Thursday, 12 August 2010


I'm a mathematician (by education) and software developer (by career), not an economist, but like many others I've been taking a very active interest in economics since 2008. I now feel as though I understand economics and banking reasonably well. The reason I'm setting out on writing a blog is that, with my new-found knowledge, I have started to realise that far too many economic arguments on news and current affairs programmes are of dubious logic or even blatantly untrue, despite in some cases having a ring of plausibility. I would like to counter this by helping others to gain the same understanding that I have acquired, which now allows me to see through the dubious reasoning which is common (though not pervasive), even in places such as BBC Radio 4 and Bloomberg. Having recently gone through the learning process myself, I hope that I can make the process easier for people who wish to understand economics better without having to try to figure it all out for themselves from a variety of good and bad sources.

In the years leading up to 2008, I had a growing sense that something seemed terribly wrong: I had been saying for years (based on intuition) that house prices had to drop because average house prices were so much higher than 3 times average combined incomes, and yet they continued to increase with no end in sight. I began to ask myself whether my simplistic understanding was wrong; perhaps the increased desire for housing, cited so often as the reason that house prices would continue to rise so quickly for many years, meant that this really could continue.

Then in summer 2007, there was talk of the investment bank Bear Stearns being in trouble over sub-prime mortgages, and there being a "credit crunch" in which banks weren't lending. It was apparently just happening in the USA at that point, but still somewhat ominous.  In October 2007, I saw an opinion piece in the Financial Times arguing that it wasn't just an American problem - the author gave examples of four acquaintances of his in the UK who had taken out mortgages which they were unlikely to be able to pay, in one case having £1,000,000 of negative equity from buying several apartments.  At 07:00 on one day in December 2007, the Today programme on Radio 4 reported on an IMF study predicting an imminent "perfect storm".  (I was barely awake for the 07:00 news, and the story mysteriously wasn't mentioned later on in the programme - I had to check the IMF web site to convince myself that I hadn't dreamt it).

In February 2008, a work colleague told me that the Federal Reserve in the USA was unconstitutional, and that fractional reserve banking was a multi-generational scam to keep people in perpetual debt slavery.  He said I should watch an animated film on Google Video called "Money as Debt", and read "The Creature from Jekyll Island" by G. Edward Griffin about the creation of the Federal Reserve.  It seemed convincing - if money is created in exchange for debt, but the debt increases (due to interest) while the amount of money doesn't, it seems that borrowers as a whole can never repay their debts.

A little later in 2008, I came across Karl Denninger's Market Ticker blog.  He's been blogging since 2007 about what he says is rampant fraud in the finance industry in the USA.  He's also someone who defends fractional reserve lending, which gave me a great opportunity to compare the two sides.

Since then, I've been spending a lot of time reading about finance and economics, doing thought experiments, and generally trying to understand the subject better.  I must have put in more effort than I did into my bachelors degree, and I believe I now have a good feel for macroeconomics, and that I can judge for myself - based on my own understanding - the truth or falsity of economic arguments made or reported in the media.

What I want to do with this blog is to help to create an environment in which people like myself - intelligent but with no formal background in economics - can sort out the wheat from the chaff of economic reporting and opinion.  I'll be presenting some (hopefully uncontroversial but often ignored) starting points and using them to see what we can understand about the economy as a whole.

I also want to get feedback so that I can continue to learn.  I've already had to change my opinions as I've learned more, and I'm quite happy to do it again as long as it increases my understanding.

Welcome to my blog.


  1. I read this account with interest, and with sympathy (empathy probably would be more accurate), because I've been through a similar educative exercise. I also respect your aim, and certainly I did not - and do not - doubt your good intentions.

    However, to my utter dismay, I found when reading through your blog that I am in fundamental disagreement with the way in which you have interpreted the workings of the fractional reserve banking system that we have, and my comments reflect that profound disgreement.

    In my view (though I don't expect you will see it my way) you are in danger of propagating an almost entirely false picture of how that system works and therefore of the effects which it actually produces which - in some important respects - are the exact opposite of those you describe.

    I'm not trying to be superior or engage in point-scoring. The subject is far too important to me to indulge in that kind of childishness. Nor is it my business to attempt to put you right. I have put certain counter-arguments to yours in my comments but, obviously, it's up to you whether you accept them or not.

    Might I urge you (if you haven't already, which I can scarcely believe under the circumstances) to read Rothbard's "Mystery of Banking"? It might make as little impression on you as my comments will, but it's a lot better-written and all the pertinent facts (including some fascinating historical ones) are there. If Rothbard doesn't convince you, I certainly could never hope to.

  2. Mysteriously, the comment I posted earlier about this article has disappeared. Or have you removed it?

    I'm curious.

  3. I haven't removed anything. I didn't even know that I had the ability to delete comments, though now you mention it I can see a bin icon next to comments.

    If I have accidentally removed it by clicking in the wrong place, I am truly sorry.

  4. This was - roughly - what I wrote before:-

    I read this account with sympathy - empathy would be a more apt word - because I myself have been through a not dissimilar educative experience. I did not - and still do not, despite what follows - doubt your good faith or worthy intentions.

    However I became utterly dismayed as I read your blog, as it became increasingly clear that, unfortunately, you have seriously misinformed yourself about the actual reality of current banking practice. Most crucially of all you do not appear to have grasped what it is about fractional reserve banking which not only makes it pernicious in itself but which also makes it work in an entirely different way from 100% reserve banking. This fundamental misperception runs like a scarlet thread through almost evetything you write - both in this blog and elsewhere.

    I have commented in the blog about various specific ways in which your analysis is flawed - sometimes to the extent of causing you to make statements which are the exact opposite of what is in fact the case. I am not trying to score debating points: for me the matter is far too serious to leave any room for that kind of childishness. Nor is it my business to seek to put you right; it's your own affair if you choose to harbour illusions.

    What really does bother me though is that you are propagating misinformation, and that by doing so you may be misleading others.

    I do urge you to read (if you've not already done so, which I can't believe to be the case) Rothbard's "Mystery of Banking". It can be downloaded from this website as a .pdf file (just search for Mystery of Banking):- It's quite short, and very readable, with some fascinating historical background. If Rothbard's analysis doesn't convince you, nothing will. That anyone could read it and continue thereafter to hold the opinions you are advancing would be entirely beyond my comprehension.

  5. This comment has been removed by the author.

  6. I've just tried deleting a test comment. I had to confirm the deletion, and it leaves a note behind saying that the post was removed by the author, so I'm sure I didn't delete your comment. I do sympathise though - it's horrible putting effort into writing something thoughtful and losing it due to some glitch or other.

    I find that I have to switch on scripts - if I don't, Blogspot seems not to work very well.

  7. Blogspot seems not to work very well period.

    Altogether now three of my posts have been deleted, even though in each case I've seen them appear as comments.

    I'm giving up!

  8. Well if you do give up, I'll be sorry. Thanks for all your contributions. I like to be challenged because it helps me to think more clearly.

  9. Hi Robert. I found 5 of your comments! They had been marked as spam for some reason. I came across them while browsing the blog owner's dashboard, and I've told it to publish them. I'll have a look at the comments themselves soon...

  10. Hi,

    Thanks for the explanation. I'm finding Blogspot frustrating to use I must say!

  11. It's taken me a long time but I've finally realized what has lain at the root of this argument all along.

    It's semantics.

    You are making a case for fractional reserve banking and attacking the case for 100% reserve banking, and I am doing the opposite. Both of us have constantly employed the term "money", but we have not been using it to mean the same thing. I use it to mean what it means in common speech, that is:- the medium of exchange in use in our society, by means of which we buy and sell. You use it to mean something other than that - and narrower than that. You exclude the money loaned by banks.

    Hardly surprisingly therefore, you take issue with the title of the video "Money as Debt"; how can money be debt, you ask, if (under your definition of the word) debt is separate from money? QED. The great majority of the arguments you advance in support of your case rely upon this semantic distinction which you have elected to make. But in common speech the definition is not the one you have chosen to use; instead it is, I repeat:- the medium of exchange - whatever that may be - in actual use in our society, and that (of course) includes the money which has been loaned to people by banks. Once loaned it passes into circulation as part of the total supply of money, and the volume in use is controlled solely by the lending-practice of private banks (subject only to their not exceeding - or not for long anyway - their reserve ratios). In point of fact, the portion of our money-supply that your definition excludes constitutes not less than 97% of all the money - as that term is commonly understood - now in use.

    So most of the argument is being conducted at cross-purposes. Had you defined your narrow interpretation of the word "money" at the outset, this misunderstanding could have been avoided (and because your use of the term is in normal parlance counter-intuitive, I believe the onus is with you to have done so in your blog; however that's a separate issue).

    Secondly, as an argument in support of your defence of FRB you place reliance upon the fact that if a bank is balance-sheet solvent it is not engaging in deception (excluding deliberate massaging of the accounts), because given underlying capital solvency it can always perfectly reasonably expect to have access to the necessary short-term liquidity to meet all its obligations, and the Bank of England will always stand ready (if necessary) to act as lender of last resort. (You make clear that you are not here talking about bail-outs of insolvent banks, which you emphatically denounce). Having once understood this argument (which I was slow to do), I don't contest it.

    However, for those of us who oppose the institution of FRB it is beside the point - but I suspect that you have not yet understood why. In our view it was never in common justice right for a court to have ruled that a person's property ceased to be his once he placed it in the custody of a bank. That property had no business, in other words, ever having been permitted to be included on the bank's balance-sheet in the first place since it was not the bank's but the depositor's. The court's decision was wrong in principle and flew in the face of reason and the common law. Be that as it may, courts and judges after all being fallible such things are bound to occur and can and should, once the mistake has been recognised, be corrected by new legislation. That is what we say ought to have happened but did not - and the sooner that (that in our view disastrous) omission is rectified, the better for our society.

    In other words we see the issue not as a matter of technical accounting or of economics, but of ethics and social policy.

  12. Actually, I see I've unintentionally misrepresented your argument.

    It is (if I understand correctly) that (real) money is exchanged for a bank's promise to repay it when demanded, and that the bank then puts the (real) money to other uses. This is 100% reserve banking, and we are not in dispute about that. Thus far, nothing has been added to the money-supply.

    FRB however permits the bank to CREATE new money out of thin air, of an amount up to (currently) 34 times the (real) money in its possession. All of this is put at the immediate disposal of the borrowers, who are free to - and do - immediately spend it into circulation. That is to say, all of it constitutes an addition to the money-supply. Only if when it is repaid it is cancelled is the money-supply thereby reduced again: but this does not happen in practice. Instead, the bank simply avails itself of the additional room to lend which is thereby created, in order to top-up the amount it has on loan to the maximum permissible. It does so because that enables it to maximize the income from its loan business which is what it is in business to do.

  13. "I am certainly a searcher after the truth. It is extremely important to me. I don't believe that I am advocating on behalf of FRB, but FRB is what we have now and it seems sensible to me to start the search for truth by describing FRB..."

    Here you are seeing yourself as being in an objective investigative role, researching into and seeking to identify (so far as is humanly possible, of course) "the truth".

    "Banking is not trivial... But I think that a few hours of study is enough for most people to get a good understanding of what is happening, once someone reliable explains it all in one place. My aim is to be that reliable source, who places all the description in one place at a level suitable for people who are interested but don't have a background in banking".

    Here you are seeing yourself as being in a pedagogical role, "reliably" imparting factual information to those who seek it which - if it means anything - must be construed as meaning "without any hidden sub-text", or "without carrying a torch for any particular school of thought, but rather presenting all relevant material equally impartially". I own a book on the subject of comparitive religion written by a C of E parson. Such a book would be competely useless to students if its aim had been to propagate the innate superiority to all others of the Christian religion. Despite being a priest the author doesn't do that, but confines himself to what he tries to make as objective and scientific a factual account as he can. His aim is disinterestedly to impart information, not to convert the reader.

    "I'm defending the idea of money created from debt and fractional reserve banking".

    Here alone can you be clearly seen to be engaged in advocacy of one particular banking system - FRB; furthermore it can now be seen that your description in quote 1 above of what you see yourself as doing ("to start the search for truth by describing FRB") is misconceived. In further enlarging on this you say that your aim is "to debunk" certain assertions which are critical of FRB.

    I'm not suggesting that this - polemical - purpose isn't legitimate, and I certainly don't mean to imply any deliberate deception. I'm only saying that I don't think that one can convincingly claim to be pursuing incompatible aims at one and the same time.

    Before reading Rothbard I didn't know enough to form an opinion one way or the other. He makes no bones about his book being a polemic, so the reader is left in no doubt (and, too, it's in keeping with the rest of his writing on political economy). Disagreeing as I do with his politics, I was prepared to take issue with his views on banking but his arguments quickly convinced me of the justice of his indictment of FRB. His discussion is couched throughout in terms of what I think is called "broad money" and for the same reasons so is mine. I still haven't seen the relevance to this discussion of any narrower definition - indeed I think that it obscures not illuminates the subject.

  14. Hi Robert,

    Lots of your comments to respond to, but so little time - largely because I've started reading Rothbard's book. Thanks for the link to the PDF. I've just started chapter III.

    It is very approachable, like Adam Smith's The Wealth of Nations (which I have to admit I've only read the first few chapters of so far). And it presents a similar and complementary view of how money originates. Microeconomics is something which I have not looked at much yet, and I'm enjoying reading it, but I have a fundamental problem with Rothbard's analysis - something which I worked out a few years ago, after being confused by it for years.

    The problem is this. He presents supply and demand as I first thought of them - as quantities (millions of pounds weight of coffee), rather than rates (millions of pounds of coffee brought to market per day). I am sure that this is a fundamental error. His conclusion that setting the equilibrium price for coffee is the best way to sell all the coffee and to make the most profit for the seller is incorrect when discussing selling a fixed amount. The seller would be better starting from the highest price that anyone will buy at, and gradually reducing it until it is all sold.

    When we are considering a rate of bringing coffee to market instead of just starting with a fixed amount, his conclusion of an equilibrium price being optimal is more convincing (though see (*) below), so I have been mentally translating his talk of quantity to rate. Initially, I then find his conclusions generally valid, but once he gets to discussion of the supply of money, I think his use of quantity rather than rate leads to serious error.

    The supply of money, like the supply of anything, is the rate at which money is brought to the market for exchange. It most certainly is not the total amount of cash in existence, or the total deposits in bank accounts, or anything like that. If the money is just sitting there, not being spent in the market, the supply of money is really zero.

    (*) The model of supply having to equal demand to clear the market reminds me of Kirchoff's current law

    where the amount of current entering a junction is equal to the amount exiting the junction. This is because a junction in an electric circuit cannot store charge.

    But a market or a shop does have a certain amount of storage - the stock is stored on the stall or shelves, and perhaps in a van or storeroom. Therefore the instantaneous inequality of supply and demand is not necessarily a problem - it just leads to an increase or decrease in stock. Taking this effect into account helps to explain the discounts on cakes at Waitrose at the end of the day. They (I assume) try to keep prices above the equilibrium price for most of the day, but allow the price to drop significantly to sell the last few cakes instead of throwing them away. I expect this produces a higher profit overall than pricing the cakes at a level that sells all of them on average exactly by the end of the day.

  15. I've read the whole blog and when you mentioned that Money is not wealth it reminded me of how people keep mentioning to me how society is heading towards a moneyless society, and how people can have access to wealth (goods and services) without the need for money.

    Could you list reasons why a moneyless society may not work and then list reasons why it may work?

  16. Matthew said...

    "people keep mentioning to me how society is heading towards a moneyless society, and how people can have access to wealth (goods and services) without the need for money."

    What I suspect they mean is that they believe that we're heading for a cashless society, where people use bank credit for their purchases, or perhaps you can use a Mondex type of system where you store credit in a smart card of some sort.

    As far as I can see, the only forms of moneyless societies are:

    Ones using barter - exchanging goods and services for other goods and services directly. This is now rare because it is so difficult to find someone who both has what you want and wants what you have. Money is much more useful.

    Ones which do not allow any say by individuals in the allocation of goods and services - your production is seized by the "authorities", and your consumption is allocated by them. This would be even more authoritarian than most tyrannies.

    Against that, some people argue that there is now sufficient production capacity to meet everyone's needs and wants, and that it is possible for everyone just to have whatever they want. I personally don't believe that, but it's not something that I have researched. In such a society, stocks of goods get built up, and people help themselves from the stock whenever they want to. No money would be required.

    If a society formed in which everyone thought of others as much as they thought of themselves, and people were disciplined enough not to take too much, it is conceivable that it could work. As far as I can see, it would fail as soon as too many people started taking too big a share of the world's produce. Such a society would require a radical transformation of human nature.

  17. When you say "a radical transformation of human nature" are you talking about human nature or human behaviour? They have different meanings and it's very easy to confuse the two, a lot of people think they are the same thing.

    There is a lecture about the Nature Vs Nurture debate on what is important in how Human Behaviour manifests

    These people talking about a moneyless society weren't talking about bartar, I apologise and maybe should have explained more about what they were talking about. An example they used is that currently humanity has the ability to have access to books, films, music and TV shows via the internet without the need for money, bartar, debt or serviude. Keeping in mind that these are digital goods and not material goods, the people that have talked to me about this say that we can apply similar means of giving people access to goods and services through machine automation and other technological inovation.

    There is an article on CNN about technological unemployment. The displacement of humans by machines.

    The authors book "The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future." Can be downloaded for free from their website