). As the BoC purchasing of bonds slows though, bank loans will increase (or rather the BoC's purchase of bonds will slow when banks can again write sufficient loans), so long as there is sufficient economic activity.
THE BANKS ARE DESPERATE TO GET THEIR OWN ('FIAT') 'MONEY' CIRCULATING AGAIN, EARNING INTEREST FOR THEM (notice the diminishing interest flowing to the banks as their currency disappears). Should the economy recover, (CPI) inflation will likely increase again, but it will be as a result of banks 'multiplying money up' and creating money out of nothing (in the 0% reserve system), not the result of sovereign money creation by the Bank of Canada.
As many are starting to realize, the 0% reserves system has pushed so much money into the system (since its introduction, between 1991 and 1994), that we have reached a point where banks cannot maintain the level of credit creation required to keep the 'balloon' inflated. Again, don't forget, banks cannot 'force' money into circulation. Also, and just as important, because real estate prices have now become disconnected from the real economy, fewer and fewer people can afford to assume a mortgage. Huge inflows of foreign money (and offshore money) are allowed, therefore, since this capital fills the gap, and drives the asset transfer process. Central Bank money creation will continue, as required, for the real economy, but we must address these other issues if we are to fix our current economic problems.
To return full circle here: IT IS IMPORTANT TO UNDERSTAND: WHOEVER CREATES THE MONEY, PROFITS FROM THE MONEY. To this I must add – whoever already has a lot of money, profits from the money. Money sequestered offshore for all these years, hidden by banks and other corporations, and very wealthy individuals, must find its way back into a productive economy (like ours) to generate an income. This 'recycling' of money from outside our economy is the root problem (to which we will return).
On an especially positive note (to wrap things up here): We have been winning this battle (in monetary terms). We have replaced a lot of bank credit (earning interest for the banks) with new sovereign money, earning seigniorage, and paying interest back to ourselves (as owners of the Bank of Canada). Our Central Bank (here in Canada), happily, is 100% public owned.
If we don't understand this system though – the gains we have made to this point, and the opportunity that now exists – we will quickly lose ground. A new monetary 'regime' is coming, and the bankers and global elite will imposed their system (of Central Bank Digital Currency and Digital ID), unless we take back control of our own monetary system. I will continue to explore recent economic events and look at the option available to us, in the next update.
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